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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2000
Commission File Number 0-26929
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INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2996071
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 Building, 435 Devon Park Drive, Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
(610) 989-0111
(Registrant's telephone number, including area code)
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Number of shares of Common Stock outstanding as of August 9, 2000:
280,152,453 shares.
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1
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INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item Page No.
---- --------
<S> <C>
Item 1--Financial Statements:
Consolidated Balance Sheets--June 30, 2000 (unaudited) and December 31, 1999....................... 4
Consolidated Statements of Operations (unaudited)--Three and Six Months Ended June 30, 2000
and 1999........................................................................................ 5
Consolidated Statements of Cash Flows (unaudited)--Six Months Ended June 30, 2000
and 1999........................................................................................ 6
Notes to Consolidated Financial Statements......................................................... 7
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations...... 20
Item 3--Quantitative and Qualitative Disclosures About Market Risk................................. 33
PART II--OTHER INFORMATION
Item 1--Legal Proceedings........................................................................... 35
Item 2--Changes in Securities and Use of Proceeds................................................... 35
Item 3--Defaults Upon Senior Securities............................................................. 35
Item 4--Submission of Matters to a Vote of Security Holders......................................... 35
Item 5--Other Information........................................................................... 36
Item 6--Exhibits and Reports on Form 8-K............................................................ 36
SIGNATURES.......................................................................................... 38
Exhibit Index....................................................................................... 39
</TABLE>
2
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This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our partner companies, that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue," or the negative of such terms
or other similar expressions. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed elsewhere in this
Report and the risks discussed in our other Securities and Exchange Commission
("SEC") filings, including our Registration on Form S-4 declared effective on
August 10, 2000 by the SEC (File No. 333-42528).
Although we refer in this Report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and that we indicate
that we have a "partnership" with these companies, we do not act as an agent or
legal representative for any of our partner companies, and we do not have the
power or authority to legally bind any of our partner companies, and we do not
have the types of liabilities in relation to our partner companies that a
general partner of a partnership would have.
3
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(in thousands, except per share data) (unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents...................................................... $ 681,362 $1,343,459
Short-term investments......................................................... -- 3,359
Accounts receivable, net....................................................... 13,718 1,207
Prepaid expenses and other current assets...................................... 16,015 6,347
---------- ----------
Total current assets................................................... 711,095 1,354,372
Fixed assets, net................................................................... 25,919 4,015
Ownership interests in and advances to Partner Companies............................ 1,938,307 547,339
Available-for-sale securities....................................................... 270,080 46,767
Goodwill and other intangible assets, net........................................... 1,191,048 23,649
Deferred taxes...................................................................... -- 34,388
Other............................................................................... 63,036 39,854
---------- ----------
Total Assets.............................................................. $4,199,485 $2,050,384
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt........................................... $ 1,613 $ 3,000
Accounts payable............................................................... 28,132 6,750
Accrued expenses............................................................... 32,574 4,205
Notes payable to Partner Companies............................................. 44,129 34,134
Other.......................................................................... 5,491 903
---------- ----------
Total current liabilities 111,939 48,992
Long-term debt...................................................................... 3,247 3,185
Other liabilities................................................................... 5,635 4,255
Deferred taxes...................................................................... 366,438 ---
Minority interest.................................................................. 235,437 7,481
Convertible subordinated notes...................................................... 566,250 566,250
---------- ----------
Total Liabilities.............................................................. $1,288,946 $ 630,163
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.0l par value; 10,000 shares authorized; None issued......... -- --
Common stock, $.001 par value; authorized 2,000,000 shares; 279,342 (2000)
and 263,579 (1999) issued and outstanding................................... 279 264
Additional paid-in capital..................................................... 2,911,281 1,513,615
Retained earnings (accumulated deficit)........................................ 138,570 (26,539)
Unamortized deferred compensation.............................................. (11,796) (11,846)
Notes receivable--stockholders.................................................. (72,857) (79,790)
Accumulated other comprehensive income (loss).................................. (54,938) 24,517
---------- ----------
Total stockholders' equity................................................ 2,910,539 1,420,221
---------- ----------
Total Liabilities and Stockholders' Equity........................... $4,199,485 $2,050,384
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Revenue................................................. $ 3,375 $ 4,480 $ 5,205 $ 7,591
---------- --------- --------- ---------
Operating expenses
Cost of revenue...................................... 1,913 2,450 2,602 4,004
Selling, general and administrative.................. 67,325 8,150 97,808 11,687
Amortization of goodwill
and other intangibles............................. 93,141 4,506 132,768 6,501
Research and development expenses.................... 11,158 --- 11,158 ---
Purchased in-process research
and development................................... 10,850 --- 10,850 ---
---------- --------- --------- ---------
Total operating expenses............................. 184,387 15,106 255,186 22,192
---------- --------- --------- ---------
(181,012) (10,626) (249,981) (14,601)
Other income, net....................................... 5,499 2,397 663,185 31,074
Interest income......................................... 13,516 975 32,315 1,284
Interest expense........................................ (12,106) (953) (21,444) (967)
---------- --------- --------- ---------
Income (loss) before income taxes,
minority interest and equity loss...................... (174,103) (8,207) 424,075 16,790
Income taxes............................................ 92,639 5,134 (116,861) 5,797
Minority interest....................................... 11,376 1,302 17,277 1,448
Equity loss............................................. (116,778) (9,439) (159,382) (15,166)
---------- --------- --------- ---------
Net Income (Loss)....................................... $ (186,866) $ (11,210) $ 165,109 $ 8,869
========== ========= ========= =========
Net Income (Loss) Per Share
Basic................................................ $ (.70) $ (.06) $ .62 $ .06
Diluted.............................................. $ (.70) $ (.06) $ .61 $ .05
Weighed Average Shares Outstanding
Basic................................................ 268,512 177,192 266,352 161,066
Diluted.............................................. 268,512 177,192 271,345 165,526
</TABLE>
See notes to consolidated financial statements.
5
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INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
---- ----
(in thousands, except per share data) (in thousands)
<S> <C> <C>
Operating Activities
Net income..................................................................... $ 165,109 $ 8,869
Adjustments to reconcile net cash used in operating activities
Amortization of goodwill and other intangibles............................ 132,768 6,501
Purchased in process research and development............................. 10,850 --
Depreciation and amortization............................................. 18,375 1,214
Deferred taxes............................................................ 116,861 (5,797)
Equity loss............................................................... 159,382 15,166
Other income.............................................................. (663,185) (31,074)
Minority interest......................................................... (17,277) (1,448)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net.................................................. (10,074) (2,049)
Prepaid expenses and other assets......................................... (9,168) (1,445)
Accounts payable.......................................................... 18,697 1,773
Accrued expenses.......................................................... 37,380 2,646
Other revenue............................................................. 321 (118)
---------- ---------
Cash used in operating activities.............................................. (39,961) (5,762)
---------- ---------
Investing Activities
Capital expenditures........................................................... (43,012) (1,831)
Proceeds from sales of available-for-sale securities........................... 80,585 2,496
Proceeds from sales of Partner Company ownership interests
and advances to a shareholder............................................ -- 2,655
Advances to partner companies.................................................. (29,333) (1,193)
Repayment of advances to Partner Companies..................................... 12,982 1,940
Acquisitions of ownership interests in Partner Companies....................... (733,691) (98,461)
Other acquisitions............................................................. -- (2,103)
Proceeds from maturities of short-term investments............................. 2,748 --
Reduction in cash due to deconsolidation of Partner Companies.................. (466) (5,646)
---------- ---------
Cash used in investing activities.............................................. (710,187) (102,143)
---------- ---------
Financing Activities
Issuance of common stock, net.................................................. 1,430 32,020
Long-term debt and capital lease obligations................................... (3,030) (150)
Line of credit repayment....................................................... -- (281)
Proceeds from subordinated convertible notes................................... 15,234 89,270
Distribution to former LLC members............................................. -- (10,676)
Repayment of advances and loans to employees................................... 6,933 --
Advances to employees.......................................................... (4,097) (4)
Treasury stock purchase by subsidiary.......................................... -- (4,469)
Issuance of stock by subsidiary................................................ 71,581 1,570
---------- ---------
Cash provided by financing activities.......................................... 88,051 107,280
---------- ---------
Net Decrease in Cash and Cash Equivalents...................................... (662,097) (625)
Cash and Cash Equivalents at the beginning of period........................... 1,343,459 26,841
---------- ---------
Cash and Cash Equivalents at the end of period................................. $ 681,362 $ 26,216
========== =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of the Company
Internet Capital Group, Inc. (the "Company") was formed on March 4, 1996.
The Company is an Internet company actively engaged in business-to-business, or
B2B, e-commerce through a network of companies. The Company defines e-commerce
as conducting or facilitating business transactions over the Internet. As of
June 30, 2000, the Company owned interests in 77 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 indicates that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of its Partner Companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general partner
of a partnership would have.
Basis of Presentation
On February 2, 1999, the Company converted from a limited liability company
("LLC") to a corporation. All stockholder 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 six months ended June 30, 2000 and 1999, included herein, have
been prepared by the Company pursuant to the interim financial statements rules
and regulations of the SEC. In the opinion of management, the accompanying
unaudited consolidated interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
results of the Company's operations and its cash flows for the three and six
months ended June 30, 2000 and 1999 and are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000 or for any
interim period. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Company's financial statements and notes thereto
included in the Company's 1999 Annual Report on Form 10-K/A.
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 Breakaway Solutions,
Inc. ("Breakaway Solutions") for the three and six months ended June 30, 1999
and Employeelife.com and iParts, Inc. ("iParts") for the three months ended
June 30, 1999. For the three and six months ended June 30, 2000, the
consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, the Operations Company and 1999 Internet Capital
L.P., ICG Holdings, Inc., 1999 Internet Capital Group (Europe) Limited, and its
majority owned subsidiaries, Animated Images, Inc. ("Animated Images"),
CyberCrop.com, Inc. ("CyberCrop.com"), EmployeeLife.com, Inc.
("EmployeeLife.com"), ICG Commerce Holdings, Inc. ("ICG Commerce") and iParts,
each of which was consolidated since its date of acquisition. For the three
months ended June 30, 2000 the consolidated Financial Statements also include
the accounts of the Company's majority owned subsidiaries Emptoris, Inc.
("Emptoris"), AssetTRADE.com, Inc. ("AssetTRADE"), Delphion, Inc. ("Delphion"),
ICG Asiaworks Ltd. ("ICG Asiaworks"), IndustrialAmerica.com LLC ("Industrial
America") and RightWorks Corporation ("RightWorks"). During the three months
ended June 30, 2000 the Company's ownership
7
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INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
in Employeelife.com dropped below 50% and accordingly, the Company has accounted
for its ownership in Employeelife.com as an equity method investment since the
date the Company's ownership dropped below 50%.
In December 1999, the Company recorded a two for one stock split effected
as a one hundred percent (100%) stock dividend. The common stock and additional
paid-in capital accounts and all share and per share amounts have been
retroactively restated in these financial statements to give effect to this
stock dividend.
Principles of Accounting for Ownership Interests in Partner Companies
The various interests that the Company acquires in its Partner Companies
are accounted for under three broad methods: consolidation, equity method and
cost method. The applicable accounting method is generally determined based on
the Company's voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities or those we
have effective control over 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 stockholders in the earnings
or losses of a consolidated Partner Company is reflected in the caption
"Minority interest" in the Company's Consolidated Statements of Operations.
Minority interest adjusts the Company's consolidated results of operations to
reflect only the Company's share of the earnings or losses of the consolidated
Partner Company. The results of operations and cash flows of a consolidated
Partner Company are included through the latest interim period in which the
Company owned a greater than 50% direct or indirect voting interest for the
entire interim period or otherwise exercised control over the Partner Company.
Upon dilution of control below 50%, the accounting method is adjusted to the
equity or cost method of accounting, as appropriate, for subsequent periods.
In 1999, the Company acquired a controlling majority interest in Breakaway
Solutions for $17.2 million and in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts for $29.8 million in the aggregate. In
2000, the Company acquired a controlling interest in RightWorks for cash and
common stock valued at $776.0 million and in Emptoris, Industrial America, ICG
AsiaWorks, AssetTRADE and Delphion for cash and common stock valued at $227.3
million in the aggregate. Breakaway Solutions' operations have historically
consisted primarily of implementation of customer relational management systems
and custom integration to other related applications. In 1999, Breakaway
Solutions expanded to provide service offerings in custom web development and
application hosting both through internal expansion and acquisitions. Animated
Images operations include software development and consulting services. Emptoris
develops procurement management systems and provides consulting services to
power e-market places. ICG Commerce provides strategic sourcing consulting and
online Internet purchasing. RightWorks provides internet based software for
powering B2B digital marketplaces. The other consolidated subsidiaries are
development stage companies that have generated negligible revenue since their
inception.
The Company's direct and indirect voting interest in Animated Images,
AssetTRADE, CyberCrop.com, Delphion, Emptoris, ICG AsiaWorks, ICG Commerce,
Industrial America, iParts and RightWorks at June 30, 2000 was 50%, 51%, 75%,
33%, 57%, 50%, 76%, 69%, 67% and 62%, respectively. Delphion is accounted for as
a consolidated Partner Company based on the Company's representation on
Delphion's Board of Directors.
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
8
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INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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 generally
over three to five years. Equity method Partner Company goodwill which was
previously classified in equity loss in the Company's consolidated statements of
operation has been reclassified to amortization of goodwill and intangibles for
all periods presented. The amortization related to equity method Partner
Companies for three and six months ended June 30, 2000 was $66.8 million and
$104.2 million and for the three and six months ended June 30, 1999 was $3.2
million and $4.7 million.
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, "Accounting for Certain
Investments in Debt and Equity Securities". 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, "Accounting By
Creditors by Impairment of a Loan".
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.
During the quarter ended June 30, 2000, the Company recorded an impairment
charge of $2.2 million on a Partner Company.
Revenue Recognition
The Company's revenues were attributable to Breakaway Solutions, Animated
Images, AssetTRADE, ICG Commerce, Emptoris and RightWorks for the periods each
of these partner companies were accounted for under the consolidation method.
RightWorks and Emptoris derive revenue from software license fees and
services. Fees from licenses are recognized as revenue upon contract execution,
provided all shipment obligations have been met, fees are fixed or determinable,
collection is probable, and vendor-specific objective evidence exists to
allocate the total fee between all elements of the arrangement. Maintenance
revenue is recognized ratably over the term of the maintenance
9
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INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
contract. Consulting and training revenue is recognized when the services are
performed. Animated Images, ICG Commerce, AssetTRADE and Breakaway solutions
revenues are generally recorded as services are rendered.
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 (loss) in stockholders' equity.
Unrealized gains or losses related to available-for-sale securities are
recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a corporation.
Short-term investments
Short-term investments are debt securities maturing in less than one year
and are carried at amortized cost, which approximates fair value.
Derivative Financial Instruments
The Company selectively uses derivative financial instruments, including
cashless collar agreements ("Collars") to manage its exposure to fluctuations in
certain of its investments in publicly held equity securities. The Company has
recorded these Collars at their estimated fair market value, with unrealized
gains and losses resulting from changes in fair value recorded as a component of
accumulated other comprehensive income (loss). Unrealized gains and losses as a
result of these instruments are recognized in the consolidated statement of
operations when the underlying hedged item is extinguished or otherwise
terminated. The Company does not hold or issue any derivative financial
instruments for trading purposes and is not a party to leveraged instruments.
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed to
losses in the event of nonperformance by the counterparties, the Company does
not expect such losses, if any, to be significant.
In March 2000, the Company entered into cashless collar agreements (the
"Equity Collars") to hedge 2.2 million shares of its holdings of Ariba, Inc.
accounted for at fair value. The Equity Collars limit the Company's exposure to
and benefits from price fluctuations in the underlying equity securities. The
Equity Collars mature between 2001 and 2003. As the Company accounts for the
Equity Collars as a hedge, changes in the value of the Equity Collars are
substantially offset by changes in the value of the underlying investment
securities. Each of these changes are marked-to-market through accumulated other
comprehensive income (loss) in the Company's Consolidated Balance Sheets.
Research and Development
Research and development costs are charged to expense as incurred.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, and
other intangible assets are amortized on a straight-line basis over generally
three to five years. Goodwill and other intangible assets at June 30, 2000 of
$1.2 billion, net of accumulated amortization of $29.1 million, is attributable
to the Company's acquisitions of ownership interests in Animated Images ($5.5
million), AssetTRADE ($35.8 million), CyberCrop.com ($6.4
10
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
million), Delphion ($68.3 million), Emptoris ($30.4 million), ICG Asiaworks
($9.6 million), ICG Commerce ($36.0 million), Industrial America (($1.2)
million), and RightWorks ($1.0 billion). The carrying value of goodwill is
evaluated for possible impairment based on achievement of business plan
objectives and milestones, the fair value of each ownership interest in and
advances to the Partner Company relative to carrying value, the financial
condition and prospects of the Partner Company, and other relevant factors. If
impairment exists, the carrying amount of the goodwill will be reduced by the
estimated shortfall of discounted cash flows.
Income Taxes
From the Company's inception in March 1996 to February 1999, the Company
was not subject to federal and state income taxes. On February 2, 1999, the
Company converted from an LLC to a Corporation. The Company's accumulated
deficit of $8.7 million at that date was reclassed to additional paid-in
capital.
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company's effective tax rate for the three and six months ended June
30, 2000 differed from the federal statutory rate of 35% principally due to the
impact of state taxes and certain nondeductible expenses. The Company's
effective tax rate for the three and six months ended June 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 liability of $366.4 million at June 30, 2000
primarily consists of deferred tax liabilities of $129.1 million relating
primarily to the gain on the sale of a Partner Company for marketable securities
partially offset by tax assets resulting from net unrealized depreciation in
available-for-sale securities and deferred tax liabilities of $248.9 million
relating primarily to the excess of book carrying values over tax carrying
values of its Partner Companies.
Net Income (Loss) Per Share
Basic 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.
If a consolidated or equity method Partner Company has dilutive options
or securities outstanding, diluted net income per share is computed by deducting
from income (loss) from continuing operations the income attributable to the
potential exercise of the dilutive options or securities of the Partner Company.
11
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INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (Continued)
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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Certain amounts recorded to reflect the Company's share of
the income (loss) of its Partner Companies accounted for under the equity method
are based on estimates and unaudited results of operations of those Partner
Companies and may require adjustments in the future when audits of these
entities are made final.
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
principal 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 Six Months Ended
June 30 June 30
-------------------------- ------------------------
(in thousands) 2000 1999 2000 1999
-------------------------- ------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $ (186,866) $ (11,210) $ 165,109 $ 8,869
Other comprehensive income (loss):
Unrealized depreciation, net of tax (19,464) (2,114) (95,604) (1,108)
Reclassification adjustments, net of tax 32,570 -- 15,690 --
Foreign currency translation adjustment 499 -- 459 --
---------- --------- --------- -------
Comprehensive income (loss) $ (173,261) $ (13,324) $ 85,654 $ 7,761
========== ========= ========= =======
</TABLE>
12
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Net Income Per Share
The calculations of Net Income (Loss) Per Share were:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(in thousands) 2000 1999 2000 1999
-------------------------- ------------------------
(in thousands except for Per Share Data)
Basic (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $ (186,866) $ (11,210) $165,109 $ 8,869
========== ========= ======== ========
Average common shares outstanding 268,512 177,192 266,352 161,066
========== ========= ======== ========
Basic $ (.70) $ (.06) $ .62 $ .06
========= ======== ======= =======
Diluted
Net income (loss) $(186,866) $(11,210) $165,109 $ 8,869
Average common shares outstanding 268,512 177,192 266,352 161,066
Effect of:
Dilutive options -- -- 4,993 4,116
Dilutive securities -- -- -- 344
--------- --------- -------- --------
Average common shares assuming dilution 268,512 177,192 271,345 165,526
========= ======== ========= =========
Diluted $ (.70) $ (.06) $ .61 $ .05
========= ======== ========= =========
</TABLE>
For the three and six months ended June 30, 2000, the impact of the
conversion of the Company's convertible subordinated notes has not been included
as its impact would be anti-dilutive.
4. Ownership Interests In and Advances to Partner Companies
The following summarizes the Company's ownership interests in and advances
to Partner Companies accounted for under the equity and cost method of
accounting. The ownership interests are classified according to applicable
accounting methods at the respective dates presented. Cost basis represents the
Company's original acquisition cost less any impairment charges recognized for
such companies to date.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------ ----------------------
Carrying Carrying
Value Cost Basis Value Cost Basis
--------- ---------- -------- ----------
(in thousands) (Unaudited)
<S> <C> <C> <C> <C>
Equity Method....................................... $1,813,596 $1,810,356 $491,977 $578,922
Cost Method......................................... 124,711 124,711 55,362 55,362
---------- ---------- -------- --------
$1,938,307 $1,935,067 $547,339 $634,284
========== ========== ======== ========
</TABLE>
13
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Ownership Interests In and Advances to Partner Companies (Continued)
At June 30, 2000, the Company's carrying value in its Partner Companies
accounted for under the equity method exceeded its share of the underlying
equity in the net assets of such companies by $1.01 billion. This excess relates
to ownership interests acquired through June 30, 2000 and is generally being
amortized over a three year period. Amortization expense of $66.8 million and
$104.2 million is included in amortization of goodwill and intangibles in the
accompanying Consolidated Statements of Operations for the three and six months
ended June 30, 2000, respectively.
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at June 30, 2000
and 1999 has been compiled from the financial statements of the respective
Partner Companies:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
----------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue......................... $ 358,768 $26,176 $ 509,766 $ 37,580
----------------------------------------------------------------------------------------------------
Net Loss........................ $(360,995) $(29,947) $(501,699) $(47,048)
----------------------------------------------------------------------------------------------------
</TABLE>
5. Debt
Convertible Subordinated Notes
In December, 1999, the Company issued $566.3 million of convertible
subordinated notes. The notes bear interest at an annual rate of 5.5% and mature
in December, 2004. The notes are convertible at the option of the holder, at any
time on or before maturity into shares of the Company's common stock at a
conversion price of $127.44 per share, which is equal to a conversion rate of
7.8468 shares per $1,000 principal of notes. Additionally, the notes may be
redeemed by the Company if the Company's closing stock price exceeds 150% of the
conversion price then in effect for at least 20 trading days within a period of
30 consecutive trading days. The conversion rate is subject to adjustment. The
Company recorded interest expense of $9.2 million and $18.4 million relating to
these notes during the three and six months ended June 30, 2000 with interest
payments due semi annually through December 21, 2004. Issuance costs of $18.3
million were recorded in other assets and are being amortized as interest
expense over the term of the notes using the effective interest method. The fair
value of the convertible subordinated notes is approximately $384.9 million.
Credit Facilities
In March 2000, the Company's revolving bank credit facility was amended to,
among other things, increase the Company's credit facility to provide for
borrowings up to $250 million, including the issuance of letters of credit up to
$125 million. The agreement includes a $125 million 364-day secured line of
credit and a $125 million two-year secured revolving credit facility. Prior to
this amendment, the credit facility was structured as a $50 million term
revolving credit facility bearing interest at the Company's option at prime or
LIBOR plus 2.5%.
The revolving facility and line of credit are subject to .375% and .25%
unused commitment fees, respectively, bear interest, at the Company's option at
LIBOR plus 2.0% or the lenders' Base Rate (the lenders' Base Rate being the
greater of (i) the prime rate or (ii) the Federal Funds Rate plus .5%) and are
secured by substantially all of the Company's assets (including the Company's
holdings in its domestic Partner Companies). Borrowing availability under the
facility is based on the fair market value of the Company's holdings of publicly
traded Partner Companies and the value, as defined in the facility, of the
Company's private Partner Companies. The credit facility contains certain
financial covenants which include restrictions on, among other things,
dispositions, certain other indebtedness and payment of dividends and similar
distributions. No amounts were outstanding on these facilities as of June 30,
2000. Letters of Credit of $5.6 million have been issued as of June 30, 2000 and
have reduced availability under the facility by such amounts. At June 30, 2000,
based on the provisions of the borrowing base, the full borrowing base was
available, less outstanding letters of credit.
14
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Debt (Continued)
Long-Term Debt
The Company's long-term debt of $3.2 million (net of current portion of
$1.6 million) relates to its Consolidated Partner Companies, is non-recourse to
the Company, and primarily consists of secured notes due to stockholders and
outside lenders of ICG Commerce and RightWorks and capital lease commitments.
6. Acquisitions
In May 2000, the Company acquired a 50.2% interest in Harbour Ring
International Holdings Limited, a listed company on the Hong Kong Stock
Exchange which was renamed ICG AsiaWorks, for approximately $116.5 million in
cash. ICG AsiaWorks will be the Company's platform for acquiring and building
market maker and internet infrastructure companies in the Asia region. While
there is no immediate plan for disposal, it is the intention of ICG AsiaWorks to
dispose of two subsidiaries of ICG AsiaWorks which operate unrelated businesses.
Due to its intention to dispose of these businesses as well as certain
contractual arrangements which result in a lack of effective control and
substantial restrictions on management, ICG AsiaWorks does not consolidate these
businesses for financial reporting purposes.
In June 2000, the Company acquired a 62% interest in RightWorks for
5,892,048 shares of the Company's common stock valued at approximately $754
million and $22 million in cash. RightWorks is a provider of B2B exchange
software which offers an extensive range of capabilities to market makers.
Due to the Company's majority ownership positions in the above Partner
Companies it has accounted for interests in these companies under the
consolidation method of accounting. The Company utilized the purchase method of
accounting for the acquisition of these Partner Companies and, accordingly, the
purchase prices have been allocated to the assets purchased and the liabilities
assumed based upon their fair value at the date of acquisition. The purchase
price allocations for each of the above acquisitions was allocated as follows:
(in thousands) RightWorks ICG AsiaWorks
---------- -------------
Working capital $29,596 $183,772
Other assets (liabilities), net 3,166 28,989
Deferred tax liabilities 269,724 ---
Developed technology 21,700 ---
Other identifiable intangible assets 17,360 ---
Goodwill 976,103 9,876
In-process research and development 10,850 ---
Purchased in-process research and development (IPR&D) represents the value
assigned to research and development projects of RightWorks which were not
complete at the acquisition date and had no alternative future use. In
accordance with SFAS No. 2, "Accounting for Research and Development Costs,"
and FASB interpretation No.4 "Applicability of SFAS No.2 to Business
Combinations Accounted For By The Purchase Method," amounts assigned to IPR&D
meeting the above stated criteria must be charged to expense as part of the
allocation of purchase price of a business combination. The IPR&D was valued
using the income approach, which includes an analysis of the markets, cash
flows, risks associated with achieving such cash flows, fair returns on all
identifiable assets and consideration of the stage of completion of such
projects. The IPR&D charge, which had no associated tax benefit, was classified
as an operating expense on the Company's consolidated statement of operations.
15
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Acquisitions (Continued)
The above allocations of purchase price are preliminary and subject to
adjustment upon finalization of the purchase accounting. Goodwill and other
intangible assets are being amortized on a straight-line basis over a period of
three years.
In June 2000 the Company acquired a 39% interest in eCredit.com,
("eCredit") Inc. for 4,655,558 shares of the Company's common stock valued at
approximately $424.7 million. eCredit.com provides real-time credit, financing
and related services to e-businesses over an internet based platform which
connects businesses to financing partners and information sources at the point
of sale. The Company also obtained a warrant to purchase an additional 1.6
million shares of eCredit.com from time to time at any time from the effective
date of a qualified initial public offering, as defined in the warrant
agreement, or a change in control for a period of four years. The investment in
eCredit.com has been accounted for using the equity method of accounting.
In addition to the above transactions during the six months ended June 30,
2000 the Company paid $869.9 million in cash in the aggregate to acquire
interests in or make advances to new and existing partner companies. These
companies included: Arbinet Communications, AssetTRADE.com, Autovia Corporation,
Blackboard, Inc., Benchmarking Partners, Inc., Buy.co.UK Limited, BuyMedia.com,
Inc., Breakaway Solutions, Cargobiz.com AG., CentriMed.com, Inc., ClearCommerce
Corporation, Collabria, Inc., CommerceQuest, Inc., ComputerJobs.com,
CourtLink/Justicelink, e-Chemicals, Inc., CreditTrade, Cybercrop.com, Delphion,
Deja.com, GoIndustry AG, eCatalogs, Inc. eColony, eMetra Inc. Emptoris,
Entegrity Solutions, EumediX, Eu-Supply.com Svenska AB, FOL NetworksLimited,
Freeborders.com, Inc., Internet Commerce Systems, Inc., VOWS Interactive Limited
(dba Mesania), ICG Commerce, Industrial America, Internet Healthcare Group,
LLC., iSky, Inc., LinkShare Corporation, Logistics.com, Inc., Jamcracker, Inc.,
MetalSite, L.P., NationStreet, Inc., NetVendor, Inc., Onvia.com Corporation,
PaperExchange.com, Inc., Print Mountain, Ltd., Retail Exchange.com, Inc.,
ServiceSoft, Inc., Simplexis.com, StarCite, Inc., Syncra Systems, Inc.,
Tibersoft Corp., TALPX, Inc., TeamOn.com, Inc., Traffic.com, Inc., Universal
Access, Inc., VerticalNet Europe, Inc., and Vivant Corporation. During the six
months ended June 30 2000, the Company also acquired an interest in new and
existing partner companies for 3,930,252 shares of the Company's common stock
valued at approximately $170.2 million. These companies included: eChemicals,
Inc., Breakaway Solutions, CommerceQuest, Inc., ComputerJobs.com, Inc. and
Emptoris.
Presented below is unaudited selected proforma financial information for
the six month periods ended June 30, 2000 as if the above noted acquisitions
occurred at the beginning of the period. The unaudited selected financial
information are not indicative of the actual results that would have occurred
had the acquisitions been consummated at the beginning of the period presented
and is not intended to be a projection of future results.
Six months ended
June 30, 2000
----------------
(in thousands except per share data)
Revenue $ 19,895
Net loss (113,279)
Net Income (Loss) per share
Basic (.41)
Diluted (.41)
16
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Segment Information
The Company's reportable segments, using the "management approach" under
SFAS 131, "Disclosures About Segments of a Business Enterprise and Related
Information," consist of Partner Company Operations and General ICG Operations.
Partner Company Operations includes the effect of consolidating Breakaway
Solutions for the three and six months ended June 30, 1999 and Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts for the three and six
months ended June 30, 2000 and Emptoris, Delphion, AssetTRADE, ICG Asiaworks,
Industrial America and Rightworks for the three months ended June 30, 2000 and
recording the Company's share of earnings and losses of Partner Companies
accounted for under the equity method of accounting. During the three months
ended June 30, 2000 our ownership in EmployeeLife.com dropped below 50% and
accordingly, the Company has accounted for its ownership in EmployeeLife.com as
an equity method investment since the date the Company's ownership dropped below
50%.
Breakaway Solutions' operations include implementation of various computer
applications. Animated Images' operations include software development and
consulting services. ICG Commerce's operations include purchasing services and
consulting services. RightWorks provides internet based software for powering
B2B digital marketplaces. Emptoris develops procurement management systems and
provides consulting services to power e-market places. AssetTRADE,
CyberCrop.com, Delphion, EmployeeLife.com, ICG Asiaworks and iParts are
development stage companies that have generated negligible revenue since their
inception. Partner Companies accounted for under the equity method of accounting
operate in various businesses. General ICG Operations represents the expenses of
providing strategic and operational support to the 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 conducted
principally in the United States of America during all periods presented.
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.
17
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Segment Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
------------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Partner Company Operations
Revenue $ 3,375 $ 4,480 $ 5,205 $ 7,591
---------- --------- ---------- ---------
Operating expenses
Cost of revenue 1,913 2,450 2,602 4,004
Selling general and administrative 41,016 4,364 54,610 6,168
Research and development 2,197 --- 2,197 ---
Purchased in process research and development 10,850 --- 10,850 ---
Amortization of goodwill and other intangibles 93,141 4,506 132,768 6,501
---------- --------- ---------- ---------
Total operating expenses 149,117 11,320 203,027 16,673
(145,742) (6,840) (197,993) (9,082)
Other income (expense), net 2 (1) 2 (7)
Interest income 2,770 30 2,899 61
Interest expense (1,946) (40) (2,072) (54)
---------- --------- ---------- ---------
Income (loss) before income taxes,
Minority interest and equity income (loss) (144,916) (6,851) (196,993) (9,082)
Income taxes --- --- 770 ---
Minority interest 11,376 1,302 17,277 1,448
Equity income (loss) (116,778) (9,439) (159,382) (15,166)
---------- --------- ---------- ---------
Loss from Partner Company Operations $ (250,318) $ (14,988) $ (338,328) $ (22,800)
========== ========= ========== =========
General ICG Operations
Research and development 8,961 --- 8,961 ---
General and administrative 26,309 3,786 43,198 5,519
---------- --------- ---------- ---------
(35,270) (3,786) (52,159) (5,519)
Other income (expense), net 5,497 2,398 663,183 31,081
Interest Income (expense), net 586 32 10,044 310
Income Taxes 92,639 5,134 (117,631) 5,797
---------- --------- ---------- ---------
Income (loss) from General ICG Operations $ 63,452 $ 3,778 $ 503,437 $ 31,669
========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- --------------
(in thousands)
(Unaudited)
<S> <C> <C>
Assets
Partner Company Operations
Cash and cash equivalents......................................................... $ 328,274 $ 16,899
Carrying value of equity method Partner Companies................................. 1,813,596 491,977
Goodwill and other intangible assets.............................................. 1,191,048 23,649
Other............................................................................. 68,857 4,527
---------- ----------
3,401,775 537,052
---------- ----------
General ICG Operations
Cash and cash equivalents......................................................... 353,088 1,326,560
Carrying value of cost method Partner Companies................................... 124,711 55,362
Other............................................................................. 319,911 131,410
---------- ----------
797,710 1,513,332
---------- ----------
$4,199,485 $2,050,384
=========== ==========
</TABLE>
18
<PAGE>
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Parent Company Financial Information
Parent company financial information is provided to present the financial
position and results of operations of the Company as if Animated Images,
AssetTRADE, Breakaway Solutions, CyberCrop.com, Delphion, EmployeeLife.com,
Emptoris, ICG Asiaworks, ICG Commerce, Industrial America, iParts and RightWorks
("consolidated companies") were accounted for under the equity method of
accounting for all applicable periods presented. The Company's share of the
consolidated companies' losses is included in "Equity income (loss)" in the
Parent Company Statements of Operations for all periods presented based on the
Company's ownership percentage in each period. The carrying value of the
consolidated companies as of June 30, 2000 and December 31, 1999 is included in
"Ownership interests in and advances to Partner Companies" in the Parent Company
Balance Sheets.
Parent Company Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
(in thousands)
(Unaudited)
<S> <C> <C>
Assets
Current assets................................................. $ 368,386 $1,332,803
Ownership interests in and advances to Partner Companies....... 3,237,013 571,706
Other.......................................................... 304,613 125,166
---------- ----------
Total assets.............................................. 3,910,012 2,029,675
---------- ----------
Liabilities and stockholders' equity
Current liabilities............................................ 66,430 43,204
Non-current liabilities........................................ 933,043 566,250
Stockholders' equity........................................... 2,910,539 1,420,221
---------- ----------
Total liabilities and stockholders' equity................ $3,910,012 $2,029,675
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Parent Company Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
-------- -------- -------- -------
Operating expenses
Research and development 8,961 -- 8,961 --
In process research and development 10,850 -- 10,850 --
Amortization of goodwill and intangibles 87,435 4,186 125,867 6,181
General and administrative 26,309 3,786 43,198 5,519
---------- --------- -------- --------
Total operating expenses 133,555 7,972 188,876 11,700
---------- --------- -------- --------
Other income net 5,497 2,398 663,183 31,081
Interest income, net 586 32 10,044 310
---------- --------- -------- --------
Income (loss) before income taxes,
And equity income (loss) (127,472) (5,542) 484,351 19,691
Income taxes 92,639 5,134 (117,631) 5,797
Equity income (loss) (152,033) (10,802) (201,611) (16,619)
---------- --------- -------- --------
Net income (loss) $(186,866) ($11,210) $165,109 $ 8,869
========== ========= ======== ========
</TABLE>
19
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. We have based these forward-looking statements on our current
expectations and projections about future events. These forward looking
statements are subject to risks, uncertainties and assumptions about us and our
partner companies, including, among other things:
-- development of an e-commerce market,
-- our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the changing
needs of these markets,
-- our ability to successfully execute our business model,
-- our partner companies' ability to compete successfully against direct
and indirect competitors,
-- our ability to acquire interests in additional companies,
-- growth in demand for Internet products and services,
-- adoption of the Internet as an advertising medium,
-- our ability to successfully expand our business internationally, and
-- our ability to raise capital if necessary.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of these factors.
General
Internet Capital Group, Inc. ("ICG") is an Internet company actively
engaged in B2B e-commerce through a network of partner companies. As of June 30,
2000 we owned interests in 77 B2B e-commerce companies which we refer to as our
partner companies. We focus on two types of B2B e-commerce companies, which we
call market makers and enabling service providers.
Although we refer in this report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and indicate that we
have a "partnership" with these companies, we do not act as an agent or legal
representative for any of our partner companies, and we do not have the power or
authority to legally bind any of our partner companies, and we do not have the
types of liabilities in relation to our partner companies that a general partner
of a partnership would have.
Because we acquire significant interests in B2B e-commerce companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. While our partner
companies have consistently reported losses, we have recorded net income in
certain periods and experienced significant volatility from period to period due
to one-time transactions and other events incidental to our ownership interests
in and advances to partner companies. We do not know if we will report net
income in any period. These transactions and events are described in more detail
under "Net Results of Operations--General ICG Operations--Other Income" and
include dispositions of, and changes to, our partner company ownership
interests, dispositions of our holdings of available-for-sale securities, and
impairment charges. On a continuous basis, but no less frequently than at the
end of each quarterly reporting period, we evaluate the carrying value of our
ownership interests in and advances to each of our partner companies for
possible impairment based on achievement of business plan objectives and
milestones, the fair value of each ownership interest and advance in the partner
company relative to carrying value, the financial condition and prospects of the
partner company, and other relevant
20
<PAGE>
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.
We operate in an industry which is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of goodwill could change
in the near term and that the effect of such changes on the financial statements
could be material. While we currently believe that the recorded amount of
goodwill is not impaired, there can be no assurance that our future results will
confirm this assessment or that a significant write-down or write-off of
goodwill will not be required in the future.
The presentation and content of our financial statements is largely a
function of the presentation and content of the financial statements of our
partner companies. To the extent our partner companies change the presentation
or content of their financial statements, as may be required upon review by the
Securities and Exchange Commission or changes in accounting literature, the
presentation and content of our financial statements may also change.
On August 23, 1999 we received an exemptive order from the Securities and
Exchange Commission under Section 3(b)(2) of the Investment Company Act of 1940
declaring us to be primarily engaged in a business other than that of investing,
reinvesting, owning, holding or trading in securities.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities or those we have effective
control over 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 stockholders in the earnings or losses of a consolidated partner company
is reflected in the caption "Minority interest" in our Consolidated Statements
of Operations. Minority interest adjusts our consolidated net results of
operations to reflect only our share of the earnings or losses of the
consolidated partner company.
We acquired controlling majority ownership interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts during
the three months ended June 30, 1999, CyberCrop.com during the three months
ended September 30, 1999 and Animated Images and ICG Commerce during the three
months ended December 31, 1999 and AssetTRADE, Delphion, Emptoris, ICG
Asiaworks, IndustrialAmerica and RightWorks during the three month period
ended June 30, 2000, each of which was consolidated from the date of its
acquisition. Due to Breakaway Solutions' initial public offering in October
1999, our voting ownership interest in Breakaway Solutions decreased below 50%
and we have accounted for Breakaway Solutions under the equity method of
accounting since October 1999. During the three months ended June 30, 2000 our
ownership in EmployeeLife.com dropped below 50% and accordingly, we have
accounted for our ownership in EmployeeLife.com as an equity method investment
since that date. As of June 30, 2000, Animated Images, AssetTRADE,
CyberCrop.com, Delphion, Emptoris, ICG Asiaworks, IndustrialAmerica, ICG
Commerce, iParts and RightWorks 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
21
<PAGE>
exercise significant influence with respect to a partner company depends on an
evaluation of several factors including, among others, representation on the
partner company's board of directors and ownership level, which is generally a
20% to 50% interest in the voting securities of the partner company, including
voting rights associated with our holdings in common, preferred and other
convertible instruments in the partner company. Under the equity method of
accounting, a partner company's accounts are not reflected within our
Consolidated Statements of Operations; however, our share of the earnings or
losses of the partner company is reflected in the caption "Equity income (loss)"
in the Consolidated Statements of Operations. As of December 31, 1999, we
accounted for 31 of our partner companies under the equity method of accounting.
As of June 30, 2000, we accounted for 54 of our partner companies under this
method.
Our partner companies accounted for under the equity method of accounting
at December 31, 1999 and June 30, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner ---------------------------
Company December 31, June 30,
Since 1999 2000
------- ------------ --------
<S> <C> <C> <C>
EQUITY METHOD:
AssetTRADE.com, Inc........................................................ 1999 17% N/A
AUTOVIA Corporation........................................................ 1998 N/A 20%
BidCom, Inc................................................................ 1999 35% 31%
Blackboard, Inc............................................................ 1998 29% 27%
Breakaway Solutions, Inc................................................... 1999 40% 33%
Buy.co.uk. limited......................................................... 2000 N/A 33%
BuyMedia.com Inc........................................................... 2000 N/A 34%
CapSpan LLC................................................................ 2000 N/A 33%
CentriMed.com, Inc......................................................... 2000 N/A 47%
CommerceQuest, Inc......................................................... 1998 28% 32%
Commerx, Inc............................................................... 1998 40% 39%
ComputerJobs.com, Inc...................................................... 1998 33% 48%
CreditTrade................................................................ 2000 N/A 25%
Data West Corporation (dba CourtLink, Inc)................................. 1999 19% 33%
DNI Holdings, Inc. (dba Blackbird)......................................... 2000 N/A 20%
eCatalogs, Inc............................................................. 2000 N/A 27%
e-Chemicals, Inc........................................................... 1998 N/A 46%
eColony.................................................................... 2000 N/A 20%
eCredit.com, Inc........................................................... 2000 N/A 39%
eMarketWorld, Inc.......................................................... 1999 42% 42%
eMerge Interactive, Inc.................................................... 1999 45% 39%
eMetra Ltd................................................................. 2000 N/A 45%
EmployeeLife.com, Inc...................................................... 1999 N/A 49%
EmediX.com BV.............................................................. 2000 N/A 37%
eu-supply.com.............................................................. 2000 N/A 29%
FOL Networks Limited....................................................... 2000 N/A 32%
Freeborders.com, Inc....................................................... 2000 N/A 46%
Internet Commerce Systems, Inc............................................. 1999 43% 43%
Internet Healthcare Group L.L.C............................................ 2000 N/A 35%
Investor Force Holdings, Inc............................................... 1999 49% 43%
iSky, Inc.................................................................. 1996 31% 28%
Jamcracker, Inc............................................................ 1999 24% 24%
JusticeLink................................................................ 1999 37% N/A
LinkShare Corporation...................................................... 1998 34% 39%
Logistics.com, Inc......................................................... 2000 N/A 34%
Mesania.................................................................... 2000 N/A 50%
MetalSite L.P.............................................................. 1999 44% 43%
NationStreet, Inc.......................................................... 1999 38% 38%
NetVendor, Inc............................................................. 1999 27% 37%
Onvia.com, Inc............................................................. 1999 23% 21%
PaperExchange.com, LLC..................................................... 1999 24% 22%
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Voting Ownership
Partner ---------------------------
Company December 31, June 30,
Since 1999 2000
------- ------------ --------
<S> <C> <C> <C>
PrintMountain Inc. ........................................................ 2000 N/A 33%
Retail Exchange, Inc....................................................... 1999 30% 32%
SageMaker, Inc............................................................. 1998 21% 21%
Simplexis.com Corporation.................................................. 2000 N/A 48%
StarCite, Inc.............................................................. 1999 43% 38%
Syncra Systems, Inc. ...................................................... 1998 35% 36%
TALPX Inc.................................................................. 2000 N/A 28%
TeamOn.com, Inc............................................................ 2000 N/A 34%
Tibersoft Corporation...................................................... 2000 N/A 28%
traffic.com, Inc........................................................... 1999 20% 32%
United Messaging, Inc...................................................... 1999 37% 36%
Universal Access, Inc...................................................... 1999 24% 23%
USgift.com Corporation..................................................... 1999 38% 38%
VerticalNet, Inc........................................................... 1996 34% 29%
Vivant! Corporation........................................................ 1998 31% 38%
</TABLE>
As of June 30, 2000, we owned voting convertible preferred stock in all
companies listed except Breakaway Solutions, eMerge Interactive, Onvia.com,
Universal Access and VerticalNet, in which we owned voting common stock and
CommerceQuest and e-Chemicals, in which we owned non-voting convertible
debentures. We also owned voting common stock in a number of these partner
companies and have representation on the board of directors of all of the above
partner companies. During the three months ended March 31, 2000 Plan Sponsor
Exchange, Inc. changed its name to InvestorForce.com, which in turn was
succeeded by Investor Force Holdings, Inc., CourtLink, Inc. merged with
JusticeLink, Inc., and Residential Delivery Services, Inc. changed its name to
NationStreet, Inc.
Those partner companies listed with a voting ownership of "N/A" reflects
that either these companies were accounted for under a different method at that
time (AUTOVIA Corporation and e-Chemicals were accounted for under the cost
method of accounting at December 31, 1999) or we had not acquired an interest in
the partner company as of December 31, 1999.
Most of our equity method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most
equity method partner companies incurred substantial losses in 1999 and are
expected to continue to incur substantial losses in 2000. Additionally, we
recognize goodwill amortization expense related to the excess basis of our
equity method partner companies.
Cost Method. Partner companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations.
Our partner companies accounted for under the cost method of accounting at
December 31, 1999 and June 30, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
Partner ---------------------------
Company December 31, June 30,
Since 1999 2000
------- ------------ --------
<S> <C> <C> <C>
COST METHOD:
Arbinet-thexchange, Inc. .................................................. 1999 8% 8%
AUTOVIA Corporation........................................................ 1998 16% N/A
Benchmarking Partners, Inc................................................. 1996 12% 19%
Cargo Biz.................................................................. 2000 N/A 15%
ClearCommerce Corp......................................................... 1997 15% 11%
Collabria, Inc............................................................. 1999 11% 13%
Context Integration, Inc................................................... 1997 14% 12%
Deja.com, Inc.............................................................. 1997 2% 2%
e-Chemicals, Inc........................................................... 1998 0% N/A
Entegrity Solutions Corporation............................................ 1996 11% 9%
GoIndustry AG.............................................................. 2000 N/A 19%
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Voting Ownership
Partner ---------------------------
Company December 31, June 30,
Since 1999 2000
------- ------------ --------
<S> <C> <C> <C>
Persona, Inc............................................................... 1998 8% 7%
Servicesoft Technologies, Inc.............................................. 1998 5% 5%
TRADEX Technologies, Inc................................................... 1999 10% N/A
U.S. Interactive, Inc...................................................... 1996 3% 2%
VerticalNet Europe......................................................... 2000 N/A 11%
</TABLE>
As of June 30, 2000, we owned voting convertible preferred stock in all
companies listed except Benchmarking Partners and Deja.com, in which we owned
non-voting convertible preferred stock and voting common stock, and US
Interactive, Inc., in which we owned voting common stock. We also owned voting
common stock in a number of these partner companies and in most cases have
representation on the board of directors of the above partner companies. We
record our ownership in debt securities at cost as we have the ability and
intent to hold these securities until maturity. In addition to our investments
in voting and non-voting equity and debt securities, we also periodically make
advances to our partner companies in the form of promissory notes. There were
advances to cost method partner companies totaling $3.0 million at June 30,
2000. During the period ended June 30, 2000, PrivaSeek, Inc. changed its name to
Persona, Inc. Additionally, Farming OnLine Ltd changed its name to FOL Networks
Limited, Purchasing Solutions, Inc. changed its name to ICG Commerce Holdings,
Inc., ICG Patent, Inc. changed its name to Delphion, Inc., Arbinet
Communications changed its name to Arbinet-thexchange, Inc., and ServiceSoft
Technologies, Inc., changed its name to ServiceSoft, Inc.
Those Partner Companies listed with a voting ownership of "N/A" reflects
that either these companies were accounted for under a different method at that
time (AUTOVIA Corporation and e-Chemicals changed from cost method companies at
December 31, 1999 to equity method companies at June 30, 2000) or, in the case
of TRADEX, we sold our ownership interest during the period ended June 30, 2000.
Most of our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most cost
method partner companies incurred substantial losses in 1999 and in the six
months ended June 30, 2000 and are expected to continue to incur substantial
losses in 2000. None of our cost method partner companies have paid dividends
during our period of ownership and they generally do not intend to pay dividends
in the foreseeable future. US Interactive is accounted for under Statement of
Financial and Accounting Standards No. 115.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting or the equity method of accounting. For example, we consolidated
Breakaway Solutions' financial statements from the date of acquisition through
September 30, 1999 and EmployeeLife.com from the date of acquisition through
March 31, 2000. Due to Breakaway Solutions' initial public offering in October
1999, and additional equity transactions effected for EmployeeLife.com
subsequent to March 31, 2000, our voting ownership interest in Breakaway
Solutions and EmployeeLife.com decreased to below 50%. Therefore, we have
applied the equity method of accounting since these dates.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts during
the three months ended June 30, 1999, and CyberCrop.com during the three months
ended September 30, 1999, and Animated Images and ICG Commerce during the three
months ended December 31, 1999 and Emptoris, AssetTRADE, Delphion,
IndustrialAmerica, ICG AsiaWorks and RightWorks during the three months
ended June 30, 2000, each of which was consolidated from the date of its
acquisition. The presentation of our consolidated financial statements looks
substantially different as a result of consolidating Animated Images,
AssetTRADE, CyberCrop.com, Delphion, Emptoris, ICG Asiaworks, ICG Commerce,
Industrial America, iParts and RightWorks and no longer consolidating Breakaway
Solutions and EmployeeLife.com in our financial statements for the three and six
months ended June 30, 2000 versus comparable periods in the prior year.
To understand our net results of operations and financial position without
the effect of consolidating our majority owned subsidiaries, Note 8 to our
Consolidated Financial Statements summarizes our Parent Company Statements of
Operations and Balance Sheets which treat our majority owned subsidiaries as if
they were accounted for under the equity method of accounting for all periods
presented. Our share of the losses of Animated Images, AssetTRADE, Breakaway
Solutions, CyberCrop.com, Delphion, Emptoris, ICG Asiaworks, ICG Commerce,
Industrial America, iParts and RightWorks is included in "Equity income (loss)"
in the Parent Company Statements of Operations. The carrying value of Animated
Images, Breakaway Solutions, CyberCrop.com, EmployeeLife.com,
22
<PAGE>
Delphion, Emptoris, ICG Asiaworks, ICG Commerce, IndustrialAmerica, iParts and
RightWorks, as of June 30, 2000, is included in "Ownership interests in and
advances to Partner Companies" in the Parent Company Balance Sheets.
Net Results of Operations
Our reportable segments determined in accordance with Statement of
Financial Accounting Standards No. 131 are Partner Company Operations and
General ICG Operations. Partner Company Operations includes the effect of
consolidating Animated Images, AssetTRADE, Breakaway Solutions, CyberCrop.com,
Delphion, Emptoris, EmployeeLife.com, ICG Asiaworks, ICG Commerce,
IndustrialAmerica, iParts and RightWorks from their dates of acquisition, 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.
Net Results of Operations-Partner Company Operations
Consolidated Companies--Analysis of the periods ended June 30, 2000 and 1999.
For the three and six months ended June 30, 1999, Breakaway Solutions was
consolidated and accounted for nearly all of our consolidated revenue and a
significant portion of our consolidated operating expenses. Breakaway Solutions
had been accounted for under the equity method since October 1999 and discussion
related to Breakaway Solutions' results of operations can be found under the
heading "Equity Income (Loss)".
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts
were consolidated during the three and six month period ended June 30, 2000, and
Emptoris, Delphion, ICG Asiaworks, IndustrialAmerica and RightWorks were
consolidated from their dates of acquisition for the three months ended June 30,
2000 and EmployeeLife.com was consolidated from its date of acquisition through
March 31, 2000. Due to additional equity investments in AssetTRADE it was
consolidated at June 30, 2000. The consolidated partner companies accounted for
$3.4 million and $50.8 million for the three months ended June 30, 2000 and $5.2
million and $66.3 million for the six months ended June 30, 2000, of our Partner
Company Operations' revenue and operating expenses, respectively. AssetTRADE,
CyberCrop.com, Delphion, Emptoris, EmployeeLife.com, ICG Asiaworks,
IndustrialAmerica and iParts, which are development stage companies, have
generated negligible revenue since their inception, and incurred aggregate
operating expenses of $19.7 million, and $23.3 million, during the three and six
months ended June 30, 2000, respectively. Animated Images, ICG Commerce and
RightWorks generated aggregate revenues of approximately $1.7 million and $3.5
million, during the three and six months ended June 30, 2000, respectively, and
incurred aggregate operating expenses of $31.1 million, and $43.0 million,
consisting primarily of selling, general and administrative expenses as they
deploy their business models. Also included in selling, general and
administrative expenses was $20.6 million and $21.6 million, of goodwill
amortization related to our acquisitions of these partner companies for the
three and six months ended June 30, 2000, respectively.
During the three months ended June 30, 2000 we acquired a majority interest
in RightWorks Corporation. Purchased in-process research and development
represents the value assigned to research and development projects of RightWorks
which were not complete at the acquisition date and had no alternative future
use. In accordance with SFAS No. 2, "Accounting for Research and Development
Costs," and FASB Interpretation No. 4 "Applicability of SFAS No. 2 to Business
Combinations Accounted for by the Purchase Method," amounts assigned to
purchased in-process research and development meeting the above stated criteria
must be charged to expense as part of the allocation of purchase price of a
business combination. The purchased in-process research and development was
valued using the income approach, which includes an analysis of the markets,
cash flows and risks associated with achieving such cash flows, fair returns on
all identifiable assets and consideration of the state of completion of such
projects. The purchased in-process research and development charge, which had no
associated tax benefit, was classified as an operating expense on our
consolidated statement of operations. The current purchase price allocation,
including the purchased in-process research and development charge, is
preliminary and subject to adjustment upon finalization of our purchase
accounting. As a result we may increase or reduce the amount of the purchased
in-process research and development charge in the three months ended September
30, 2000.
Equity Method Companies
A significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership interest. These
companies are accounted for under the equity method of accounting. Equity income
(loss) fluctuates with the number of companies, and the net results of
operations of these companies. Certain amounts recorded to reflect our share of
the income (loss) of our partner companies accounted for under the equity method
are based on estimates and on unaudited results of operations of those partner
companies and may require adjustments in the future when audits of these
entities are made final. During the three and six months ended June 30, 2000 and
the years ended December 31, 1999 and 1998 we utilized cash, stock, or notes
payable totaling $757.6 million, $1.24 billion, $495.6 million and $23.7
million, respectively, to acquire partner company interests accounted for under
the equity method of accounting which resulted in goodwill of $1.01 billion,
$1.25 billion, $293.7 million and $15.1 million, respectively, which is being
amortized over 3 years. Without giving effect to additional acquisitions in
equity method companies subsequent to June 30, 2000, we expect goodwill
amortization related to equity method companies to approximate $186.2 million
through the remainder of 2000. The extent to which actual goodwill
23
<PAGE>
amortization in 2000 related to equity method companies exceeds this estimate
will depend primarily upon the amount of capital we deploy in 2000 for the
acquisition of additional ownership interests in equity method companies. Equity
method partner company goodwill which was previously classified in equity loss
in the Company's consolidated statements of operation has been reclassified to
amortization of goodwill and intangibles for all periods presented. The
amortization related to equity method partner companies for three and six months
ended June 30, 2000 was $17.8 million and $103.5 million and for the three and
six months ended June 30, 1999 was $3.2 million and $4.7 million.
During the period ended June 30, 2000 we accounted for 54 companies under
the equity method of accounting, compared to 19 for the period ended June 30,
1999. All of the companies, incurred losses in the three and six months ended
June 30, 2000. Our equity loss is related to our share of the equity method
companies' income and losses for the period. Of the $116.8 million and $159.4
million equity loss related to our share of the income and losses of companies
accounted for under the equity method for the three and six months ended June
30, 2000, $(25.2) million and $(11.8) million in income(loss) was attributable
to VerticalNet and $(7.4) million and $(12.9) million, $(2.4) million and $(4.5)
million, $(5.6) million and $(6.9) million and $(1.6) million and $(2.8)
million, respectively, were attributable to Onvia.com's, Universal Access',
Breakaway Solutions' and eMerge Interactive's net losses, for the three and six
months ended June 30, 2000, respectively, while the other 49 companies accounted
for the remaining equity losses ranging from less than $0.1 million to $5.7
million.
For the three and six months ended June 30, 2000, VerticalNet had
revenues of $53.6 million and $81.0 million, respectively, and a net loss of
$85.7 million and $43.6 million, respectively compared to revenues of $3.6
million and $5.5 million and a net loss of $6.8 million and $12.4 million in the
comparable periods in 1999. For the three and six months ended June 30, 2000,
VerticalNet's loss attributable to common shareholders after deducting preferred
stock dividends was $87.1 million and $45.1 million, respectively. VerticalNet's
revenue increased from the three months ended March 31, 2000 to the three months
ended June 30, 2000 due to a significant increase in each of its primary revenue
streams, including exchange transactions, advertising and sponsorship, and
e-commerce. Net exchange transaction revenues from NECX.com LLC, a wholly owned
subsidiary of VerticalNet, reached $29.1 million or 54 percent of total revenues
for the quarter. This increase was in part attributable to an acquisition made
by the subsidiary during the quarter. Advertising revenues reached $20.4
million, which represented 38 percent of total revenues for the quarter. Of the
advertising revenues $5.3 million, or 26 percent, was derived from storefronts
and $15.1 million, or 74 percent, was derived from sponsorships. E-commerce
fees (including slotting fees, product sales, commissions, education,
training and auction listing and transaction fees) increased to $4.0 million.
During the first quarter, VerticalNet recorded net income of $42.1 million,
primarily related to the net gain of $79.9 million resulting from the receipt of
Ariba, Inc. shares in exchange for its equity interest in TRADEX Technologies,
Inc. when Ariba acquired Tradex and the subsequent sale of a portion of the
Ariba common stock. Excluding this gain, VerticalNet's losses increased period
to period due to its cost of maintaining, operating and promoting an increased
number of vertical trade community features and services, as well as the
exchange operation and the newly acquired development stage software company,
Tradeum, Inc. Operational and customer service costs also increased due to the
increased number of customers that resulted from VerticalNet's commercial
relationship with Microsoft. Additional costs include increased amortization
expense associated with acquisitions and a conversion payment to debt holders.
For the three and six months ended June 30, 2000, Onvia.com had
revenues of $29.3 million and $50.8 million, respectively, and net losses of
$34.7 million and $60.8 million, respectively, compared to revenue of $3.6
million and $5 million, respectively, and a net loss of $3.8 million and $5.4
million, respectively, for the comparable periods in 1999. The company has
generated substantially all of its revenue from product sales. Onvia.com's
revenue increased period to period due to increased product sales to new and
existing customers. Onvia.com's losses increased period to period despite
improvement in negative gross margins due to additional selling, general and
administrative and technology costs incurred as it builds its customer base and
increases its operating expenses related to marketing and advertising programs
designed to build its brand and drive customer acquisition as well as increases
in personnel and non-cash equity compensation charges.
For the three and six months ended June 30 2000, Universal Access had
revenues of $9.5 million and $16.8 million, respectively, and net losses of
$10.4 million and $19.4 million, respectively, compared to revenues of
$2.7 million and $4.3 million, respectively and net losses of $2.2 million and
$3.3 million, respectively, for the comparable periods in 1999. The company has
generated substantially all of its revenue from providing ongoing, dedicated
circuit access. Monthly recurring circuit revenues are generated under client
contracts with terms ranging
24
<PAGE>
from 12 to 60 months and average 26 months. The increase in revenues was
attributable to an increase in the volume of circuits sold due to an increase in
the number of customers as well as additional sales to existing customers.
Universal Access' losses increased period to period as a result of increased
operating expenses as the result of increases in personnel, depreciation,
amortization and marketing expenses and non-cash equity compensation charges.
For the three and six months ended June 30, 2000, Breakaway Solutions had
revenues of $35.2 million and $53.3 million, respectively, and net losses of
$16.9 million and $20.1 million, respectively, compared to revenues of $4.5
million and $7.6 million, respectively, and net losses of $2.3 million and $2.5
million for the comparable periods in 1999. Breakaway Solutions is a full
service provider of e-business solutions and application hosting. Prior to
Breakaway Solutions' acquisition of Applica in 1999, Breakaway Solutions derived
no revenues from application hosting. Breakaway Solutions believes, however,
that application hosting will account for a significantly greater portion of
revenues in the future. For the three and six months ended June 30, 2000,
application hosting services generated $5.2 million and $0.8 million,
respectively. The increase in revenues was attributable to an increase in
billable consultants and billing rates as the market demand for internet
professional services continued to increase as well as $5.2 million and $8.0
million in application hosting revenues for the three and six months ended June
30, 2000, respectively, which did not exist in the comparable periods in 1999.
Breakaway Solutions' losses increased period to period as a result of increases
in personnel, marketing and increased depreciation and amortization expenses.
For the three and six months ended June 30, 2000, eMerge Interactive, Inc.
had revenues of $160.4 million and $199 million, respectively, and net losses of
$7.9 million and $13.4 million, respectively, compared to revenues of $2.0
million and $2.6 million, respectively, and net losses of $4.0 million and $6.0
million, respectively, for the comparable periods in 1999. Substantially all
revenue for the period was derived from cattle sales and comparisons to the
comparable periods in 1999 are not meaningful. Gross margins were less than 1%
during the quarter and significant sales and marketing and research and
development costs have contributed to eMerge Interactive's net loss.
Due to the early stage of development of the other companies in which we
acquire interests, new and existing partner companies accounted for under the
equity method are expected to incur substantial losses. Our share of these
losses is expected to be significant.
While most of the companies accounted for under the equity method of
accounting have generated losses to date, and therefore in most cases did not
incur income tax liabilities, these companies may generate taxable income in the
future. Our share of these companies' net income, if generated, would be reduced
to the extent of our share of these companies' tax expense.
Net Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. We commenced operations in March 1996 with offices in
Wayne, Pennsylvania and San Francisco, California. As the number of our
employees grew to support our operations and those of our partner companies, our
general and administrative costs increased. In late 1998, we opened an office in
Boston, Massachusetts, and in 1999 we established operations in Seattle,
Washington and London, England and in 2000 we established operations in Munich,
Germany, Paris, France and Tokyo, Japan and we significantly increased the
number of our employees. As a result of these initiatives, our general and
administrative costs increased $22.5 million and $37.7 million for the three and
six months ended June 30, 2000 compared to the comparable periods in 1999. Also,
included in this increase for the three and six months ended June 30, 2000 was
approximately $6.0 million in non-cash compensation relating to the acceleration
of stock option vesting. We plan to continue to hire new employees, open new
offices, and build our overall infrastructure, therefore we expect these costs
to continue to be substantially higher compared to historical periods.
During the years ended December 31, 1999 and 1998, we recorded aggregate
unearned compensation expense of $16.4 million and $0.7 million, respectively,
in connection with the grant of stock options to non-employees and the grant of
employee stock options with exercise prices less than the deemed fair value on
the respective dates of
25
<PAGE>
grant. General and administrative costs for the three and six months ended June
30, 2000 and 1999 included $1.8 million, $3.7 million, $0.1 million and $0.1
million, respectively, of amortization expense related to stock option grants.
Research and Development
During the three months ended June 30, 2000, the Company expensed $9.0
million on research and development projects principally relating to the
development of a technology platform to allow market makers to conduct business-
to-business transactions. We anticipate we will continue to devote substantial
resources to product development and that these costs may increase in the
future.
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 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended, Six Months Ended,
June 30, June 30,
-----------------------------------------------
2000 1999 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Sales of Excite holdings............................... $ -- $ -- $ -- $ 2,051
Sale of Excite to @Home Corporation.................... -- 2,719 -- 2,719
Sale of i2 Technologies holdings....................... -- -- 26,967 --
Issuance of stock by VerticalNet....................... 44,208 1,349 221,002 29,603
Issuance of stock by Breakaway Solutions............... 19,673 -- 19,673 --
Tradex Sale to Ariba................................... -- -- 449,284 --
Sales of Ariba holdings................................ (51,701) -- (51,701) --
Partner company impairment charges..................... (2,193) (1,677) (2,193) (3,297)
Other.................................................. (4,490) 7 151 5
-------- ------- --------- --------
$ 5,497 $ 2,398 $ 663,183 $ 31,081
======== ======= ========= ========
</TABLE>
28
<PAGE>
In February 1998, we exchanged all of our holdings of Matchlogic, Inc. for
763,820 shares of Excite, Inc. Throughout the remainder of 1998 we sold 716,082
shares of Excite. During the three month period ended March 31, 1999, we sold
23,738 shares of Excite which resulted in $2.5 million of proceeds and $2.1
million of gains.
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.
In August 1999, we divested our ownership interest in SMART Technologies,
Inc. due to the agreement of merger of SMART Technologies, Inc. and i2
Technologies, Inc. Upon completion of this merger during the three months ended
September 30, 1999, our ownership interest in and advances to SMART
Technologies, Inc. were converted into cash, common stock and warrants to
purchase common stock of i2 Technologies, Inc. During the period ended June 30,
2000, we sold 180,176 shares of i2 Technologies which resulted in $31 million in
proceeds received in April 2000 and a $27 million gain.
As a result of VerticalNet issuing additional shares for acquisitions and
during the three and six months ended June 30, 2000, our share of VerticalNet's
net equity increased by approximately $44.2 million and $221 million,
respectively. These increases adjust our carrying value in VerticalNet and
result in non-operating gains of $44.2 million and $221 million, before deferred
taxes of $16.4 million and $81.8 million, respectively, for the three and six
months ended June 30, 2000. Additionally, as a result of VerticalNet completing
its initial public offering in February 1999 and issuing additional shares in
May 1999, our share of VerticalNet's net equity increased by $28.3 million and
$1.3 million, respectively. This increase adjusts our carrying value in
VerticalNet and results in a non-operating gain of $1.3 million and $29.6
million, before deferred taxes of $0.5 million and $11.0 million, in the three
and six months ended June 30, 2000. As a result of Breakaway Solutions issuing
additional shares for acquisitions during the three months ended June 30, 2000,
our share of Breakaway Solutions' net equity increased by approximately $19.7
million. This increase adjusts our carrying value in Breakaway Solutions and
result in a non operating gain of $19.7 million before deferred taxes of $7.3
million. 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 stockholders'
equity.
In March 2000 we exchanged all of our interest in TRADEX Technologies, Inc.
for approximately 2.9 million shares of Ariba, Inc. common stock. Based on
Ariba's closing price on March 9, 2000, the closing date of the transaction, we
recorded a pre-tax gain of $449.3 million. Our holdings of Ariba are accounted
for as available-for-sale securities and will be marked to market, with the
difference between carrying value and market value, net of deferred taxes,
recorded in "Accumulated other comprehensive income" in the stockholders' equity
section of our Consolidated Balance Sheets in accordance with Statement of
Financial Accounting Standards No. 115. During the three months ended June 30,
2000 we sold approximately 631,530 shares of Ariba Common Stock at an average
price of $78.57 and recorded a loss of $51.7 million.
For the three and six months ended June 30, 1999, we recorded impairment
charges of $1.7 million and $3.3 million for the other than temporary decline in
the fair value of a cost method partner company. From the date we initially
acquired an ownership interest in this partner company, our funding to this
partner company represented all of the outside capital the company had available
to fund its net losses and capital asset requirements. During the six months
ended June 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. During the three months ended
June 30, 2000, we recorded an impairment charge of $2.2 million for the other
than temporary decline in the fair value of an equity method company. The
impairment charge we recorded was determined by comparing the carrying value of
our ownership interest in this equity method company to the estimated fair value
of our ownership interest.
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Interest Income
Our cash and cash equivalents at June 30, 2000 are invested primarily in
money market accounts and highly liquid, high quality debt instruments. During
the three months ended December 31, 1999, we received approximately $831 million
in our follow-on stock offering and approximately $549.9 million from the sale
of convertible subordinated notes. The increase in interest income in the three
and six months ended June 30, 2000 was primarily due to the significant increase
in our cash and cash equivalents as a result of these transactions.
Interest Expense
Interest expense increased during the period primarily as the result of the
December 1999 issuance of approximately $566.3 million in convertible
subordinated notes due 2004 bearing interest at 5.5%.
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.
Our net deferred tax liability of $366.4 million at June 30, 2000 primarily
consists of deferred tax liabilities of $129.1 million, relating primarily to
the gain on the sale of a partner company for marketable securities, partially
offset by tax assets resulting from net unrealized depreciation in available-
for-sale securities and deferred tax liabilities of $248.9 million relating
primarily to the excess of book carrying values over tax carrying values of our
partner companies.
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 June
30, 2000, our only publicly traded partner companies are VerticalNet, Breakaway
Solutions, eMerge Interactive, Onvia.com, Universal Access, and US Interactive.
As a result, there is significant risk that we may not be able to realize the
benefits of expiring carryforwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds,
proceeds from the issuance of convertible notes, proceeds from the sales of
marketable securities, and borrowings under bank credit facilities. From 1996
through December 31, 1999 we received approximately $1.79 billion in proceeds
including our initial public offering, follow-on public offering and debt
issuance.
In March 2000, our revolving bank credit facility was amended to, among
other things, increase our credit facility to provide for borrowings up to $250
million, including the issuance of letters of credit up to $125 million. The
agreement includes a $125 million 364-day secured line of credit and a $125
million two-year secured revolving credit facility. The revolving facility and
line of credit are subject to .375% and .25% unused commitment fees
respectively, bear interest, at our option at LIBOR plus 2.0% or the lenders'
Base Rate (the lenders' Base Rate being
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the greater of (i) the prime rate or (ii) the Federal Funds Rate plus .5%) and
are secured by substantially all of our assets (including our holdings in
domestic partner companies). Borrowing availability under the facility is based
on the fair market value of our holdings of publicly traded partner companies
and the value, as defined in the facility, of our private partner companies. As
of June 30 , 2000 no amounts were outstanding. Letters of credit of $5.6 million
have been issued as of June 30, 2000 and have reduced our availability under the
facility by such amounts.
Borrowing availability under the facility is based on the fair market value
of our holdings of publicly-traded partner companies (VerticalNet, Breakaway
Solutions, eMerge Interactive, Onvia.com, Universal Access and US Interactive as
of June 30, 2000) 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. At June 30, 2000, based on the provisions of the borrowing base, the
full borrowing base was available less outstanding letters of credit.
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 August 9, 2000, we were contingently
obligated for approximately $28.5 million of guarantee commitments and $39.9
million of funding commitments to new and existing partner companies. We will
continue to evaluate acquisition opportunities and expect to acquire additional
ownership interests in new and existing partner companies in the next 12 months;
however, such acquisitions will be made at our discretion. If we elect
to make additional acquisitions, it may become necessary for us to raise
additional funds. There can be no assurance we will be able to raise additional
capital and failure to do so could have a material adverse effect on our
business. If additional funds are raised through the issuance of equity
securities, our existing shareholders may experience significant dilution.
Consolidated working capital decreased to $599 million at June 30, 2000,
compared to $1.3 billion at December 31, 1999 primarily as a result of the cost
of ownership interests we acquired and other net cash outflows during the six
months ended June 30, 2000
Cash used in operating activities in the six months ended June 30, 2000
compared to the same prior year period increased due to the increased cost of
General ICG Operations' general and administrative expenses and research and
development.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies.
We utilized $869.9 million in the aggregate to acquire interests in or make
advances to new and existing partner companies during the six months ended June
30, 2000. These companies included: Arbinet Communications, AssetTRADE.com,
AUTOVIA, Blackboard, Benchmarking Partners, Breakaway Solutions, Buy.co.uk,
Ltd., BuyMedia, CargoBiz, Centrimed, ClearCommerce, Collabria, CommerceQuest,
ComputerJobs.com, CourtLink/Justicelink, CreditTrade, Cybercrop.com, Delphion,
Deja.com, eCatalog, e-Chemicals, eColony, Emptoris, Entegrity Solutions,
eumediX, eu-supply, FarmingOnLine, Freeborders, GoIndustry, ICG Commerce, ICS
FoodOne, Industrial America, Internet Healthcare Group, iSky, IVOWS, LinkShare,
Logistics.com, MetalSite, NationStreet, NetVendor, Onvia.com, PaperExchange,
Print Mountain, Retail Exchange, Servicesoft Technologies, Simplexis.com,
StarCite, Syncra, TALPX, TeamOn.com, Tibersoft, Traffic.com, Universal Access,
VerticalNet Europe and Vivant!.
During the period from July 1, 2000 through August 9, 2000 we utilized
$47.4 million to acquire interests in or make advances to new and existing
partner companies. These companies included: AssetTRADE, CommerceQuest,
CreditTrade, Deja, Eumedix, Industrial America, Logistics.com, MetalSite,
StarCite, US Gift and eu-Supply.
During January 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 150,000 shares of
our common stock valued at $26.6 million.
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In February 2000, we entered into an agreement to form a joint venture with
DuPont named CapSpan. CapSpan will provide management, growth capital,
financial, technical and infrastructure capabilities designed to accelerate the
development of B2B e-commerce.
In May 2000, we acquired a majority interest in Harbour Ring International
Holdings, which was renamed ICG AsiaWorks Limited for approximately $116.5
million.
During the three months ended June 30, 2000, we acquired interests in new
and existing partner companies for 3,780,252 shares in the aggregate of our
common stock valued at approximately $143.6 million. These companies included:
Breakaway Solutions, CommerceQuest, ComputerJobs.com and Emptoris.
In June 2000, we acquired a significant interest in eCredit.com, Inc., a
leading provider of Internet-based credit, financing and related services in
exchange for approximately $424.6 million of our common stock (valued at $91.22
per share). We also acquired a majority interest in RightWorks, a leading
provider of e-procurement software that powers B2B exchanges in exchange for
approximately $754 million of our common stock (valued at $127.97 per share)
and $22 million in cash.
During the year ended December 31, 1999, Ariba, Inc. announced its
intention to acquire all of the outstanding stock of one of our partner
companies, TRADEX Technologies, in exchange for approximately $2.0 billion in
Ariba stock. Ariba closed its acquisition of TRADEX Technologies on March 9,
2000. Based on Ariba's closing price of $160.4375 on March 9, 2000, we recorded
a non-operating gain of approximately $290 million, net of tax, during the
quarter ended March 31, 2000. Our holdings of Ariba after the transaction will
be accounted for as available-for-sale securities and will be marked to market,
with the difference between carrying value and market value, net of deferred
taxes, recorded in "Accumulated other comprehensive income" in the shareholders'
equity section of our Consolidated Balance Sheets in accordance with Statement
of Financial Accounting Standards No. 115. We entered into cashless collar
agreements with respect to 2.2 million shares of our holdings of Ariba's common
stock accounted for at fair value of $230.6 million at March 31, 2000. During
the quarter ended June 30, 2000, we sold approximately 631,530 shares of Ariba
common stock at an average price of $78.57 and recorded a loss of $51.7
million.
Our general operations are not capital intensive, and capital expenditures
in any year normally will not be significant in relation to our overall
financial position. We committed funds in 1999 and expect to commit funds in
2000 to the buildout of our larger new corporate headquarters in Wayne,
Pennsylvania, our international expansion, and the development of our
information technology infrastructure. There were no material capital asset
purchase commitments as of June 30, 2000.
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Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended, is effective for all fiscal quarters
beginning after December 31, 2000. We are currently analyzing the potential
impact of SFAS No. 133 on our results of operations, financial position and cash
flows upon the adoption of this standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission required that the Financial Accounting Standards Board Emerging
Issues Task Force, or the EITF, address a number of accounting and financial
reporting issues that the Securities and Exchange Commission believes has
developed with respect to Internet businesses. The Securities and Exchange
Commission identified twenty issues for which they believed some form of
standard setting or guidance may be appropriate either because (i) there
appeared to be diversity in practice or (ii) the issues are not specifically
addressed in current accounting literature or (iii) the Securities and Exchange
Commission staff is concerned that developing practice may be inappropriate
under generally accepted accounting principles. Many of the issues identified by
the Securities and Exchange Commission, including those which address barter and
revenue recognition, are potentially applicable to us and our partner companies.
Although the EITF has begun to deliberate these issues, formal guidance has not
been issued to date for many of them. In addition, in December 1999, the
Securities and Exchange Commission staff issued Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, which is required
to be implemented in the quarter ended December 31, 2000. Although we believe
our historical accounting policies and practices conform with generally accepted
accounting principles, there can be no assurance that final consensus reached by
the EITF on the Internet issues referred to above, or other actions by standard
setting bodies, will not result in changes to our historical accounting policies
and principles or to the manner in which certain transactions are presented and
disclosed in our consolidated financial statements. We do not expect the
adoption of SAB No. 101 to have a significant impact on our net results of
operations, financial position or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risks on the marketable portion of our
equity securities. Our public holdings at June 30, 2000 include equity positions
in companies in the Internet industry sector, including: Ariba, Inc.,
Excite@Home; Breakaway Solutions, Inc.; i2 Technologies, Inc.; eMerge
Interactive, Inc.; Universal Access, Inc.; Onvia.com, Inc.; Lycos, Inc.; US
Interactive, Inc.; and VerticalNet, Inc., many of which have experienced
significant historical volatility in their stock prices. A 20% adverse change in
equity prices, based on a sensitivity analysis of our public holdings as of June
30, 2000, would result in an approximate $609 million decrease in the fair value
of our public holdings. A significant portion of the value of the potential
decrease in equity securities, or $185.2 million and $123.6 million, consisted
of our holdings in VerticalNet and ICG Asiaworks, respectively.
Although we typically do not attempt to reduce or eliminate our market
exposure on these securities, particularly with respect to securities of our
partner companies, we did enter into cashless collar agreements with respect to
2.2 million shares of our holdings of Ariba's common stock. The collar
arrangements limit our exposure to and benefits from price fluctuations in the
underlying equity securities. The collar arrangements mature between
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2001 and 2003. The combined value of the collars and the underlying hedged
securities at June 30, 2000 was $258 million. We may enter into similar collar
arrangements in the future, particularly with respect to available for sale
securities which do not constitute ownership interests in our partner companies.
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
fair value of convertible subordinated notes is approximately $384.9 million
versus a carrying value of $566.3 million. The carrying value of other long-term
debt approximates its fair value, as estimated by using discounted future cash
flows based on our current incremental borrowing rates for similar types of
borrowing arrangements.
Availability under our credit facility is determined by the market value of
the publicly traded and privately held securities pledged as collateral. As of
June 30, 2000, we had sufficient collateral to enable us to fully utilize this
facility. Additionally, we are exposed to interest rate risk primarily through
our bank credit facility. At June 30, 2000, there were no borrowings
outstanding. Letters of credit of $5.6 million have been issued as of June 30,
2000 and have reduced our availability under the facility by $5.6 million.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may dramatically increase. Therefore,
in the future, we may consider utilizing derivative instruments to mitigate such
risks.
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PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
Private Placements
(1) On April 5, 2000, Internet Capital Group issued 323,509 shares of
Common Stock in a private placement to Frank Selldorff in exchange for 800,000
shares of Common Stock of Breakaway Solutions, Inc.
The sale and issuance of securities in the transaction described above was
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act or Regulation D promulgated thereunder as a transaction by an
issuer not involving a public offering, where the purchaser was a sophisticated
investor who represented his 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
The Company held its Annual Meeting of Shareholders on May 31, 2000. At
this meeting, the shareholders voted in favor of the following items listed in
the Proxy Statement dated April 21, 2000:
(1) ELECTION OF DIRECTORS
FOR WITHHELD
Julian A. Brodsky 209,760,605 282,789
Warren V. Musser 209,739,188 304,206
The following directors terms of office as directors continued after this
meeting:
Walter W. Buckley, III Robert E. Keith, Jr.
Kenneth A. Fox Peter A. Solvik
Dr. Thomas P. Gerrity
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(2) RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
FOR AGAINST ABSTAIN
209,808,727 139,869 94,798
(3) PROPOSAL TO APPROVE AN AMENDMENT TO OUR RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
FOR AGAINST ABSTAIN
202,262,750 3,652,850 127,794
(4) PROPOSAL TO APPROVE AN AMENDMENT TO OUR 1999 EQUITY COMPENSATION PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED TO BE ISSUED UNDER
THE PLAN
FOR AGAINST ABSTAIN
171,298,051 3,907,722 337,599
Item 5. OTHER INFORMATION
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Document
10.1 Lease dated March 24, 2000 between Friends' Provident Life Office and
Internet Capital Group (Europe) Limited for first floor office and sixth
floor apartment premises located in London, England
10.2 Lease dated March 29, 2000 between Friends' Provident Life Office and
Internet Capital Group (Europe) Limited for ground floor office premises
located in London, England
10.3 Lease dated January 1, 2000 between Bebob Associates and Internet Capital
Group, Inc. for premises located in Wayne, Pennsylvania
10.4 Amendment to Lease dated February 1, 2000 between Bebob Associates and
Internet Capital Group, Inc. for additional space in Wayne, Pennsylvania
10.5 Second Amendment to Lease dated May 9, 2000 between Bebob Associates, Inc.
and Internet Capital Group, Inc.
10.6 Lease dated March 27, 2000 between the Equitable Life Assurance Society of
the United States and Internet Capital Group, Inc. for premises located in
Boston, Massachusetts
10.7 Short Term Lease Agreement dated April 21, 2000 between EOP-One Market, LLC
and Internet Capital Group, Inc. for premises in San Francisco, California
11.1 Statement Regarding Computation of Per Share Earnings (included herein at
Note 1- "Significant Accounting Policies" in the subsection "Net Income
(Loss) Per Share" to the Consolidated Financial Statements on Page 11 and
Note 3- "Net Income Per Share" to the Consolidated Financial Statements on
Page 13
27.1 Financial Data Schedule for the Quarter ended June 30, 2000
99.1 Press Release regarding licensing agreement between eMerge Interactive and
RightWorks (incorporated by reference to Registrant's filing on Form 425
filed April 3, 2000 (File No. 132-01830))
99.2 Memorandum from the Company to Shareholders of RightWorks (incorporated by
reference to the Registrant's filing on Form 425 filed by the Company on
May 16, 2000 (Registration No. 132-01830))
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99.3 Memorandum from the Company to the Stockholders of eCredit.com
(incorporated by reference to the Registrant's filing on Form 425 filed on
May 16, 2000 (Registration No. 132-01812))
99.4 Press Release issued by the Company on June 9, 2000 regarding extension of
the Exchange Offer for RightWorks (incorporated by reference to the
Registrant's filing on Form 425 filed by the Company on June 9, 2000
(Registration No. 132-01830))
99.5 Press Release issued by the Company on June 12, 2000 regarding the
Acquisition of Interest in eCredit.com (incorporated by reference to the
Registrant's filing on Form 8-K filed by the Company on June 23, 2000
(Registration No. 000-26929))
99.6 Press Release issued by the Company on June 15, 2000 regarding the
Acquisition of Interest in RightWorks (incorporated by reference to the
Registrant's filing on Form 8-K filed by the Company on June 29, 2000
(Registration No. 000-26929))
(b) Reports on Form 8-K
On June 23, 2000, we filed a Current Report on Form 8-K dated June 9, 2000
to report under Item 2 the execution of the Exchange Offer Agreement among
Internet Capital Group, Inc., ICG Holdings, Inc., and eCredit.com, Inc. The
filing included the required financial statements and pro forma financial
information.
On June 29, 2000, we filed a Current Report on Form 8-K dated June 15, 2000
to report under Item 2 the execution of the Recapitalization and Exchange Offer
Agreement and Plan of Reorganization among Internet Capital Group, Inc., Rain
Acquisition Corp., a wholly owned subsidiary of Internet Capital Group, Inc.,
RightWorks Corporation and some of the Shareholders of RightWorks Corporation.
The filing included the required financial statements and pro forma financial
information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000
INTERNET CAPITAL GROUP, INC.
By: /S/ DAVID D. GATHMAN
----------------------------------------
Name: David D. Gathman
Title: Chief Financial Officer and Treasurer
(Principal Financial and Principal Accounting
Officer)
(Duly Authorized Officer)
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EXHIBIT INDEX
Exhibit
Number Description
-------- -----------
10.1 Lease dated March 24, 2000 between Friends' Provident Life Office and
Internet Capital Group (Europe) Limited for first floor office and
sixth floor apartment premises located in London, England
10.2 Lease dated March 29, 2000 between Friends' Provident Life Office and
Internet Capital Group (Europe) Limited for ground floor office
premises located in London, England
10.3 Lease dated January 1, 2000 between Bebob Associates and Internet
Capital Group, Inc. for premises located in Wayne, Pennsylvania
10.4 Amendment to Lease dated February 1, 2000 between Bebob Associates and
Internet Capital Group, Inc. for additional space in Wayne,
Pennsylvania
10.5 Second Amendment to Lease dated May 9, 2000 between Bebob Associates,
Inc. and Internet Capital Group, Inc.
10.6 Lease dated March 27, 2000 between the Equitable Life Assurance
Society of the United States and Internet Capital Group, Inc. for
premises located in Boston, Massachusetts
10.7 Short Term Lease Agreement dated April 21, 2000 between EOP-One
Market, LLC and Internet Capital Group, Inc. for premises in San
Francisco, California
27.1 Financial Data Schedule (Electronic filing only)
39
