<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2000 Commission File Number 0-26929
-------------- -------
INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 23-2996071
(state or 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)
</TABLE>
Registrant's telephone number, including area code (610) 989-0111
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
Number of shares of Common Stock outstanding as of May 12, 2000: 264,616,889
shares
<PAGE>
INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 4
Consolidated Statements of Operations (unaudited) -
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 31
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings 32
Item 2 - Changes in Securities and Use of Proceeds 32
Item 3 - Defaults Upon Senior Securities 32
Item 4 - Submission of Matters to a Vote of Security Holders 32
Item 5 - Other Information 32
Item 6 - Exhibits and Reports on Form 8-K 33
Signatures 35
Exhibit Index 36
</TABLE>
2
<PAGE>
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 as amended, and Section
21E of the Securities Exchange Act. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about us and our partner companies, that may cause
our actual results, levels of activity, performance, or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those discussed elsewhere in this Report and
the risks discussed in our other Securities and Exchange Commission ("SEC")
filings, including our Registration on Form S-4 declared effective on May 10,
2000 by the SEC (File No. 333-34722).
Although we refer in this Report to the companies in which we have acquired an
equity ownership interest as our "partner companies" and that we have a
"partnership" with these companies, we do not act as an agent or legal
representative for any of our partner companies, and we do not have the power or
authority to legally bind any of our partner companies, and we do not have the
types of liabilities in relation to our partner companiesthat a general partner
of a partnership would have.
3
<PAGE>
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands except per share data) March 31, December 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 858,567 $1,343,459
Short-term investments -- 3,359
Accounts receivable, net 3,403 1,207
Prepaid expenses and other current assets 41,544 6,347
---------- ----------
Total current assets 903,514 1,354,372
Fixed assets, net 9,459 4,015
Ownership interests in and advances to Partner Companies 1,157,635 547,339
Available-for-sale securities 350,596 46,767
Intangible assets, net 21,477 23,649
Deferred taxes -- 34,388
Other 28,376 39,854
---------- ----------
Total Assets $2,471,057 $2,050,384
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 2,612 $ 3,000
Line of credit 754 --
Accounts payable 8,170 6,750
Accrued expenses 21,348 4,205
Notes payable to Partner Companies 24,704 34,134
Other 1,348 903
---------- ----------
Total current liabilities 58,936 48,992
Long-term debt 2,690 3,185
Other liability 4,880 4,255
Deferred taxes 84,685 --
Minority interest 4,553 7,481
Convertible subordinated notes (Note 5) 566,250 566,250
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.0l par value; 10,000 shares authorized;
None issued -- --
Common stock, $.001 par value; authorized 300,000
shares; 264,293 (2000) and 263,579 (1999)
issued and outstanding 264 264
Additional paid-in capital 1,583,022 1,513,615
Retained earnings (accumlated deficit) 325,436 (26,539)
Unamortized deferred compensation (11,720) (11,846)
Notes receivable - shareholders (79,396) (79,790)
Accumulated other comprehensive income (loss) (68,543) 24,517
---------- ----------
Total shareholders' equity 1,749,063 1,420,221
---------- ----------
Total Liabilities and Shareholders' Equity $2,471,057 $2,050,384
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(in thousands except per share data) 2000 1999
--------- --------
<S> <C> <C>
Revenue $ 1,830 $ 3,111
--------- --------
Operating expenses
Cost of revenue 689 1,553
Selling, general and administrative 32,663 3,848
--------- --------
Total operating expenses 33,352 5,401
--------- --------
(31,522) (2,290)
Other income, net 657,686 28,677
Interest income 18,800 310
Interest expense (9,340) (14)
--------- --------
Income before income taxes,
minority interest and equity income (loss) 635,624 26,683
Income taxes (209,499) 663
Minority interest 5,901 146
Equity income (loss) (80,051) (7,413)
--------- --------
Net Income $ 351,975 $ 20,079
========= ========
Net Income Per Share
Basic $1.33 $0.14
Diluted $1.30 $0.14
Weighted Average Shares Outstanding
Basic 264,191 145,292
Diluted 270,132 147,400
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------
<S> <C> <C>
(in thousands) 2000 1999
------------------- --------------------
Operating Activities
Net income $ 351,975 $ 20,079
Adjustments to reconcile net cash used
in operating activities
Depreciation and amortization 5,691 551
Deferred taxes 209,499 (914)
Equity (income) loss 80,051 7,413
Other income (657,686) (28,685)
Minority interest (5,901) (146)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net (2,132) (674)
Prepaid expenses and other assets (4,620) 70
Accounts payable 1,119 (332)
Accrued expenses 17,812 903
Deferred revenue 498 (97)
------------------- --------------------
Net cash used in operating activities (3,694) (1,832)
------------------- --------------------
Investing Activities
Capital expenditures (6,212) (156)
Proceeds from sales of available-for-sale securities - 2,574
Proceeds from sales of Partner Company ownership interests and
advances to a shareholder - 2,655
Advances to Partner Companies (6,092) (1,892)
Repayment of advances to Partner Companies 2,809 1,913
Acquisitions of ownership interests in Partner Companies (477,202) (22,481)
Proceeds from short-term investments 3,362 -
Increase in cash surrender value of - (62)
life insurance
Reduction in cash due to deconsolidation of VerticalNet - (5,646)
------------------- --------------------
Net cash used in investing activities (483,335) (23,095)
------------------- --------------------
Financing Activities
Issuance of common stock, net 650 31,980
Long-term debt and capital lease obligations (746) (59)
Line of credit borrowing - 576
Proceeds from convertible notes 1,926 -
Distribution to former LLC members - (10,676)
Repayments of advances to employees 46 -
Treasury stock purchase by subsidiary - (4,463)
Issuance of stock by subsidiary 261 100
------------------- --------------------
Net cash provided by financing activities 2,137 17,458
------------------- --------------------
Net decrease in Cash and Cash Equivalents (484,892) (7,469)
Cash and Cash Equivalents at the beginning of period 1,343,459 26,841
------------------- --------------------
Cash and Cash Equivalents at the End of Period 858,567 $ 19,372
=================== ====================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Description of the Company
Internet Capital Group, Inc. (the "Company") was formed on March 4, 1996.
The Company is an Internet company actively engaged in business-to-business, or
B2B, e-commerce through a network of companies. The Company defines e-commerce
as conducting or facilitating business transactions over the Internet. As of
March 31, 2000, the Company owned interests in 63 companies engaged in e-
commerce, which the Company calls its "Partner Companies". The Company's goal is
to become the premier B2B e-commerce company. The Company's operating strategy
is to integrate its Partner Companies into a collaborative network that
leverages the collective knowledge and resources of the Company and the network.
Although the Company refers to the companies in which it has acquired an
equity ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of its Partner Companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general partner
of a partnership would have.
Basis of Presentation
On February 2, 1999, the Company converted from a Limited Liability Company
("LLC") to a corporation. All shareholder transactions have been presented as if
the conversion occurred on March 4, 1996 (inception).
The accompanying unaudited consolidated financial statements of the Company
for the three months ended March 31, 2000 and 1999, included herein, have been
prepared by the Company pursuant to the interim financial statements rules and
regulations of the SEC. In the opinion of management, the accompanying unaudited
consolidated interim financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the results of
the Company's operations and its cash flows for the three months ended March 31,
2000 and 1999 and are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000 or for any other interim period.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. The information included in this Form 10-Q
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's financial
statements and notes thereto included in the Company's 1999 Annual Report on
Form 10-K.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiary, Internet Capital Group Operations, Inc. (the
"Operations Company") and its majority owned subsidiary Breakaway Solutions,
Inc. ("Breakaway Solutions") for the three months ended March 31, 1999. For the
three months ended March 31, 2000, the consolidated financial statements include
the accounts of the Company, its wholly owned subsidiaries, the Operations
Company and Internet Capital Group (Europe) Limited, and its majority owned
subsidiaries, Animated Images, Inc. ("Animated Images"), CyberCrop.com, Inc.
("CyberCrop.com"), EmployeeLife.com, ICG Commerce, Inc. ("ICG Commerce") and
iParts, each of which was consolidated since its date of acquisition.
In December 1999, the Company recorded a two for one stock split effected
as a one hundred percent (100%) stock dividend. The common stock and additional
paid-in capital accounts and all share and per share amounts have been
retroactively restated in these financial statements to give effect to this
stock dividend.
7
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
Principles of Accounting for Ownership Interests in Partner Companies
The various interests that the Company acquires in its Partner Companies
are accounted for under three broad methods: consolidation, equity method and
cost method. The applicable accounting method is generally determined based on
the Company's voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities are generally
accounted for under the consolidation method of accounting. Under this method, a
Partner Company's results of operations are reflected within the Company's
Consolidated Statements of Operations. All significant intercompany accounts and
transactions have been eliminated. Participation of other Partner Company
shareholders in the earnings or losses of a consolidated Partner Company is
reflected in the caption "Minority interest" in the Company's Consolidated
Statements of Operations. Minority interest adjusts the Company's consolidated
results of operations to reflect only the Company's share of the earnings or
losses of the consolidated Partner Company. The results of operations and cash
flows of a Consolidated Partner Company are included through the latest interim
period in which the Company owned a greater than 50% direct or indirect voting
interest for the entire interim period. Upon dilution of control below 50%, the
accounting method is adjusted to the equity or cost method of accounting, as
appropriate, for subsequent periods.
In 1999, the Company acquired a controlling majority interest in Breakaway
Solutions for $17.2 million and in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts ("Other Majority Owned Subsidiaries")
for $29.8 million in the aggregate. Breakaway Solutions' operations have
historically consisted primarily of implementation of customer relational
management systems and custom integration to other related applications. In
1999, Breakaway Solutions expanded to provide service offerings in custom web
development and application hosting both through internal expansion and
acquisitions. Breakaway Solutions' revenue is generally recognized upon
performance of services. ICG Commerce provides strategic sourcing consulting and
online Internet purchasing. The Other Majority Owned Subsidiaries, excluding ICG
Commerce, are development stage companies that have generated negligible revenue
since their inception. In connection with the acquisition of its ownership
interest in Breakaway Solutions and the Other Majority Owned Subsidiaries, the
Company recorded the excess of cost over net assets acquired of $13.0 million
and $11.8 million, respectively, as goodwill which is being amortized over three
years.
The Company's direct and indirect voting interest in Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts at March 31, 2000 was
50.1%, 75%, 52%, 50.2% and 67%, respectively.
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are accounted for under
the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an evaluation
of several factors including, among others, representation on the Partner
Company's Board of Directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the Partner Company, including voting
rights associated with the Company's holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, the Company's share of the
earnings or losses of the Partner Company is reflected in the caption "Equity
income (loss)" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the
consolidation or equity method of accounting is amortized on a straight-line
basis over three to five years which adjusts the Company's share of the Partner
Company's earnings or losses.
8
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
Cost Method. Partner Companies not accounted for under the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method Partner Company impairment charges are recognized in the
Consolidated Statement of Operations with the new cost basis not written-up if
circumstances suggest that the value of the Partner Company has subsequently
recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost because it has the ability
and intent to hold these securities until maturity. The Company records its
ownership interest in equity securities of Partner Companies accounted for under
the cost method at cost, unless these securities have readily determinable fair
values based on quoted market prices, in which case these interests are valued
at fair value and classified as available-for-sale securities or some other
classification in accordance with SFAS No. 115. In addition to the Company's
investments in voting and non-voting equity and debt securities, it also
periodically makes advances to its Partner Companies in the form of promissory
notes which are accounted for in accordance with SFAS No. 114.
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have invested or have committed to invest in the Partner Companies.
Available-for-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a component of
accumulated other comprehensive income in shareholders' equity.
Unrealized gains or losses related to available-for-sale securities are
recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a corporation.
Short-term investments
Short-term investments are debt securities maturing in less than one year
and are carried at amortized cost, which approximates fair value.
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.
9
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed to
losses in the event of nonperformance by the counterparties, the Company does
not expect such losses, if any, to be significant.
In March 2000, the Company entered into cashless collar agreements (the
"Equity Collars") to hedge 2.2 million shares of its holdings of Ariba, Inc.
accounted for at fair value. The Equity Collars limit the Company's exposure to
and benefits from price fluctuations in the underlying equity securities. The
Equity Collars mature between 2001 and 2003. As the Company accounts for the
Equity Collars as a hedge, changes in the value of the Equity Collars are
substantially offset by changes in the value of the underlying investment
securities. Each of these changes are marked-to-market through accumulated other
comprehensive income (loss) in the Company's Consolidated Balance Sheets.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, and
other intangible assets are amortized on a straight-line basis over three to
five years. Goodwill and other intangible assets at March 31, 2000 of $21.5
million, net of accumulated amortization of $2.2 million, is attributable to the
Company's acquisitions of ownership interests in Animated Images ($5.9 million),
CyberCrop.com ($.7 million), EmployeeLife.com ($1.0 million), ICG Commerce ($2.0
million), and iParts ($0.1 million) and ICG Commerce's acquisitions of
Purchasing Group, Inc. and Integrated Sourcing, LLC ($11.8 million). The
carrying value of goodwill is evaluated for possible impairment based on
achievement of business plan objectives and milestones, the fair value of each
ownership interest in and advances to the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. If impairment exists, the carrying amount of the goodwill will
be reduced by the estimated shortfall of undiscounted cash flows.
Income Taxes
From the Company's inception in March 1996 to February 1999, the Company
was not subject to federal and state income taxes. On February 2, 1999, the
Company converted from an LLC to a Corporation. The Company's accumulated
deficit of $8.7 million at that date was reclassed to additional paid-in
capital.
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company's effective tax rate for the three months ended March 31, 2000
differed from the federal statutory rate of 35% principally due to the impact of
state taxes and certain nondeductible expenses. The Company's effective tax
rate for the three months ended March 31, 1999 differed from the federal
statutory rate 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.
10
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
The Company's net deferred tax liability of $84.7 million at March 31, 2000
consists of deferred tax liabilities of $166.2 million relating primarily to the
gain on the sale of a Partner Company for marketable securities, offset by net
deferred tax assets of $81.5 million relating primarily to the excess of tax
carrying values over book carrying values of its Partner Companies and net
unrealized depreciation in available-for-sale securities.
Net Income (Loss) Per Share
Net income (loss) per share (EPS) is computed using the weighted average
number of common shares outstanding during each period. Diluted EPS includes
common stock equivalents (unless anti-dilutive) which would arise from the
exercise of stock options and conversion of other convertible securities and is
adjusted, if applicable, for the effect on net income (loss) of such
transactions.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net income per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Gain or Loss on Issuances of stock By Partner Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner
Company accounted for under the consolidation or equity method of accounting
issues its common stock at a price different from the Partner Company's book
value per share, the Company's share of the Partner Company's net equity
changes. If at that time, the Partner Company is not a newly-formed, non-
operating entity, nor a research and development, start-up or development stage
company, nor is there question as to the Company's ability to continue in
existence, the Company records the change in its share of the Partner Company's
net equity as a gain or loss in its Consolidated Statements of Operations.
2. Comprehensive Income
Comprehensive income is the change in equity of a business enterprise
during a period resulting from transactions and other events and circumstances
from non-owner sources. Excluding net income, the Company's source of
comprehensive income (loss) is net unrealized appreciation (depreciation)
related to its available-for-sale securities. The following summarizes the
components of comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
(in thousands) 2000 1999
-------- -------
(UNAUDITED)
<S> <C> <C>
Net income 351,975 20,079
Other comprehensive income (loss):
Unrealized appreciation
(depreciation), net of tax (76,140) 2,946
Reclassification adjustments, net of tax (16,882) (1,940)
Foreign currency translation adjustment (40) --
-------- -------
Comprehensive income $258,913 $21,085
======== =======
</TABLE>
11
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
3. Net Income Per Share
The calculations of Net Income Per Share were:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
(in thousands except 2000 1999
per share data)
---------- ---------
(UNAUDITED)
<S> <C> <C>
Basic
Net income $351,975 $ 20,079
======== ========
Average common shares outstanding 264,191 145,292
Basic $ 1.33 $ .14
======== ========
Diluted
Net income $351,975 $ 20,079
Partner Company equity adjustment ( 1,338) -
-------- --------
Adjusted net income $350,637 $ 20,079
======== ========
Average common shares outstanding 264,191 145,292
Effect of:
Dilutive options 2,976 2,108
Dilutive securities 2,965 -
-------- --------
Average common shares assuming
dilution 270,132 147,400
======== ========
Diluted $ 1.30 $ .14
======== ========
</TABLE>
If a consolidated or equity method partner company has dilutive options or
securities outstanding, diluted net income per share is computed first by
deducting from income (loss) from continuing operations the income attributable
to the potential exercise of the dilutive options or securities of the partner
company. For the three months ended March 31, 2000, the impact of a partner
company's dilutive securities has been shown as an adjustment to net income for
purposes of calculating diluted net income per share. The impact of the
conversion of the Company's convertible subordinated notes has not been included
as its impact would be anti-dilutive.
4. Ownership Interests In and Advances to Partner Companies
The following summarizes the Company's ownership interests in and advances
to Partner Companies accounted for under the equity and cost method of
accounting. The ownership interests are classified according to applicable
accounting methods at the respective dates presented. Cost basis represents the
Company's original acquisition cost less any impairment charges recognized for
such companies to date.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
---------------------------- -------------------------------
(in thousands) (UNAUDITED)
Carrying Carrying
Value Cost Basis Value Cost Basis
-------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Equity Method $1,093,500 $ 971,158 $491,977 $578,922
Cost Method 64,136 64,136 55,362 55,362
---------- --------
$1,157,635 $547,339
========== ========
</TABLE>
12
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements (Continued)
At March 31, 2000, the Company's carrying value in its Partner Companies
accounted for under the equity method exceeded its share of the underlying
equity in the net assets of such companies by $503.5 million. This excess
relates to ownership interests acquired through March 31, 2000 and is being
amortized over a three year period. Amortization expense of $37.4 million is
included in "Equity income (loss)" in the accompanying Consolidated Statements
of Operations for the three months ended March 31, 2000.
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at March 31, 2000
and 1999 has been compiled from the financial statements of the respective
Partner Companies:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Revenue $ 150,998 $ 10,895
Net Loss $(140,704) $(17,891)
</TABLE>
5. Debt
Convertible Subordinated Notes
In December, 1999, the Company issued $566.3 million of convertible
subordinated notes. The notes bear interest at an annual rate of 5.5% and mature
in December, 2004. The notes are convertible at the option of the holder, at any
time on or before maturity into shares of the Company's common stock at a
conversion price of $127.44 per share, which is equal to a conversion rate of
7.8468 shares per $1,000 principal of notes. Additionally, the notes may be
redeemed by the Company if the Company's closing stock price exceeds 150% of the
conversion price then in effect for at least 20 trading days within a period of
30 consecutive trading days. The conversion rate is subject to adjustment. The
Company recorded interest expense of $7.8 million relating to these notes during
the three months ended March 31, 2000 with the first interest payment due June
21, 2000 and subsequent interest payments due each six months following through
December 21, 2004. Issuance costs of $18.3 million were recorded in other assets
and are being amortized as interest expense over the term of the notes using the
effective interest method.
Credit Facilities
In March 2000, the Company's revolving bank credit facility was amended to,
among other things, increase the Company's credit facility to provide for
borrowings up to $250 million, including the issuance of letters of credit up to
$125 million. The agreement includes a $125 million 364-day secured line of
credit and a $125 million two-year secured revolving credit facility. Prior to
this amendment, the credit facility was structured as a $50 million term
revolving credit facility bearing interest at the Company's option at prime or
LIBOR plus 2.5%.
The revolving facility and line of credit are subject to .375% and .25%
unused commitment fees, respectively, bear interest, at the Company's option at
LIBOR plus 2.0% or the lenders' Base Rate (the lenders' Base Rate being the
greater of (i) the prime rate or (ii) the Federal Funds Rate plus .5%) and are
secured by substantially all of the Company's assets (including the Company's
holdings in Partner Companies). Borrowing availability under the facility is
based on the fair market value of the Company's holdings of publicly traded
Partner Companies and the value, as defined in the facility, of the Company's
private Partner Companies. The credit facility contains certain financial
covenants which include restrictions on, among other things, dispositions,
certain other indebtedness and payment of dividends and similar distributions.
No amounts were outstanding on these facilities as of March 31, 2000.
13
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements-(Continued)
EmployeeLife.com has a $1,000,000 revolving credit facility and a $500,000
equipment line of credit at March 31, 2000. Borrowings under the credit facility
accrue interest at a rate of prime plus .75% and the equipment line of credit
accrues interest at the two year treasury rate plus 1.75%. No amounts were
outstanding at March 31, 2000. The revolving credit facility expires in March
2001 and the equipment line expires in June 2000.
Long-Term Debt
The Company's long-term debt of $2.7 million (net of current portion of
$2.6 million) relates to its Consolidated Partner Companies, is non-recourse to
the Company, and primarily consists secured notes due to shareholders of ICG
Commerce and EmployeeLife.com and capital lease commitments.
6. Segment Information
The Company's reportable using the "management approach" under SFAS 131,
Disclosures About Segments of a Business Enterprise and Related Information,
consist of Partner Company Operations and General ICG Operations. Partner
Company Operations includes the effect of consolidating , Breakaway Solutions
for the three months ended March 31, 1999 and Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts for the three months ended March 31,
2000, and recording the Company's share of earnings and losses of Partner
Companies accounted for under the equity method of accounting.
Breakaway Solutions' operations include implementation of various computer
applications. Animated Images' operations include software development and
consulting services and ICG Commerce's operations include purchasing services
and consulting services. CyberCrop.com, EmployeeLife.com and iParts are
development stage companies that have generated negligible revenue since their
inception. Partner Companies accounted for under the equity method of accounting
operate in various businesses. General ICG Operations represents the expenses of
providing strategic and operational support to the Internet-related Partner
Companies, as well as the related administrative costs. General ICG Operations
also includes the effect of transactions and other events incidental to the
Company's general operations and the Company's ownership interests in and
advances to Partner Companies. The Company's and Partner Companies' operations
were principally in the United States of America during all periods presented.
14
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements-(Continued)
The following summarizes the unaudited information related to the Company's
segments. All significant intersegment activity has been eliminated. Assets are
owned or allocated assets used by each operating segment.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
(in thousands) 2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Partner Company Operations
Revenue $ 1,830 $ 3,111
---------- ----------
Operating expenses
Cost of revenue 689 1,553
Selling, general and administrative 15,774 2,115
---------- ----------
Total operating expenses 16,463 3,668
---------- ----------
(14,633) (557)
Other income (expense), net - (7)
Interest income 129 32
Interest expense (127) (14)
---------- ----------
Income (loss) before income taxes,
minority interest and equity income (loss) (14,631) (546)
Income taxes 771 -
Minority interest 5,901 146
Equity income (loss) (80,051) (7,413)
---------- ----------
Loss from Partner Company Operations $ (88,010) $ (7,813)
========== ==========
General ICG Operations
General and administrative $ 16,889 $ 1,733
---------- ----------
Other income, net 657,686 28,684
Interest income (expense), net 9,458 278
Income taxes (210,270) 663
---------- ----------
Income (loss) from General ICG Operations $ 439,985 $ 27,892
========== ==========
March 31, December 31,
---------- ----------
(in thousands) 2000 1999
---------- ----------
(UNAUDITED)
Assets
Partner Company Operations
Carrying value of equity method Partner Companies $1,093,500 $ 491,977
Other 53,794 45,075
---------- ----------
1,147,294 537,052
---------- ----------
General ICG Operations
Cash and cash equivalents 834,181 1,326,560
Carrying value of cost method Partner Companies 64,135 55,362
Other 425,447 131,410
---------- ----------
1,323,763 1,513,332
---------- ----------
$2,471,057 $2,050,384
========== ==========
</TABLE>
15
<PAGE>
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements-(Continued)
7. Parent Company Financial Information
Parent Company Financial information is provided to present the financial
position and results of operations of the Company as if Animated Images,
Breakaway Solutions, Cybercrop.com, EmployeeLife.com, ICG Commerce, and iParts
("consolidated companies") were accounted for under the equity method of
accounting for all applicable periods presented. The Company's share of the
consolidated companies' losses is included in "Equity income (loss)" in the
Parent Company Statements of Operations for all periods presented based on the
Company's ownership percentage in each period. The carrying value of the
consolidated companies as of March 31, 2000 and December 31, 1999 is included in
"Ownership interests in and advances to Partner Companies" in the Parent Company
Balance Sheets.
<TABLE>
<CAPTION>
Parent Company Balance Sheets
(in thousands)
March 31, December 31,
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets $ 876,672 $1,332,803
Ownership interests in and advances to Partner Companies 1,187,596 571,706
Other 382,955 125,166
---------- ----------
Total assets 2,447,223 2,029,675
---------- ----------
Liabilities and shareholders' equity
Current liabilities 47,224 43,204
Non-current liabilities 650,934 566,250
Shareholders' equity 1,749,063 1,420,221
---------- ----------
Total liabilities and shareholders' equity $2,447,223 $2,029,675
========== ==========
Parent Company Statements of Operations
Three Months Ended
March 31,
-------------------------
2000 1999
---------- ----------
(UNAUDITED)
Revenue $ - $ -
Operating expenses
General and administrative 16,889 1,733
---------- ----------
Total operating expenses 16,889 1,733
---------- ----------
(16,889) (1,733)
Other income, net 657,686 28,684
Interest income, net 9,458 278
---------- ----------
Income before income taxes
and equity income (loss) 650,255 27,229
Income taxes (210,270) 663
Equity income (loss) (88,010) (7,813)
---------- ----------
Net income $ 351,975 $ 20,079
========== ==========
</TABLE>
16
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward looking statements are subject to risks,
uncertainties and assumptions about us and our partner companies, including,
among other things:
- development of an e-commerce market,
- our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the
changing needs of these markets,
- our ability to successfully execute our business model,
- our partner companies' ability to compete successfully against direct
and indirect competitors,
- our ability to acquire interests in additional companies,
- growth in demand for Internet products and services,
- adoption of the Internet as an advertising medium, and
- our ability to successfully expand our business internationally.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of these factors.
General
Internet Capital Group, Inc. ("ICG") is an Internet company actively
engaged in B2B e-commerce through a network of partner companies. As of March
31, 2000 we owned interests in 63 B2B e-commerce companies which we refer to as
our partner companies. We focus on two types of B2B e-commerce companies, which
we call market makers and enabling service providers.
Although we refer in this Report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and that we have a
"partnership" with these companies, we do not act as an agent or legal
representative for any of our partner companies, and we do not have the power or
authority to legally bind any of our partner companies, and we do not have the
types of liabilities in relation to our partner companies that a general partner
of a partnership would have.
Because we acquire significant interests in B2B e-commerce companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. While our partner
companies have consistently reported losses, we have recorded net income in
certain periods and experienced significant volatility from period to period due
to one-time transactions and other events incidental to our ownership interests
in and advances to partner companies. We do not know if we will report net
income in any period. These transactions and events are described in more detail
under "Net Results of Operations-General ICG Operations-Other Income" and
include dispositions of, and changes to, our partner company ownership
interests, dispositions of our holdings of available-for-sale securities, and
impairment charges. On a continuous basis, but no less frequently than at the
end of each quarterly reporting period, we evaluate the carrying value of our
ownership interests in and advances to each of our partner companies for
possible impairment based on achievement of business plan objectives and
milestones, the fair value of each ownership interest and advance in the partner
company relative to carrying value, the financial condition and prospects of the
partner company, and other relevant factors. The business plan objectives and
milestones we consider include, among others, those related to financial
performance such as achievement of planned financial results or completion of
capital raising activities, and those that are not primarily financial in nature
such as the launching of a web site or the hiring of key employees. The fair
value of our ownership interests in and advances to privately held partner
companies is generally determined based on the value at which independent third
parties have invested or have committed to invest in our partner companies.
The presentation and content of our financial statements is largely a
function of the presentation and content of the financial statements of our
partner companies. To the extent our partner companies change the presentation
or content of their financial statements, as may be required upon review by the
Securities and Exchange Commission or changes in accounting literature, the
presentation and content of our financial statements may also change.
17
<PAGE>
On August 23, 1999 we received an exemptive order from the Securities and
Exchange Commission under Section 3(b)(2) of the Investment Company Act of 1940
declaring us to be primarily engaged in a business other than that of investing,
reinvesting, owning, holding or trading in securities.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, a partner
company's accounts are reflected within our Consolidated Statements of
Operations. Participation of other partner company shareholders in the earnings
or losses of a consolidated partner company is reflected in the caption
"Minority interest" in our Consolidated Statements of Operations. Minority
interest adjusts our consolidated net results of operations to reflect only our
share of the earnings or losses of the consolidated partner company.
We acquired controlling majority ownership interests in Breakaway
Solutions during the three months ended March 31, 1999, EmployeeLife.com and
iParts during the three months ended June 30, 1999, CyberCrop.com during the
three months ended September 30, 1999 and Animated Images and ICG Commerce
during the three months ended December 31, 1999, each of which was consolidated
from the date of its acquisition. Due to Breakaway Solutions' initial public
offering in October 1999, our voting ownership interest in Breakaway Solutions
decreased below 50% and we have accounted for Breakaway Solutions under the
equity method of accounting since October 1999. As of March 31, 2000, Animated
Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts were our only
consolidated partner companies.
The effect of a partner company's net results of operations on our net
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each of
these methods only our share of the earnings or losses of a partner company is
reflected in our net results of operations in the Consolidated Statements of
Operations.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, representation on the partner company's board
of directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the partner company, including voting rights associated
with our holdings in common, preferred and other convertible instruments in the
partner company. Under the equity method of accounting, a partner company's
accounts are not reflected within our Consolidated Statements of Operations;
however, our share of the earnings or losses of the partner company is reflected
in the caption "Equity income (loss)" in the Consolidated Statements of
Operations. As of December 31, 1999, we accounted for 31 of our partner
companies under the equity method of accounting. As of March 31, 2000, we
accounted for 48 of our partner companies under this method.
18
<PAGE>
Our partner companies accounted for under the equity method of accounting
at December 31, 1999 and March 31, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
----------------
Partner
Company December 31, March 31,
Since 1999 2000
------- ------------ ---------
<S> <C> <C> <C>
EQUITY METHOD:
AssetTRADE.com, Inc. 1999 17% 30%
AUTOVIA Corporation 1998 N/A 20%
BidCom, Inc. 1999 35% 30%
Blackbird 2000 N/A 32%
Blackboard, Inc. 1998 29% 28%
Breakaway Solutions, Inc. 1999 40% 40%
BuyMedia, Inc. 2000 N/A 34%
CapSpan LLC 2000 N/A 33%
CentriMed.com, Inc. 2000 N/A 47%
CommerceQuest, Inc. 1998 28% 28%
CommerX, Inc. 1998 40% 39%
ComputerJobs.com, Inc. 1998 33% 33%
CourtLink, Inc. 1999 19% 34%
e-Chemicals, Inc. 1998 N/A 20%
eMarketWorld, Inc. 1999 42% 42%
eMerge Interactive, Inc. 1999 45% 39%
eMetra Ltd. 2000 N/A 45%
eumediX 2000 N/A 31%
Eu-supply.com 2000 N/A 29%
FarmingOnline Limited 2000 N/A 32%
Freeborders.com, Inc. 2000 N/A 46%
Industrial America, Inc. 2000 N/A 50%
Internet Commerce Systems, Inc. 1999 43% 43%
Internet Healthcare Group 2000 N/A 30%
InvestorForce.com, Inc. 1999 49% 43%
iSky, Inc. 1996 31% 34%
Jamcracker, Inc. 1999 24% 24%
JusticeLink, Inc. 1999 37% 37%
LinkShare Corporation 1998 34% 39%
Logistics.com, Inc. 2000 N/A 36%
MetalSite General Partner, LLC 1999 44% 39%
NationStreet, Inc. 1999 38% 38%
NetVendor, Inc. 1999 27% 26%
ONVIA.com, Inc. 1999 23% 23%
PaperExchange.com, LLC 1999 24% 23%
Retail Exchange, Inc. 1999 30% 32%
SageMaker, Inc. 1998 21% 21%
Simplexis.com Corporation 2000 N/A 47%
StarCite, Inc. 1999 43% 40%
Syncra Software, Inc. 1998 35% 35%
TALPX Inc. 2000 N/A 28%
TeamOn.com, Inc. 2000 N/A 34%
traffic.com, Inc. 1999 20% 32%
United Messaging, Inc. 1999 37% 37%
Universal Access, Inc. 1999 24% 25%
USgift.com 1999 38% 38%
VerticalNet, Inc. 1996 34% 32%
Vivant! Corporation 1998 31% 39%
</TABLE>
19
<PAGE>
As of March 31, 2000, we owned voting convertible preferred stock in all
companies listed except Breakaway Solutions, eMerge Interactive, ONVIA.com,
Universal Access and VerticalNet, in which we owned voting common stock and e-
Chemicals, in which we owned non-voting convertible debentures. We also owned
voting common stock in a number of these partner companies and have
representation on the board of directors of all of the above partner companies.
During the period ended March 31, 2000 Plan Sponsor Exchange, Inc. changed its
name to InvestorForce.com. Subsequent to March 31, 2000 CourtLink, Inc. merged
with JusticeLink, Inc., and Residential Delivery Services, Inc. changed its name
to NationStreet, Inc.
Those Partner Companies listed with a voting ownership of "N/A" at December
31, 1999 reflects that either these companies were accounted for under a
different method at that time (AUTOVIA Corporation and e-Chemicals were
accounted for under the cost method of accounting at December 31, 1999) or we
had not acquired an interest in the Partner Company as of December 31, 1999.
Most of our equity method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most
equity method partner companies incurred substantial losses in 1999 and are
expected to continue to incur substantial losses in 2000. Additionally, we
recognize goodwill amortization expense related to the excess basis of our
equity method partner companies.
Cost Method. Partner companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations.
Our partner companies accounted for under the cost method of accounting at
December 31, 1999 and March 31, 2000 included:
<TABLE>
<CAPTION>
Voting Ownership
---------------------------------
Partner
Company December 31, March 31,
Since 1999 2000
------- ----------- ---------
<S> <C> <C> <C>
COST METHOD:
Arbinet Communications, Inc. 1999 8% 8%
AUTOVIA Corporation 1998 16% N/A
Benchmarking Partners, Inc. 1996 12% 13%
ClearCommerce Corp. 1997 15% 11%
Collabria, Inc. 1999 11% 11%
Context Integration, Inc. 1997 14% 12%
Deja.com, Inc. 1997 2% 2%
e-Chemicals, Inc. 1998 0% N/A
Entegrity Solutions Corporation 1996 11% 9%
PrivaSeek, Inc. 1998 8% 7%
Servicesoft Technologies, Inc. 1998 5% 5%
TRADEX Technologies, Inc. 1999 10% N/A
US Interactive, Inc. 1996 3% 3%
</TABLE>
As of March 31, 2000, we owned voting convertible preferred stock in all
companies listed except Deja.com, in which we owned non-voting convertible
preferred stock and voting common stock, and US Interactive, Inc., in which we
owned voting common stock. We also owned voting common stock in a number of
these partner companies and in most cases have representation on the board of
directors of the above partner companies. We record our ownership in debt
securities at cost as we have the ability and intent to hold these securities
until maturity. In addition to our investments in voting and non-voting equity
and debt securities, we also periodically make advances to our partner companies
in the form of promissory notes. There were advances to cost method partner
companies totaling $1.1 million at March 31, 2000.
20
<PAGE>
Those Partner Companies listed with a voting ownership of "N/A" at March
31, 2000 reflects that either these companies were accounted for under a
different method at that time (AUTOVIA Corporation and e-Chemicals changed from
cost method companies at December 31, 1999 to equity method companies at March
31, 2000) or, in the case of TRADEX, we sold our ownership interest during the
period ended March 31, 2000.
Most of our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most cost
method partner companies incurred substantial losses in 1999 and are expected to
continue to incur substantial losses in 2000. None of our cost method partner
companies have paid dividends during our period of ownership and they generally
do not intend to pay dividends in the foreseeable future. US Interactive is
accounted for under Statement of Financial and Accounting Standards No. 115.
Effect of Various Accounting Methods on the Presentation of our Financial
Statements
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting or the equity method of accounting. For example, we consolidated
Breakaway Solutions' financial statements from the date of acquisition (January
6, 1999) through September 30, 1999. Due to Breakaway Solutions' initial public
offering in October 1999, however, our voting ownership interest in Breakaway
Solutions decreased to below 50%. Therefore, we have applied the equity method
of accounting since October 1999.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts during
the three months ended June 30, 1999, and CyberCrop.com during the three months
ended September 30, 1999, and Animated Images and ICG Commerce during the three
months ended December 31, 1999, each of which was consolidated from the date of
its acquisition. The presentation of our consolidated financial statements looks
substantially different as a result of consolidating Animated Images,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts and no longer
consolidating Breakaway Solutions in our financial statements for the three
months ended March 31, 2000 versus comparable periods in the prior year.
To understand our net results of operations and financial position without
the effect of consolidating our majority owned subsidiaries, Note 7 to our
Consolidated Financial Statements summarizes our Parent Company Statements of
Operations and Balance Sheets which treat our majority owned subsidiaries as if
they were accounted for under the equity method of accounting for all periods
presented. Our share of the losses of Animated Images, Breakaway Solutions,
CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts is included in "Equity
income (loss)" in the Parent Company Statements of Operations. The carrying
value of Animated Images, Breakaway Solutions, CyberCrop.com, EmployeeLife.com,
ICG Commerce and iParts as of March 31, 2000 is included in "Ownership interests
in and advances to Partner Companies" in the Parent Company Balance Sheets.
Net Results of Operations
Our reportable segments determined in accordance with Statement of
Financial Accounting Standards No. 131 are Partner Company Operations and
General ICG Operations. Partner Company Operations includes the effect of
consolidating Breakaway Solutions for the three months ended March 31, 1999 and
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts for
the three months ended March 31, 2000, and recording our share of earnings or
losses of partner companies accounted for under the equity method of accounting.
General ICG Operations represents the expenses of providing strategic and
operational support to our partner companies, as well as the related
administrative costs related to these expenses. General ICG Operations also
includes the effect of transactions and other events incidental to our ownership
interests in our partner companies and our operations in general.
21
<PAGE>
Net Results of Operations-Partner Company Operations
Consolidated Companies--Analysis of the period ended March 31, 2000
For the three months ended March 31, 1999, Breakaway Solutions was
consolidated and accounted for nearly all of our consolidated revenue and a
significant portion of our consolidated operating expenses. Breakaway Solutions
has been accounted for under the equity method since October 1999 and discussion
related to Breakaway Solutions' results of operations can be found under the
heading "Equity Income (Loss)".
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts
were consolidated during the period ended March 31, 2000 and accounted for $1.8
million and $15.5 million of our Partner Company Operations' revenue and
operating expenses, respectively. CyberCrop.com, EmployeeLife.com and iParts are
development stage companies, have generated negligible revenue since their
inception, and incurred aggregate operating expenses of $3.6 million during the
period ended March 31, 2000. Animated Images and ICG Commerce generated
aggregate revenues of approximately $1.8 million during the period and incurred
aggregate operating expenses of $11.9 million, primarily selling, general and
administrative expenses as they deploy their business models. Also included in
selling, general and administrative expenses for the period ended March 31, 2000
was $1 million of goodwill amortization related to our acquisitions of these
partner companies.
Equity Income (Loss)
A significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership interest. These
companies are accounted for under the equity method of accounting. Equity income
(loss) fluctuates with the number of companies accounted for under the equity
method, our voting ownership percentage in these companies, the amortization of
goodwill related to newly acquired ownership interests in equity method
companies, and the net results of operations of these companies. During the
three months ended March 31, 2000 and the years ended December 31, 1999 and 1998
we utilized cash, stock, or notes payable totalling $ 486.9 million, $495.6
million and $23.7 million, respectively, to acquire partner company interests
accounted for under the equity method of accounting which resulted in goodwill
of $241.7 million, $293.7 million and $15.1 million, respectively, which is
being amortized over 3 years. Without giving effect to additional acquisitions
in equity method companies subsequent to March 31, 2000, we expect goodwill
amortization related to equity method companies to approximate $140 million
through the remainder of 2000. The extent to which actual goodwill amortization
in 2000 related to equity method companies exceeds this estimate will depend
primarily upon the amount of capital we deploy in 2000 for the acquisition of
additional ownership interests in equity method companies.
During the period ended March 31, 2000 we accounted for 48 companies under
the equity method of accounting, compared to 13 for the period ended March 31,
1999. All of the companies, with the exception of VerticalNet, incurred losses
in the period ended March 31, 2000. VerticalNet recorded net income as the
result of a one time gain from the sale of its interest in Tradex Technologies,
Inc. Our equity loss of $80.1 million for the period ended March 31, 2000
consisted of $42.6 million related to our share of the equity method companies'
income and losses and $37.5 million of amortization of the goodwill of these
companies. Of the $42.6 million equity loss related to our share of the income
and losses of companies accounted for under the equity method for the period
ended March 31, 2000, $13.4 million in income was attributable to VerticalNet
and $5.6 million, $2.1 million, $1.3 million and 1.2 million,
22
<PAGE>
respectively, were attributable to ONVIA.com's, Universal Access', Breakaway
Solutions' and eMerge Interactive's net losses, while the other 43 companies
accounted for the remaining equity losses ranging from less than $0.1 million to
$4.3 million.
For the period ended March 31, 2000, VerticalNet had revenues of $27.5
million and net income of $42.1 million, compared to revenue of $1.9 million and
a net loss of $15.3 million in the comparable period in 1999. VerticalNet's
revenue increased period to period primarily due to a significant increase in
the number of storefronts as it grew the number of its vertical trade
communities from 35 as of March 31, 1999 to 55 as of March 31, 2000. In
addition, transaction revenues from one of VerticalNet's subsidiaries acquired
after March 31, 1999 reached $14.6 million and represented 53 percent of the
total revenues for the quarter. Advertising revenues accounted for $11.9
million, or 43 percent of the total. E-commerce revenues (including slotting
fees, product sales, commissions, education, training and auction listing fees)
increased to $1.0 million. Advertising revenue accounted for the majority of
revenues in the period ended March 31, 1999. VerticalNet recorded net income of
$42.1 million, net of tax, primarily related to the sale of its interest in
Tradex Technologies to Ariba, Inc., resulting in a one time pre-tax gain of
$79.9 million. Excluding this gain, VerticalNet's losses increased period to
period due to its costs of maintaining, operating, promoting and increasing the
number of its vertical trade communities increasing more than revenue, increased
amortization of goodwill associated with acquisitions and a $10 million charge
for in-process research and development expensed during the period relating to
VerticalNet's acquisition of Tradeum.
For the period ended March 31, 2000, Onvia.com had revenue of $21.5 million
and a net loss of $26.1 million compared to revenue of $1.5 million and a net
loss of $1.6 million for the comparable period in 1999. The company has
generated substantially all of its revenue from product sales. Onvia.com's
revenue increased period to period due to increased product sales to new and
existing customers. Onvia.com's losses increased period to period as a result of
negative gross margins as it build its customer base, its increased operating
expenses related to marketing and advertising programs designed to build its
brand and drive customer acquisition, increases in personnel and non-cash equity
compensation charges.
For the period ended March 31, 2000, Universal Access had revenue of $7.3
million and a net loss of $9 million compared to revenue of $1.5 million and a
net loss of $1 million for the comparable period in 1999. The company has
generated substantially all of its revenue from providing ongoing, dedicated
circuit access. Monthly recurring circuit revenues are generated under client
contracts with terms ranging from 12 to 60 months. The increase in revenues was
attributable to an increase in the volume of circuits sold, some of which were
higher capacity and, therefore, generated greater revenues per circuit. In
addition, there was an increase in the number of clients and additional sales to
existing clients. Universal Access' losses increased period to period as a
result of its increased costs to provide circuit access and increased operating
expenses as the result of increases in personnel, depreciation, amortization and
marketing expenses and non-cash equity compensation charges.
For the period ended March 31, 2000, Breakaway Solutions had revenue of
$18.1 million and a net loss of $3.2 million compared to revenue of $3.1 million
and a net loss of $.2 million for the comparable period in 1999. Breakaway
Solutions' operating activities primarily consisted of providing strategy
consulting and systems integration services. Prior to Breakaway Solutions'
acquisition of Applica in 1999, Breakaway Solutions derived no revenues from
application hosting. Breakaway Solutions believes, however, that application
hosting will account for a significantly greater portion of revenues in the
future. The increase in revenues was attributable to an increase in billable
consultants and billing rates as well as $2.8 million in application hosting
revenues which did not exist at March 31, 1999. Breakaway Solutions' losses
increased period to period as a result of increases in personnel, marketing,
increased depreciation and amortization expenses.
For the period ended March 31, 2000, eMerge Interactive, Inc. had revenue
of $38.6 million and a net loss of $5.5 million compared to revenue of $.6
million and a net loss of $2 million for the comparable period in 1999.
Substantially
23
<PAGE>
all revenue for the period was derived from cattle sales and comparisons to the
comparable period in 1999 are not meaningful. Gross margins were less than 1%
during the quarter and significant sales and marketing and research and
development costs have contributed to eMerge Interactive's net loss.
Due to the early stage of development of the other companies in which we
acquire interests, existing and new partner companies accounted for under the
equity method are expected to incur substantial losses. Our share of these
losses is expected to be significant.
While most of the companies accounted for under the equity method of
accounting have generated losses to date, and therefore in most cases did not
incur income tax liabilities, these companies may generate taxable income in the
future. Our share of these companies' net income, if generated, would be reduced
to the extent of our share of these companies' tax expense.
Net Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. We commenced operations in March 1996 with offices in
Wayne, Pennsylvania and San Francisco, California. As the number of our
employees grew to support our operations and those of our partner companies, our
general and administrative costs increased. In late 1998, we opened an office in
Boston, Massachusetts, and in 1999 we established operations in Seattle,
Washington and London, England and we significantly increased the number of our
employees. As a result of these initiatives, our general and administrative
costs increased $15.2 million for the period ended March 31, 2000 compared to
the comparable period in 1999. We plan to continue to hire new employees, open
new offices, and build our overall infrastructure, therefore we expect these
costs to continue to be substantially higher compared to historical periods.
During the years ended December 31, 1999 and 1998, we recorded aggregate
unearned compensation expense of $16.4 million and $0.7 million, respectively,
in connection with the grant of stock options to non-employees and the grant of
employee stock options with exercise prices less than the deemed fair value on
the respective dates of grant. General and administrative costs for the periods
ended March 31, 2000 and 1999 included $1.8 million and $0.1 million of
amortization expense related to stock option grants. Without giving effect to
any unearned compensation expense related to equity granted subsequent to March
31, 2000, we expect to recognize amortization of deferred compensation expense
of $5.6 million in 2000 and $3.4 million in 2001, $1.9 million in 2002, $0.9
million in 2003 and $0.2 million in 2004.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the issuances of stock by our partner companies to reflect the change in our
share of the net equity of these companies, and impairment charges related to
our ownership interests in and advances to partner companies.
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<PAGE>
General ICG Operations' other income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended,
March 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
Sales of Excite holdings $ - $ 2,051
Sale of i2 Technologies holdings 26,967 -
Issuance of stock by VerticalNet 176,794 28,254
Issuance of stock by Universal Access 4,641 -
Tradex Sale to Ariba 449,284 -
Partner company impairment charges - (1,620)
-------- -------
$657,686 $28,684
======== =======
</TABLE>
In February 1998, we exchanged all of our holdings of Matchlogic, Inc. for
763,820 shares of Excite, Inc. Throughout the remainder of 1998 we sold 716,082
shares of Excite. During the three month period ended March 31, 1999, we sold
23,738 shares of Excite which resulted in $2.5 million of proceeds and $2.1
million of gains.
In August 1999, we divested our ownership interest in SMART Technologies,
Inc. due to the agreement of merger of SMART Technologies, Inc. and i2
Technologies, Inc. Upon completion of this merger during the three months ended
September 30, 1999, our ownership interest in and advances to SMART
Technologies, Inc. were converted into cash, common stock and warrants to
purchase common stock of i2 Technologies, Inc. During the period ended March 31,
2000 we sold 180,176 shares of i2 Technologies which resulted in $31 million in
proceeds received in April 2000 and a $27 million gain.
As a result of VerticalNet issuing additional shares for acquisitions and
Universal Access completing its initial public offering during the period ended
March 31, 2000, our share of VerticalNet's and Universal Access' net equity
increased by approximately $176.8 million and $4.6 million respectively. These
increases adjust our carrying value in VerticalNet and Universal Access and
result in non-operating gains of $176.8 million and $4.6 million, before
deferred taxes of $66.1 million and $1.7 million, respectively, for the period
ended March 31, 2000. Additionally, as a result of VerticalNet completing its
initial public offering in February 1999, our share of VerticalNet's net equity
increased by $28.3 million. This increase adjusts our carrying value in
VerticalNet and results in a non-operating gain of $28.3 million, before
deferred taxes of $10.5 million, in the three months ended March 31, 1999. These
gains were recorded in accordance with SEC Staff Accounting Bulletin No. 84 and
our accounting policy with respect to such transactions. We believe there is a
high likelihood that transactions similar to these, in which a partner company
we account for under the consolidation or equity method of accounting issues
shares of its common stock, will occur in the future and we expect to record
gains or losses related to such transactions provided they meet the requirements
of SEC Staff Accounting Bulletin No. 84 and our accounting policy. In some
cases, as described in SEC Staff Accounting Bulletin No. 84, the occurrence of
similar transactions may not result in a non-operating gain or loss but would
result in a direct increase or decrease to our shareholders' equity.
In March 2000 we exchanged all of our interest in Tradex Technologies, Inc.
for approximately 2.9 million shares of Ariba Inc. common stock. Based on
Ariba's closing price on March 9, 2000, the closing date of the transaction, we
recorded a pre-tax gain of $449.3 million. Our holdings of Ariba are accounted
for as available-for-sale securities and will be marked to market, with the
difference between carrying value and market value, net of deferred taxes,
recorded in "Accumulated other comprehensive income" in the shareholders' equity
section of our Consolidated Balance Sheets in accordance with Statement of
Financial Accounting Standards No. 115.
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<PAGE>
For the three months ended March 31, 1999, we recorded an impairment charge
of $1.6 million for the other than temporary decline in the fair value of a cost
method partner company. From the date we initially acquired an ownership
interest in this partner company, our funding to this partner company
represented all of the outside capital the company had available to fund its net
losses and capital asset requirements. During the three months ended March 31,
1999 we fully guaranteed the partner company's new bank loan and agreed to
provide additional funding. We acquired additional non-voting convertible
debentures of this partner company for $5.0 million in April 1999. The
impairment charges we recorded were determined by the decrease in net book value
of the partner company caused by its net losses, which were funded entirely
based on our funding and bank guarantee.
Interest Income
Our cash and cash equivalents at March 31, 2000 are invested primarily in
money market accounts and highly liquid, high quality debt instruments. During
the three months ended December 31, 1999, we received approximately $831 million
in our follow-on stock offering and approximately $549.9 million from the sale
of convertible subordinated notes. The increase in interest income in the three
months ended March 31, 2000 was primarily due to the significant increase in our
cash and cash equivalents as a result of these transactions.
Interest Expense
Interest expense increased during the period primarily as the result of the
December 1999 issuance of approximately $566.3 million in convertible
subordinated notes due 2004 bearing interest at 5.5%.
Income Taxes
From our inception on March 4, 1996 to February 2, 1999, we were organized
as a limited liability company and were treated as a partnership for income tax
purposes. As a result of our converting from an LLC to a corporation on February
2, 1999, we are subject to corporate federal and state income taxes. At the time
of our conversion to a corporation, we recorded a deferred tax benefit and
related deferred tax asset of $7.7 million which primarily represented the
excess of tax basis over book basis of our partner companies. The Company's net
deferred tax liability of $84.7 million at March 31, 2000 consists of deferred
tax liabilities of $166.2 million relating primarily to the gain on the sale of
a partner company for marketable securities, offset by net deferred tax assets
of $81.5 million relating primarily to the excess of tax carrying values over
book carrying values of our partner companies and net unrealized depreciation in
available-for-sale securities.
We have not recorded a valuation allowance related to our gross deferred
tax assets because we believe it is more likely than not that we will realize
the benefits of these assets. The assets relate primarily to the excess of tax
basis over book basis of our partner companies. These differences in basis
represent capital losses for tax purposes which, if recognized, can only be
deducted to the extent of capital gains. Additionally, these losses may be
carried back three
26
<PAGE>
years and carried forward five years from the year in which they occur. While
selling any portion of our ownership interests in partner companies is something
we will not do in the ordinary course of business, we would consider pursuing
such a sale at the minimum amount necessary to prevent any capital losses from
expiring unutilized. If we do not believe such a strategy, or an alternative
strategy, will be available in the time periods allowed for carrying back and
carrying forward losses, we will establish a valuation allowance at that time.
Most of our partner companies are in an early stage of development, currently
generate significant losses and are expected to generate significant losses in
the future. The marketability of the securities we own of our partner companies
is generally limited as they primarily represent ownership interests in
companies whose stock is not publicly traded. As of March 31 2000, our only
publicly traded partner companies are VerticalNet, Breakaway Solutions, eMerge
Interactive, ONVIA.com, Universal Access, and US Interactive. As a result, there
is significant risk that we may not be able to realize the benefits of expiring
carryforwards.
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds,
proceeds from the issuance of convertible notes, proceeds from the sales of
marketable securities, and borrowings under bank credit facilities. From 1996
through December 31, 1999 we received approximately $1.79 billion in proceeds
including our initial public offering, follow-on public offering and debt
issuances.
In March 2000, our revolving bank credit facility was amended to, among
other things, increase our credit facility to provide for borrowings up to $250
million, including the issuance of letters of credit up to $125 million. The
agreement includes a $125 million 364-day secured line of credit and a $125
million two-year secured revolving credit facility. The revolving facility and
line of credit are subject to .375% and .25% unused commitment fees
respectively, bear interest, at our option at LIBOR plus 2.0% or the lenders'
Base Rate (the lenders' Base Rate being the greater of (i) the prime rate or
(ii) the Federal Funds Rate plus .5%) and are secured by substantially all of
our assets (including our holdings in partner companies). Borrowing availability
under the facility is based on the fair market value of our holdings of publicly
traded Partner Companies and the value, as defined in the facility, of our
private partner companies. The full amount of these facilities were available at
May 12, 2000. No amounts were outstanding on these facilities as of March 31,
2000 or May 12, 2000.
Existing cash, cash equivalents and short-term investments, availability
under our bank credit facility, proceeds from the potential sales of all or a
portion of our minority interests and other internal sources of cash flow are
expected to be sufficient to fund our cash requirements through the next 12
months, including commitments to new and existing partner companies and general
operations requirements. As of May 12, 2000, we were contingently obligated for
approximately $5.5 million of guarantee commitments and commitments to new and
existing partner companies that may require funding in the next 12 months
totaled $42.2 million. We will continue to evaluate acquisition opportunities
and we expect to acquire additional ownership interests in new and existing
partner companies in the next 12 months which may make it necessary for us to
raise additional funds. We will likely have to raise additional funds through
the issuance of equity securities or obtain additional bank or other financing.
If additional funds are raised through the issuance of equity securities, our
existing shareholders may experience significant dilution.
Consolidated working capital decreased to $844.6 million at March 31, 2000,
compared to $1.3 billion at December 31, 1999 primarily as a result of the cost
of ownership interests we acquired and other net cash outflows during the three
months ended March 31, 2000.
Cash used in operating activities in the three months ended March 31, 2000
compared to the same prior year period increased due to the increased cost of
General ICG Operations' general and administrative expenses.
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<PAGE>
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies.
We utilized $494.5 million in the aggregate to acquire interests in or make
advances to new and existing partner companies during the three months ended
March 31, 2000. These companies included: Arbinet Communications,
AssetTRADE.com, AUTOVIA, Blackboard, Benchmarking Partners, BuyMedia, Centrimed,
ClearCommerce, Collabria, CommerceQuest, ComputerJobs.com, CourtLink, e-
Chemicals, Entegrity Solutions, eumediX, eu-supply, FarmingOnLine, Freeborders,
ICG Commerce, Industrial America, Internet Healthcare Group, iSky, LinkShare,
Logistics.com, MetalSite, NetVendor, ONVIA.com, PaperExchange, Servicesoft
Technologies, Simplexis.com, StarCite, TALPX, TeamOn.com, Traffic.com, Universal
Access, and Vivant!.
During the period from April 1, 2000 through May 12, 2000 we utilized
$323.7 million to acquire interests in or make advances to new and existing
partner companies. These companies included:, Arbinet Communications,
AssetTRADE.com, Breakaway Solutions, Buy.com, eColony, Emptoris,
ComputerJobs.com, Cybercrop.com, Deja.com, ICG AsiaWorks, ICG Commerce, ICS
FoodOne, Logistics.com, MetalSite, NetVendor, Print Mountain, Retail Exchange,
StarCite and Tibersoft.
During January 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 150,000 shares of
our common stock valued at $26.6 million.
In February 2000, we entered into an agreement to form a joint venture with
DuPont which will provide management, growth capital, financial, technical, and
infrastructure capabilities designed to accelerate the development of B2B e-
commerce.
In February 2000, we entered into an agreement to acquire a significant
interest in eCredit.com, a leading provider of Internet based credit, financing
and related services. We will issue common stock valued at approximately $450
million to eCredit.com shareholders, which is subject to customary closing
conditions and regulatory approval. We expect the transaction to close in the
quarter ending June 30, 2000.
In March 2000, we entered into an agreement to acquire a majority interest
in RightWorks, a leading provider of e-procurement software that powers B2B
exchanges. We will issue approximately $635 million of our common stock (valued
at $111.48 per share) to tendering RightWorks' preferred shareholders (subject
to adjustment based on the number of RightWorks' shares tendered) and also will
purchase newly issued RightWorks' shares for $22 million in cash. The
transaction is subject to customary closing conditions and regulatory approval.
We expect the transaction to close in the quarter ending June 30, 2000.
In March 2000, we entered into an agreement with Hutchinson Whampoa Ltd., a
Hong Kong based multi-national conglomerate, to acquire a majority interest in
Harbour Ring International Holdings, which will be renamed ICG AsiaWorks
Limited. We will expand approximately $117 million upon the closing of this
transaction which is expected to take place in the quarter ending June 30, 2000,
subject to customary closing conditions and regulatory approval.
During April 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 323,509 shares of
our common stock valued at $39 million.
In March 2000 Ariba Inc. purchased all the outstanding shares of Tradex
Technologies. In connection with this transaction we exchanged all of our
interest in Tradex Technologies for approximately 2.9 million shares of Ariba's
common stock. Based on Ariba's closing price on March 9, 2000 we recorded a pre-
tax gain of $449.3 million. We also entered into cashless collar agreements to
hedge 2.2 million shares of our holdings of Ariba's common stock accounted for
at fair value. The cashless collar agreements limit our exposure to and benefits
from price fluctuations in the underlying equity securities. The cashless collar
agreements mature between
28
<PAGE>
2001 and 2003. As we account for the cashless collar agreements as a hedge,
changes in the value of the cashless collar agreements are substantially offset
by changes in the value of the underlying investment securities which are both
marked-to-market through accumulated other comprehensive income in our
Consolidated Balance Sheet in accordance with Statement of Financial Accounting
Standards No. 115.
In January 2000, Breakaway Solutions announced it had signed a definitive
agreement to acquire EggRock Partners for 3,636,000 shares of its common stock
valued at $250 million at the date of signing the definitive agreement. The
transaction closed in April 2000. Upon closing, our voting ownership in
Breakaway Solutions will decrease from 40% to approximately 33%. In addition, we
expect to record a non-operating gain due to the increase in our share of
Breakaway Solutions' net equity as a result of their issuance of shares.
Our operations are not capital intensive, and capital expenditures in any
year normally will not be significant in relation to our overall financial
position. We committed funds in 2000 to the buildout of our larger new corporate
headquarters in Wayne, Pennsylvania, our international expansion, and the
development of our information technology infrastructure. There were no material
capital asset purchase commitments as of March 31, 2000.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. We are currently
analyzing the potential impact of SFAS No. 133 on our results of operations,
financial position and cash flows upon the adoption of this standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission required that the Financial Accounting Standards Board Emerging
Issues Task Force, or the EITF, address a number of accounting and financial
reporting issues that the Securities and Exchange Commission believes has
developed with respect to Internet businesses. The Securities and Exchange
Commission identified twenty issues for which they believed some form of
standard setting or guidance may be appropriate either because (i) there appears
to be diversity in practice or (ii) the issues are not specifically addressed in
current accounting literature or (iii) the Securities and Exchange Commission
staff is concerned that developing practice may be inappropriate under generally
accepted accounting principles. Many of the issues identified by the Securities
and Exchange Commission, including those which address barter and revenue
recognition, are potentially applicable to us. Althought the EITF has begun to
deliberate these issues, formal guidance has not been issued to date for the
majority of them. In addition, in December 1999, the Securities and Exchange
Commission staff issued Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements, which is required to be implemented in the
quarter ended June 30, 2000. Although we believe our historical accounting
policies and practices conform with generally accepted accounting principles,
there can be no assurance that final consensus reached by the EITF on the
Internet issues referred to above, or other actions by standard setting bodies,
will not result in changes to our historical accounting policies and practices
or to the manner in which certain transactions are presented and disclosed in
our consolidated financial statements.
Year 2000 Compliance
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates. Most reports to date, however, have indicated that computer
systems are functioning normally and the compliance and remediation work
accomplished leading up to 2000 was
29
<PAGE>
effective to prevent any problems. However, computer experts have warned that
there may still be residual consequences of the change in centuries. It is also
possible that errors or defects may remain undetected, or that dates other than
January 1, or February 29, 2000, may trigger Year 2000 type problems. As a
result, although we have not experienced any significant Year 2000 problems to
date, it is possible that we could face problems or disruptions during 2000.
30
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risks on the marketable portion of our
equity securities. Our public holdings at March 31, 2000 include equity
positions in companies in the Internet industry sector, including Ariba, Inc.,
Excite@Home; Breakaway Solutions, Inc.; i2 Technologies, Inc.; eMerge
Interactive, Inc.; Universal Access, Inc.; ONVIA. com, Inc.; Lycos, Inc.; US
Interactive, Inc.; and VerticalNet, Inc., many of which have experienced
significant historical volatility in their stock prices. We typically do not
attempt to reduce or eliminate our market exposure on these securities,
particularly with respect to securities of our partner companies. A 20% adverse
change in equity prices, based on a sensitivity analysis of our public holdings
as of March 31, 2000, would result in an approximate $937 million decrease in
the fair value of our public holdings. A significant portion of the value of the
potential decrease in equity securities, or $340.1 million, consisted of our
holdings in VerticalNet.
We entered into cashless collar agreements with respect to 2.2 million
shares of our holdings of Ariba's common stock accounted for at fair value of
$230.6 million at March 31, 2000. The collar arrangements limit our exposure to
and benefits from price fluctuations in the underlying equity securities. The
collar arrangements mature between 2001 and 2003. We account for the collar
arrangements as a hedge, and changes in the value of the collar arrangements are
substantially offset by changes in the value of the underlying investment
securities which are both marked-to-market through accumulated other
comprehensive income (loss) in our consolidated balance sheet in accordance with
Statement of Financial Accounting Standards No. 115. The combined value of the
collars and the underlying hedged securities at March 31, 2000 was $259.3
million. We may enter into similar collar arrangements in the future,
particularly with respect to available for sale securities which do not
constitute ownership interests in our partner companies.
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
fair value of convertible subordinated notes is approximately $502.5 million
versus a carrying value of $566.3 million. The carrying value of other long-term
debt approximates its fair value, as estimated by using discounted future cash
flows based on our current incremental borrowing rates for similar types of
borrowing arrangements.
Availability under our credit facility is determined by the market value of
the publicly traded and privately held securities pledged as collateral. As of
March 31, 2000, we had sufficient collateral to enable us to fully utilize this
facility. Additionally, we are exposed to interest rate risk primarily through
our bank credit facility. At March 31, 2000, there were no borrowings
outstanding.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may dramatically increase. Therefore,
in the future, we may consider utilizing derivative instruments to mitigate such
risks.
31
<PAGE>
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
Private Placements
(1) On January 4, 2000, Internet Capital Group issued 140,000 shares Common
Stock in a private placement to Alfred Sherk in exchange for 2,250,000 shares of
common stock of e-Chemicals, Inc.
(2) On January 4, 2000, Internet Capital Group issued 10,000 shares of Common
Stock in a private placement to Community Foundation for Southeastern Michigan
in exchange for 150,000 shares of common stock of e-Chemicals, Inc.
The sale and issuance of securities in the transactions described above were
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering, where the purchasers were sophisticated
investors who represented their intention to acquire securities for investment
only and not with a view to distribution and received or had access to adequate
information about Internet Capital Group.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Document
10.1 Internet Capital Group, Inc. Long-Term Incentive Plan
10.2 Amendment No. 3 to the 1999 Credit Agreement dated February 25,
2000 by and among Internet Capital Group, Inc., Internet Capital
Group Operations, Inc., the Banks named therein and PNC Bank,
N.A. (incorporated by reference to Exhibit 10.15.3 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 (Registration No. 000-26929) (the "10-K"))
10.3 Press Release regarding Acquisition of eCredit.com (incorporated
by reference to the Registrant's filing on Form 425 filed
February 24, 2000 (File No. 132-01812))
10.4 Sublease Agreement dated January 6, 2000 between SP Investments
Inc. and Internet Capital Group, Inc. for premises located in
Seattle, Washington (incorporated by reference to Exhibit 10.30
to the 10-K)
10.5 Amended and Restated Credit Agreement by and among Internet
Capital Group, Inc., ICG Holdings, Inc., The Banks Party
Thereto, PNC Bank, National Association, as Administrative
Agent, Bank of America, N.A., and Deutsche Bank AG New York
Branch/Cayman Island Branch, as Co-Syndication Agents and PNC
Capital Markets, Inc., as Lead Arranger (incorporated by
reference to Exhibit 10.31 to the Registrant's Registration
Statement on Form S-4 filed April 13, 2000 (Registration No.
333-34722) (the "S-4"))
10.6 Press Release regarding Acquisition of RightWorks (incorporated
by reference to the Registrant's filing on Form 425 filed March
31, 2000 (File No. 132-01830))
10.7 Exchange Offer Agreement dated as of February 24, 2000 by and
among eCredit.com, Inc., Internet Capital Group, Inc. and ICG
Holdings, Inc. (incorporated by reference to Exhibit 2.2 of the
S-4)
10.8 Recapitalization and Exchange Offer Agreement and Plan of
Reorganization by and among Internet Capital Group, Inc., Rain
Acquisition Corp., RightWorks Corporation, Suhas Patal, as
Shareholder Representative, and Chase Manhattan Trust Company,
National Association, as Escrow Agent, dated as of March 7, 2000
(incorporated by reference to Exhibit 2.3 of the S-4)
11.1 Statement Regarding Computation of Per Share Earnings (included
herein at Note 1-"Significant Accounting Policies" in the
subsection "Net Income (Loss) Per Share" to the Consolidated
Financial Statements on page 11 and Note 3-"Net Income (Loss)
Per Share" to the Consolidated Financial Statements on page 12)
27.1 Financial Data Schedule for the Quarter ended March 31, 2000
33
<PAGE>
(b) Reports on Form 8-K
On January 11, 2000, we filed a Current Report on Form 8-K dated December
29, 1999 to report under Item 2 the execution of the Securities Purchase
Agreement between Internet Capital Group and Weirton Steel Corporation. The
financial statements required were omitted and were filed by amendment.
On March 13, 2000, we filed an amended Current Report on Form 8-K/A dated
December 29, 1999 to report under Item 5 (Other Events) the execution of the
Securities Purchase Agreement between Internet Capital Group and Weirton Steel
Corporation. The filing included the required financial statements and pro forma
financial information.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 INTERNET CAPITAL GROUP, INC.
By: /s/ David D. Gathman
----------------------------------
Name: David D. Gathman
Title: Chief Financial Officer and
Treasurer
(Principal Financial and Principal
Accounting Officer)
(Duly Authorized Officer)
35
<PAGE>
EXHIBIT INDEX
Exhibit number Description
- -------------- -----------
10.1 Internet Capital Group, Inc. Long-Term Incentive Plan
27.1 Financial Data Schedule
(Electronic filing only)
36
<PAGE>
Exhibit 10.1
1999 INTERNET CAPITAL L.P.
AGREEMENT OF LIMITED PARTNERSHIP, effective as of March 1, 2000 (the
"Effective Date"), among ICG Holdings, Inc. ("General Partner"), and the persons
and/or entities identified on Exhibit II attached hereto as Limited Partners,
and such other persons as shall, from time to time, become limited partners as
provided herein (the "Limited Partners"). The General Partner and the Limited
Partners are sometimes referred to herein collectively as the "Partners" or
individually as a "Partner."
The parties, in consideration of their mutual covenants herein contained,
agree to become partners and to form a limited partnership (the "Partnership")
as follows:
ARTICLE I
Formation; Name and Office;
Purpose; Powers; Term and Dissolution
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Section 1.1. Formation. The Partners hereby form the Partnership pursuant
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to the provisions of the Act by executing this Agreement of Limited Partnership
and filing a Certificate of Limited Partnership in the office of the Secretary
of State of the State of Delaware.
Section 1.2. Name and Office. The Partnership shall be conducted under the
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name 1999 Internet Capital L.P.
(a) The General Partner shall have the power at any time to
(i) change the name of the Partnership and (ii) qualify the Partnership to do
business under any name when the Partnership's name is unavailable for use in a
particular jurisdiction. The General Partner shall use its best efforts to
qualify the Partnership to do business in each jurisdiction where the activities
of the Partnership make such qualification necessary. The General Partner shall
give prompt notice of any change of the Partnership's name to each Partner.
(b) The registered office of this Partnership in the State of
Delaware is 103 The Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19801, c/o Cindy Conner or such other place as may from time to time be
designated by the General Partner. The General Partner shall give prompt notice
of any such change to each Partner.
(c) The principal office of the Partnership shall be at 103
The Springer Building, 3411 Silverside Road, Wilmington, Delaware 19801, c/o
Cindy Conner or such other place as may from time to time be designated by the
General Partner. The General Partner shall give prompt notice of any such change
to each Partner.
Section 1.3. Purpose. The Partnership is being organized for the purpose of
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investing in Securities, to engage in such activities as may be permitted hereby
or are incidental hereto and for engaging in any and all lawful business
activities in which limited partnerships formed in the State of Delaware under
the Act may participate.
<PAGE>
Section 1.4. Powers. In furtherance of the purpose of the Partnership as
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specified in Section 1.3, the Partnership shall have all powers available to it
as a limited partnership under the laws of the State of Delaware that are
reasonably necessary to enable it to perform its functions and conduct its
activities, including, without limitation, (i) the power to make and perform all
contracts and engage in all activities and transactions necessary or advisable
to carry out the purpose of the Partnership, (ii) the power to purchase, sell,
transfer, pledge and exercise all rights, privileges and incidents of ownership
or possession with respect to Securities and other Partnership Assets and (iii)
the power to form other limited partnerships and to make capital contributions
to such partnerships.
Section 1.5. Term and Dissolution. The Partnership shall continue in full
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force and effect indefinitely until the Partnership is dissolved pursuant to the
provisions of Article VII.
ARTICLE II
Limited Partners
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Section 2.1. Initial Limited Partners. The initial Limited Partners are
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listed on Exhibit II hereto. Additional Limited Partners may be admitted by the
General Partner from time to time pursuant to Section 2.2 below.
Section 2.2. Admission of Limited Partners. One or more additional Limited
-----------------------------
Partners shall be admitted to the Partnership and shall become a party to this
Agreement upon (i) each signing a counterpart of this Agreement and delivering
such counterpart to the General Partner in such manner and at such time as the
General Partner shall determine and (ii) acceptance thereof by the General
Partner, at the discretion of the General Partner. Each additional Limited
Partner so admitted to this Partnership shall be bound by all the provisions of
this Agreement. Following an amendment pursuant to Article VIII, the General
Partner is authorized to revise this Agreement as appropriate and, if required
by the Act, to file amendments to the Certificate of Limited Partnership from
time to time.
Section 2.3. Liability of Limited Partners. Except as otherwise provided
-----------------------------
under the Act, no Limited Partner, in his capacity as such, shall be liable for
any debts, liabilities, contracts or obligations of the Partnership. No Limited
Partner, in his capacity as such, shall be liable for any debts, liabilities,
contracts or obligations of any other Partner.
ARTICLE III
Capital Contributions
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Section 3.1. Contribution of General Partner. The General Partner shall
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contribute in cash or Securities in respect of its interest in the Partnership
in the amount set forth opposite its name on Exhibit I attached hereto. The
General Partner may make additional Capital Contributions from time to time in
cash or Securities, and Exhibit I shall be accordingly amended, but the
inadvertent failure to amend such Exhibit I shall not affect the calculations of
Capital Contributions.
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Section 3.2. Contributions of Limited Partners. Upon admission to the
---------------------------------
Partnership, each Limited Partner shall make an initial Capital Contribution in
an amount equal to the product of one thousand dollars ($1,000) and such Limited
Partner's Profit Percentage, which amount shall be credited to such Limited
Partner's Capital Account. A Limited Partner shall not be required to make any
additional Capital Contributions to the Partnership.
Section 3.3. Withdrawal of Capital. A Partner shall not be entitled to
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bring an action for partition against the Partnership, or to demand or receive
any distribution of or with respect to his Capital Contribution except as is
specifically provided in this Agreement.
ARTICLE IV
Rights, Powers and Duties of the General Partner
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Section 4.1. Management of Partnership. The General Partner shall have sole
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and exclusive right to manage, control and conduct the affairs of the
Partnership and to do any and all acts on behalf of the Partnership. All
decisions with respect to Securities including, without limitation, the
investment or reinvestment, holding, disposition, distribution to Partners or
any similar investment-related decisions will be made solely by the General
Partner. The General Partner may delegate responsibility over any right or
obligation to any of the General Partner's agents or representatives as the
General Partner in its sole discretion, deems appropriate. The General Partner
will possess all of the powers and rights of a general partner under the Act.
Section 4.2. Authorized Acts. The General Partner is authorized and
---------------
empowered to carry out and implement the purpose of the Partnership, as provided
in Section 1.3, and to exercise the powers of the Partnership, as provided in
Section 1.4, for, in the name of, and on behalf of, the Partnership.
Section 4.3. Powers of the Limited Partners. The Limited Partners shall
------------------------------
take no part in the control, management or conduct of the affairs of the
Partnership nor shall the Limited Partners have any authority to vote on
Partnership matters or to act for or on behalf of the Partnership except as
otherwise required by law.
Section 4.4. Liabilities of the General Partner. The General Partner shall
----------------------------------
not be liable, responsible or accountable, in damages or otherwise, to any other
Partner or to the Partnership for any act or omission taken by such General
Partner, except for its own gross negligence or willful misconduct, nor shall
the General Partner be liable, responsible or accountable for the gross
negligence or willful misconduct (including dishonesty or bad faith) of any
employee, broker or other agent of the Partnership which the General Partner
shall have selected with reasonable care. The General Partner shall be entitled
to rely upon the advice of counsel and public accountants, and shall not be
liable, responsible or accountable, in damages or otherwise, to any other
Partner or to the Partnership, for any act or omission which he shall take in
good faith in reliance on such advice.
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Section 4.5. Indemnification.
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(a) The Partnership shall indemnify, to the fullest extent
permitted by law, the General Partner and its officers, directors, employees,
partners and agents ("Indemnified Parties") from and against all costs and
expenses, including attorneys' fees, judgments, fines, settlements and/or
liabilities incurred by or imposed upon any Indemnified Party in connection
with, or resulting from, investigating, preparing or defending any action, suit
or proceeding, whether civil, criminal, legislative or otherwise (or any appeal
thereof), to which any Indemnified Party may be made a party or become otherwise
involved or with which any Indemnified Party may be threatened, in each case by
reason of, or in connection with, the Indemnified Party being or having been
associated with or otherwise acting for the Partnership, or having acted as a
director, officer, employee, partner or agent of any Entity in which the
Partnership had invested, or by reason of any action or alleged action, omission
or alleged omission by any Indemnified Party in any such capacity, provided that
the Indemnified Party is not ultimately adjudged to have engaged in gross
negligence or willful misconduct, and provided further that the Indemnified
Party acted in a manner that he reasonably believed to be in, or not opposed to,
the best interests of the Partnership.
(b) The Partnership shall pay the expenses incurred by an
Indemnified Party in investigating, preparing or defending any civil or criminal
action, suit or proceeding, in advance of the final disposition thereof, upon
receipt of (i) an undertaking by the Indemnified Party to repay such payment if
there is a final determination that he is not entitled to indemnification as
provided herein and (ii) satisfactory evidence that the Indemnified Party has
sufficient financial resources to satisfy any such undertaking.
(c) The Partnership shall make all indemnification provided
for pursuant to this Section 4.5 solely out of Partnership Assets and only to
the extent of such Partnership Assets. Except as provided aforesaid, no Limited
Partner shall have any personal liability for any indemnification required or
permitted pursuant to this Section 4.5. None of the provisions of this Section
4.5 shall be deemed to create or grant any rights in favor of Indemnified
Parties which cannot be discharged out of Partnership Assets, except as provided
aforesaid, or in favor of anyone other than Indemnified Parties; this provision
excludes, among others, any right of subrogation in favor of any insurer or
surety. The rights of indemnification granted hereunder shall survive the
termination, dissolution and winding up of the Partnership.
ARTICLE V
Capital Accounts; Allocations and Distributions
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Section 5.1. Capital Accounts.
----------------
(a) There shall be established for each Partner a separate
Capital Account.
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Section 5.2. Allocations.
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(a) After giving effect to the special allocations, if any,
set forth in Section 5.5, Net Income or Net Loss for any Accounting Period shall
be allocated among the Partners in accordance with the following provisions:
(i) Net Income derived from the Partnership's interest in
each Investment Position shall be allocated as follows:
(A) First, one hundred percent (100%) to the
General Partner until (1) the cumulative amount of Net
Income from a particular Investment Position allocated
pursuant to this Section 5.2(a)(i)(A)(1) for the current
Accounting Period and all prior Accounting Periods equals
the cumulative amount of Net Loss, if any, derived from
such Investment Position and allocated pursuant to Section
5.2(a)(ii) for all prior Accounting Periods and (2) the
cumulative amount of Net Income allocated to the General
Partner pursuant to this Section 5.2(a)(i)(A)(2) equals
one hundred percent (100%) of the General Partner's
Threshold Amount minus its Equity Cost Basis in such
Investment Position.
(B) Second, one hundred percent (100%) to the Limited
Partners (to be divided among them pro rata in accordance
with their Vested Profit Percentages) until the Net
Profits allocated to them pursuant to this Section
5.2(a)(i)(B) is equal to the aggregate Limited Partners'
Vested Profit Percentages multiplied by the sum of (a) the
Equity Cost Basis and (b) the amount allocated pursuant to
this Section 5.2(a)(i)(B) and Section 5.2(a)(i)(A)(2)
above with respect to such Investment Position, and
(C) Third, pro rata among the Partners in
accordance with their Vested Profit Percentages.
(ii) Net Loss with respect to an Investment Position
shall first be allocated in a manner that reverses the allocated Net Income with
respect to such Investment Position in Section 5.2(a)(i) above, reversing
allocations first under subsection (C) and then subsection (B) and then
subsection (A) of Section 5.2(a)(i) above and then to the Partners in accordance
with Capital Percentages.
(iii) Short-term Investment Income and Short-term
Investment Loss shall be allocated to the Partners in accordance with Capital
Percentages.
(b) Upon the admission of any additional Limited Partner
during 1999 or 2000, the General Partner shall assign a Profit Percentage to
such additional Limited Partner, which shall dilute the Profit Percentages of
the Limited Partners to the extent that the aggregate Profit Percentage of all
Limited Partners would otherwise exceed twelve percent (12%) and the schedule on
file with the General Partner recording the Limited Partners' Profit Percentages
shall be amended to reflect such new Profit Percentages.
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<PAGE>
(c) The allocations agreed to be made pursuant to Section
5.2(a) hereto shall, for purposes of determining Capital Account balances, be
deemed allocated prior to a distribution in kind (giving effect to such
distribution in kind).
(d) If an interest in the Partnership is transferred during a
taxable year, Net Income or Net Loss (and any item of income, gain, loss,
deduction or credit) for such taxable year allocable to the transferred interest
shall be allocated between the transferor and the transferee on an interim
closing of the books basis, based upon that portion of such taxable year during
which each was recognized as owning such interest; provided, that such
allocation must be in accordance with a method permissible under section 706 of
the Code and Treasury Regulations thereunder.
Section 5.3. Distributions.
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(a) Except as otherwise provided in this Section 5.3, from
time to time the General Partner shall cause the Partnership to distribute to
the Partners all or part of the Investment Assets, the proceeds from a
Disposition or Dispositions or other income and proceeds attributable to the
Partnership's interest in any of the Investment Positions. Any Investment Assets
distributed by the Partnership shall be valued at their Gross Asset Value and
treated for Capital Account purposes as if sold immediately prior to
distribution. Distributions of different types or classes of property or
securities need not be made pro rata to all Partners, so long as the Gross Asset
Value of all distributions is allocated in accordance with this Section 5.3.
(b) In the case of any distribution with respect to an
Investment Position, distributions shall be made among the Partners in the
following manner:
(i) First, the General Partner shall receive an amount
equal to the cumulative amount, if any, of the Net Loss with respect to the
Investment Position previously allocated to the General Partner;
(ii) Then:
(1) Each Limited Partner shall receive an amount
equal to such Limited Partner's Vested Profit Percentage in the balance of such
distribution; and
(2) The General Partner shall receive the balance.
(c) In the case of a distribution attributable to a
disposition of Securities that occurred in a prior calendar year, the
distribution shall be treated, for purposes of this Section 5.3, as taking place
in such prior calendar year.
(d) Distributions with respect to Short-term Investment Income
shall be made at such times as the General Partner shall determine in proportion
to the Partners' Capital Percentages.
(e) Notwithstanding the foregoing provisions of this Section
5.3, in no event shall a distribution be made to a Limited Partner to the extent
that such distribution would cause such Limited Partner (after taking into
account any allocations of Net Income or Net Loss
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<PAGE>
attributable to such distribution) to have a deficit balance in such Limited
Partner's Capital Account. In the event that a distribution is restricted
pursuant to this Section 5.3(e), the Partnership shall, as promptly as possible,
make a special distribution to such Limited Partner of an amount subject to
restriction under this Section 5.3(e) at such time, if any, as such distribution
would not cause such Limited Partners to have a deficit balance in such Limited
Partner's Capital Account.
Section 5.4. Tax Withholdings. To the extent the Partnership is required by
----------------
federal, state or local law or any tax treaty to withhold or to make tax
payments on behalf of or with respect to any Partner, the General Partner shall
withhold such amounts or make such tax payments as so required. The amount of
such payments shall constitute an advance by the Partnership to such Partner
bearing interest at the lowest applicable federal rate for such advance and, if
such Partner shall not have reimbursed the Partnership for such amount, such
amount, plus interest, if any, shall be repaid to the Partnership by reducing
the amount of the current or next succeeding distribution or distributions which
would otherwise have been made to such Partner or, if such distributions are not
sufficient for that purpose, by so reducing the proceeds of liquidation
otherwise payable to such Partner and if such proceeds are insufficient, such
Partner shall pay to the Partnership the amount of such insufficiency.
Section 5.5. Special Allocation - Qualified Income Offset. In the event
--------------------------------------------
that any Partner unexpectedly received any adjustments, allocations or
distributions described in Treasury Regulations Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6),
items of Partnership income and gain shall be specifically allocated to each
Partner in an amount and manner sufficient to eliminate, to the extent required
by the Treasury Regulations, the deficit Capital Account of such Partner as
quickly as possible, provided that an allocation pursuant to this Section 5.5
shall be made if and only to the extent that such Partner would have a deficit
Capital Account after all other allocations provided for in this Article V have
been tentatively made as if this Section 5.5 were not in this Agreement.
Section 5.6. Allocations for Tax Purposes.
----------------------------
(a) Items of Partnership taxable income, gain, loss,
deduction, or credit shall be determined according to Code Section 703, and
except as otherwise required under Code Section 704 or the Treasury Regulations
promulgated thereunder, the Partners' distributive shares of each such item for
purposes of Code Section 702 shall be determined by allocating such item in the
same manner as its correlative item of "book" income, gain, loss, deduction or
credit has been allocated pursuant to this Agreement.
(b) Items of the Partnership's taxable income, gain and
deduction with respect to any property contributed to the capital of the
Partnership shall be allocated among the Partners in accordance with Code
Section 704(c) so as to take account of any variation between the adjusted basis
of such property to the Partnership for federal income tax purposes and its
Gross Asset Value using the traditional method of Treas. Reg. (S)1.704-2(b)(2).
(c) If the Gross Asset Value of a Partnership asset is
adjusted, subsequent allocations of items of taxable income, gain, loss, and
deduction with respect to such asset shall take account of the variation between
the adjusted basis of such asset for federal
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<PAGE>
income tax purposes and its Gross Asset Value in the same manner as under Code
Section 704(c).
(d) Allocations pursuant to this Section 5.6 are solely for
purposes of federal, state and local taxes and shall not effect, or in any way
be taken into account in computing, a Partner's Capital Account or share of
income, gains, losses, deductions distributions or other Partnership items
pursuant to these provisions.
ARTICLE VI
Vesting Provisions
------------------
Section 6.1. Vested Profit Percentage. For purposes of this Partnership,
------------------------
the term "Vested Profit Percentage" of a Limited Partner with respect to an
Investment Position shall be the product obtained by multiplying the following
three factors: (1) such Limited Partner's Profit Percentage, (2) the Threshold
Requirement Percentage applicable to such Investment Position, and (3) the
Performance Requirement Percentage applicable to all Investments Positions of
the Partnership.
Section 6.2. Determining the Profit Percentage. For purposes of determining
---------------------------------
a Limited Partner's Vested Profit Percentage, the term "Profit Percentage" shall
mean, with respect to any given Measurement Period, the percentage initially
established for each such Limited Partner in connection with the Limited
Partner's admission to the Partnership, which percentage shall be set forth in a
schedule on file with the General Partner, and which percentage may be adjusted
pursuant to this Agreement.
Section 6.3. Determining the Threshold Requirement Percentage. On the date
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of any distribution with respect to an Investment Position, the Threshold
Requirement shall be considered satisfied and the "Threshold Requirement
Percentage" shall equal one hundred percent if (i) in connection with the sale
or other disposition of such Investment Position the Threshold Amount with
respect to such Investment Position was reached as of the time of such sale or
disposition or (ii) in connection with a distribution in-kind of an Investment
Position the Threshold Amount has been reached for at least three (3) of the six
(6) immediately preceding calendar months, determined on the last business day
of each such month, prior to the date of such distribution; provided that, if
the Threshold Requirement would have been met with respect to an Investment
Position prior to the end of a calendar year of the Partnership, and the Board
does not make a contemporaneous determination of whether the Performance
Requirement would have been satisfied as of that point in time during the
calendar year, the Threshold Requirement shall be deemed to be satisfied as of
such later date that the Board determines whether the Performance Requirement
has been satisfied. For any Investment Position for which the Threshold
Requirement is not satisfied pursuant to the preceding sentence, the Threshold
Requirement Percentage shall equal zero (0).
Section 6.4. Determining the Performance Requirement Percentage.
--------------------------------------------------
(a) With respect to all Investment Positions of the
Partnership on a given date, the Performance Requirement shall be considered
satisfied for the relevant Measurement Period if the Aggregate Return equals or
exceeds fifteen percent (15%) and the
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Performance Requirement Percentage shall therefore be equal to one hundred
percent (100%). If the Performance Requirement has not been satisfied, the
Performance Requirement Percentage shall equal zero (0).
(b) For purposes of this Section 6.4, the term "Measurement
Period" means the period beginning on the date hereof and ending (i) on the last
day of each calendar year beginning with the calendar year ended December 31,
2000 and (ii) such other date as the Board shall from time to time decide is
appropriate for determining whether the Performance Requirement has been
satisfied.
(c) As of a given date, each Investment Position shall be
valued as follows: (1) if an Investment Position has been sold or otherwise
disposed of prior to such date, the value of the consideration received by the
Partnership as a result of such sale or disposition, (2) in the event that no
such sale or disposition has occurred, if an Investment Position has received
third-party financing within the twelve month period prior to such date, the
value of the Investment Position determined in connection with such financing,
or (3) in the event that no such sale, disposition or financing has occurred,
the value of an Investment Position shall be determined by an independent
appraiser chosen in good faith by the General Partner.
(d) In determining whether the Performance Requirement has
been satisfied for any Measurement Period, the "Aggregate Return" shall mean the
weighted average percentage appreciation in the value of the Investment Assets
of the Partnership over such Measurement Period, taking into account the size of
each investment and the length of time held by the Partnership, expressed on an
annualized basis, without regard to compounding.
Section 6.5. Board Discretion. Notwithstanding that the Performance
----------------
Requirement or the Threshold Requirement has not been satisfied in accordance
with the provisions of Section 6.3 or Section 6.4 as of any particular point in
time, the Board reserves the right to determine that such requirements have been
met in full or in part as of such time.
ARTICLE VII
Dissolution and Winding-Up of the Partnership;
Withdrawal and Removal of Partners
----------------------------------
Section 7.1. Events of Dissolution. The Partnership shall be dissolved, and
---------------------
its affairs wound up, upon the happening of any of the following events:
(a) the determination for any reason by the General Partner
that the Partnership should be dissolved and its affairs wound up;
(b) the dissolution of the General Partner or the entry of an
order amounting to a stay of proceedings against the General Partner under the
federal bankruptcy laws or rules;
(c) the sale or distribution of all or substantially all of
the assets held by the Partnership;
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<PAGE>
(d) any other event that would cause a dissolution of a
limited partnership under the Act; or
(e) December 31, 2004.
Section 7.2. Winding Up. Upon the occurrence of (i) a Dissolution Event or
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(ii) the determination by a court of competent jurisdiction that the Partnership
has dissolved prior to the occurrence of a Dissolution Event, the Partnership
shall continue solely for the purposes of winding up its affairs in an orderly
manner, liquidating its assets, and satisfying the claims of its creditors and
Partners, and no Partner shall take any action that is inconsistent with, or not
necessary to or appropriate for, the winding up of the Partnership's business
and affairs, provided that all covenants contained in this Agreement shall
continue to be fully binding upon the Partners until such time as the assets of
the Partnership have been fully distributed pursuant to this Section 7.2 and the
Certificate has been canceled pursuant to the Act. The General Partner shall be
responsible for overseeing the winding up and dissolution of the Partnership and
the determining the time, manner and terms of sale or other disposition of the
Partnership's assets. The winding up and dissolution shall be completed within
ninety (90) days of the occurrence of the Dissolution Event. The completion of
the winding up and dissolution shall operate as the Limited Partners' release of
any and all of their claims against both the Partnership and the General
Partner. The General Partner shall take full account of the Partnership's
liabilities and property and shall cause the property or the proceeds from the
sale thereof, to the extent sufficient therefor, to be applied and distributed,
to the maximum extent permitted by law, in the following order:
(a) First to creditors (including Partners who are creditors,
to the extent otherwise permitted by law) in satisfaction of all of the
Partnership's debts and other liabilities (whether by payment of the making of
reasonable provision for payment thereof);
(b) The balance, if any, to the Partners in accordance with
the positive balances in their Capital Accounts, after giving effect to all
contributions, distributions and allocations for all periods. Such distribution
shall, to the greatest extent possible, be made among the Partners in a manner
consistent with the manner in which distributions shall be made among the
Partners pursuant to Section 5.3.
Section 7.3. Deficit Capital Accounts. If any Limited Partner has a deficit
------------------------
balance in his Capital Account (after giving effect to all contribution,
distributions and allocations for all Fiscal Years, including the Fiscal Year in
which such liquidation occurs), such Limited Partner shall have no obligation to
make any contribution to the capital of the Partnership with respect to such
deficit, and such deficit shall not be considered a debt owed to the Partnership
or to any other person for any purpose whatsoever.
Section 7.4. Voluntary Removal of a Limited Partner. A Limited Partner may,
--------------------------------------
at such Partner's option exercised upon written notice to the General Partner,
voluntarily remove himself or herself as a Limited Partner as of the last day of
a calendar month (a "Voluntary Removal") (the last business day immediately
preceding the effective date of a Voluntary Removal or an Involuntary Removal
pursuant to Section 7.5 shall be herein referred to as the "Termination Date.").
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Section 7.5. Involuntary Removal of a Limited Partner. Effective upon
----------------------------------------
written notice to a Limited Partner from the General Partner, the Limited
Partner named in such notice shall be involuntarily removed for any reason or
for no reason as a Limited Partner (an "Involuntary Removal"). A Voluntary
Removal under Section 7.4 or an Involuntary Removal under this Section 7.5 shall
not dissolve the Partnership, the business of which shall be carried on by the
remaining Partner(s). (A Limited Partner who is removed as a Partner pursuant to
Section 7.4 or this Section 7.5 may be referred to herein as a "Removed
Partner.")
Section 7.6. Treatment of Interest of Withdrawn or Removed Partner.
-----------------------------------------------------
(a) From and after the Termination Date, a Removed Partner's
Capital Account shall be eliminated and all items of Net Income and Net Loss
previously allocated to such Partner's Capital Account shall be reallocated to a
special Capital Account which shall be established for the benefit of such
Removed Partner. The Net Income or Net Loss realized following a Termination
Date with respect to the Removed Partner's portion of any Investment Position at
the Removed Partner's Termination Date shall be allocated solely to the General
Partner.
(b) A Removed Partner shall be entitled to receive only the
balance, if any, in such Removed Partner's Capital Account at the Removed
Partner's Termination Date. From and after the Termination Date, the Removed
Partner shall not be deemed a Partner for any purpose except for the purposes of
Section 4.5 and Section 5.4, and any interest that a Removed Partner would have
had in Investment Positions acquired subsequent to the Termination Date shall,
unless allocated by the General Partner to one or more other Limited Partners,
be allocated solely to the General Partner.
(c) In each instance of a Removed Partner, the General Partner
may make the election under Code Section 754, and adjust the basis of the
Partnership property pursuant to Code Sections 734 or 743, as may be applicable.
ARTICLE VIII
Amendments
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Section 8.1. This Agreement may be amended only by the General Partner;
provided, however, that prompt written notice thereof shall be delivered to the
other Partners and that any amendment to this Agreement which (a) increases the
liability of any Partner (b) affects vesting or (c) amends this Article VIII,
shall require the prior approval of a majority in interest of the Partners so
affected.
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ARTICLE IX
Limitations on Transfers of Interests;
Additional Partners; Adjustments to Distributive Shares
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Section 9.1. Transfer by General Partner. The General Partner may assign,
---------------------------
pledge, mortgage or otherwise hypothecate, sell or dispose of any part or all of
its Partnership Interest without the consent of the Limited Partners.
Section 9.2. Limitations on Transfers of Interests of Limited Partners. No
---------------------------------------------------------
Limited Partner shall assign, pledge, mortgage, or otherwise hypothecate, sell,
or dispose of any part or all of his Partnership Interest without the prior
written consent of the General Partner.
Section 9.3. Effect of Authorized and Unauthorized Transfers. Any
-----------------------------------------------
transferee of a Partnership Interest transferred in accordance with this
Agreement shall succeed to all the rights and liabilities of the transferor
provided for under this Agreement, but shall only become a Substituted Limited
Partner if the permission required by Section 9.4 is granted. Any attempted
transfer of a Limited Partner's Partnership Interest without compliance with the
provisions of this Agreement shall be void and ineffectual and shall not be
binding upon the Partnership, and the Partnership may refuse to recognize such
attempted transfer for all purposes.
Section 9.4. Substituted Limited Partners. The General Partner may, in its
----------------------------
sole discretion, permit an assignee or transferee of a Partnership Interest to
become a Substituted Limited Partner in the Partnership entitled to all the
rights and benefits under this Agreement of the assignor or transferor. No such
assignee or transferee shall become a Substituted Limited Partner unless and
until the General Partner has given such permission. Each Limited Partner hereby
consents to such admission and authorizes the General Partner to amend Exhibit I
or II, the schedules referred to by this Agreement and, if required by the Act,
the Certificate of Limited Partnership of the Partnership to reflect such
admission.
Section 9.5. Additional Limited Partners. The General Partner may from time
---------------------------
to time admit one or more Persons as additional Limited Partners. Upon admission
of such Person(s), the Profit Percentage of each Partner will be adjusted as
provided below. Subject to the last sentence of this Section 9.5, the General
Partner shall assign such additional Limited Partners a Profit Percentage, and
any Profit Percentage assigned to such additional Limited Partners will dilute
the Profit Percentage of the existing Limited Partners in proportion to their
Profit Percentages to the extent that the aggregate Profit Percentages of all
Limited Partners would otherwise exceed twelve percent (12%), unless the General
Partner elects to have such assignment of Profit Percentage dilute the General
Partner. No Limited Partner shall participate in any Investment Asset acquired
by the Partnership prior to the time such Limited Partner became a Limited
Partner, unless expressly provided by the General Partner.
-12-
<PAGE>
ARTICLE X
Fiscal Year; Records; Reports
-----------------------------
Section 10.1. Fiscal Year. "Fiscal Year," as used in this Agreement, means
-----------
the period beginning on January 1 and ending on December 31 of each year.
Section 10.2. Records. At all times the General Partner shall keep books of
-------
account of the Partnership. Such books of account, together with a copy of this
Agreement and the Certificate of Limited Partnership and any amendments thereto
and restatements thereof, shall at all times be maintained at the principal
office of the Partnership, and shall be open to inspection at any reasonable
time by the Partners.
Section 10.3. Reports. As promptly as possible after the close of each
-------
Fiscal Year, but in any event within ninety (90) days after the close of each
Fiscal Year, the General Partner shall distribute K-1 tax returns and a report
on the Investment Positions held by the Partnership to each Partner. Within
ninety (90) days after the close of each Fiscal Year, the Partnership shall
transmit to each Partner a report indicating his share of the income or losses
of the Partnership for such Fiscal Year for federal income tax purposes. Such
report shall contain a separate accounting for such tax purposes of each of the
following four items: realized capital gains, realized capital losses, ordinary
income, and ordinary losses.
Section 10.4. Accounting Decisions. All decisions as to accounting
--------------------
treatment of any items of Partnership business, when made by the General Partner
in accordance with generally accepted accounting principles, shall have
conclusive effect upon the Partnership and the Partners.
Section 10.5. Tax Matters Partner. The General Partner shall be the tax
-------------------
matters partner for the Partnership for all federal income tax purposes set
forth in the Code, with the power and authority to take all actions and do such
things as required or as he shall deem appropriate under the Code or regulations
promulgated thereunder.
ARTICLE XI
----------
Miscellaneous
-------------
Section 11.1. Counterparts. This Agreement may be executed by the Partners
------------
in counterparts, all of which taken together shall be deemed one original.
Section 11.2. Further Assurances. The Partners will execute, acknowledge,
------------------
and deliver such further instruments and do such further acts and things as may
be required to carry out the intent and purpose of this Agreement.
Section 11.3. Captions. The descriptive headings contained in this
--------
Agreement are inserted only as a matter of convenience and shall not control or
affect the meaning or construction of any provision of this Agreement.
-13-
<PAGE>
Section 11.4. Binding Effect. Except to the extent required under the Act
--------------
and except for fees, rights to reimbursement and indemnity, and other
compensation, none of the provisions of this Agreement shall be for the benefit
of or enforceable by any creditor of the Partnership, as such. The provisions of
this Agreement shall be binding upon and shall inure to the benefit of the
successors and permitted assigns, if any, of the respective Partners, except as
otherwise provided in this Agreement.
Section 11.5. Partial Invalidity. The invalidity or unenforceability of a
------------------
portion of this Agreement will not affect the validity or enforceability of the
remainder hereof.
Section 11.6. Integration. This Agreement and its schedules and Exhibits
-----------
constitutes the entire understanding and agreement among the parties pertaining
to the subject matter of this Agreement and supersedes all prior agreements and
understandings of the parties in connection with this Agreement.
Section 11.7. Notices. All notices provided for or permitted hereunder
-------
shall be made in writing by hand-delivery, registered or certified first-class
mail, telex, telecopier or air courier guaranteeing overnight delivery and
directed if to a Partner, at its address set forth under its signature below,
and if to the Partnership, to the General Partner at its address set forth below
under its signature. All such notices shall be deemed to have been duly given:
when delivered by hand, if personally delivered; five business days after being
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt acknowledged, if telecopied; and on the next business day,
if timely delivered to an air courier guaranteeing overnight delivery.
Section 11.8. English Usage. Words of gender or neuter may be read as
-------------
masculine, feminine or neuter, as required by context, and the word "persons"
shall include individuals, trusts, Entities, and all other forms of association.
Section 11.9. References. Article and Section references in this Agreement
----------
are, unless otherwise indicated, references to the Articles or Sections, as the
case may be, of this Agreement which are so numbered, as such may be amended.
All references to numbered or lettered Exhibits are references to the Exhibits
so numbered or lettered which are appended to this Agreement, as such Exhibits
may be amended from time to time. Such references to Exhibits are to be
construed as incorporating by reference the contents of each Exhibit to which
such reference is made, as though such contents were set out in full at the
place in this Agreement where such reference is made.
Section 11.10. Action by General Partner. Any action, approval or consent
-------------------------
to be taken or given by the General Partner hereunder shall be valid only if
taken or given by a member of the Board of Directors of the General Partner who
is acting on behalf of a majority of the members of such Board of Directors.
Section 11.11. No Right to Employment. The establishment or existence of
----------------------
the Agreement shall not confer upon any individual the right to continue as a
Limited Partner or as an employee of any entity, including, without limitation,
the General Partner.
-14-
<PAGE>
ARTICLE XII
Defined Terms
-------------
The following terms, when used in this Agreement, have the following
meanings, unless otherwise expressly indicated:
"Accounting Period" means a Fiscal Year or, if during a Fiscal Year there
shall be one or more interim closings of the Partnership's books, means the
period from the beginning of such Fiscal Year to the date of the first such
closing, the period(s) between any such closings, and the period from the last
such closing to the end of such Fiscal Year.
"Act" means the Delaware Revised Uniform Limited Partnership Act and any
successor statute, as amended from time to time.
"Affiliate" means any member of a person's immediate family and any entity
controlled by, controlling or under common control with such person.
"Aggregate Return" has the meaning ascribed to it in Section 6.4(d).
"Agreement" means this Agreement of Limited Partnership, with the Exhibits
which are appended to and referred to in this Agreement, and the schedules
referred to in this Agreement, as such Agreement, Exhibits and schedules may be
amended, modified or restated at any time and from time to time.
"Board" means the Board of Directors of the General Partner.
"Capital Account" means, for each Partner, the sum of (a) such Partner's
Capital Contribution(s), plus (b) the aggregate amount of Net Income (including
deemed gains only to the extent arising pursuant to this Agreement) allocated to
such Partner pursuant to Article V, minus (c) the aggregate amount of cash
distributed to such Partner pursuant to Article V, minus (d) the aggregate
amount of Net Losses (including deemed losses only to the extent arising
pursuant to this Agreement), minus (e) the aggregate amount of expenses
allocated to such Partner pursuant to Article VII, minus (f) the value, as
determined pursuant to Section 5.3, of such Partner's allocable share of
Partnership Assets distributed to such Partner in kind and (g) otherwise in
accordance with Treasury Regulations (S)1.704-1. All such allocations and
distributions shall be credited or charged, as the case may be, to the Capital
Accounts of the Partners to whom they apply, as of the time as of which they are
determined.
"Capital Contribution" means, for each Partner, the amount shown as the
Capital Contribution for such Partner, as from time to time increased pursuant
to Article III.
"Capital Percentages" mean (a) with respect to each Limited Partner, the
Capital Account initially established for such Limited Partners divided by the
sum of (i) the Capital Accounts initially established for all Limited Partners
upon their admission to the Partnership and (ii) the aggregate Capital
Contributions made by the General Partners and (b) with respect to the General
Partner, the aggregate Capital Contributions made by the General Partner divided
the
-15-
<PAGE>
sum of (i) the Capital Accounts initially established by the Limited Partners
upon their admission to the Partnership and (ii) the aggregate Capital
Contributions made by the General Partner.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
"Cost Basis" means the amount paid, or deemed paid, by the Partnership for
a Security or as set forth on Exhibit III.
"Disposition" means the sale of all or a portion of any of an Investment
Position; in the case of a partial Disposition, such Disposition shall be
treated as a Disposition of a separate asset to which shall be attributed, for
purposes of this Agreement, a pro rata portion of the Partner's Capital
Contributions made with respect to the entire Capital Contribution attributable
to such Investment Position.
"Dissolution Event" shall mean an event of dissolution specified in Section
7.1.
"Entity" means any business corporation, partnership, unincorporated
association, firm, organization, or any other business entity having one or more
leaders or managerial figures.
"Equity Cost Basis" means the Cost Basis of equity Securities or Securities
convertible into or exercisable into equity Securities.
"Fair Market Value" means the market price of publicly traded Securities,
if publicly traded, or the fair market value determined by the General Partner
otherwise.
"Fiscal Year" has the meaning ascribed to it in Section 10.1.
"General Partner" means ICG Holdings, Inc. or any Person who succeeds its
interest as the general partner under this Agreement.
"Gross Asset Value" means with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a Partner
to the Partnership shall be the Fair Market Value of such asset;
(ii) The Gross Asset Values of all Partnership assets shall be adjusted to
equal their respective Fair Market Values as of the following times: (A) the
acquisition of an additional interest in the Partnership by any new or existing
Partner in exchange for more than a de minimis Capital Contribution; (B) the
----------
distribution by the Partnership to a Partner of more than a de minimis amount of
----------
Partnership property as consideration for an interest in the Partnership; and
(C) the liquidation of the Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), provided, however, that an adjustment described in clauses
(A) and (B) of this paragraph shall be made only if the General Partner
reasonably determines that such adjustment is necessary or appropriate to
reflect the relative economic interests of the Partners in the Partnership;
-16-
<PAGE>
(iii) The Gross Asset Value of any Partnership assets distributed to any
Partner shall be adjusted to equal the Fair Market Value of such asset on the
date of distribution; and
(iv) The Gross Asset Values of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) clause (vi) of the
definition of "Net Income" and "Net Loss"; provided, however, that Gross Asset
Values shall not be adjusted pursuant to this subparagraph (iv) to the extent
that an adjustment pursuant to subparagraph (ii) is required in connection with
a transaction that would otherwise result in an adjustment pursuant to this
subparagraph (iv).
"Indebtedness" means all obligations, direct or contingent, for the payment
of cash or cash equivalents, including, without limitation, obligations with
respect to borrowed money, accounts payable, checks, drafts bills of exchange,
letters of credit, margin accounts, short sales, reverse purchase agreements,
futures contracts, and other recognized commercial transactions, instruments
involving the extension of credit, and all obligations incurred as surety or
guarantor of the obligations of others.
"Indemnified Parties" has the meaning ascribed to it in Section 4.5.
"Investment Assets," directly or indirectly, means and include all
Securities, rights and other tangible and intangible property acquired by the
Partnership for the purpose of producing a profit in the ordinary course of
business.
"Investment Position" means an Investment Asset and all Securities or other
property which may be exchanged for or distributed with respect to such
Investment Asset, whether by the issuer of the Investment Asset or related group
of Entities or any successor or successors thereto.
"Involuntary Removal" has the meaning ascribed to it in Section 7.5.
"Limited Partners" means all and only those persons who are so designated
in Exhibit II hereto, a copy of which shall be kept on file by the General
Partner and principal executive offices of the Partnership.
"Limited Partnership Interest" means the Limited Partner's ownership
interest in the Partnership received in exchange for his or her Capital
Contribution.
"Limited Partners Profit Percentage" means the aggregate Profit Percentage
of all of the Limited Partners.
"Measurement Period" has the meaning ascribed to it in Section 6.4(b).
"Net Income" and "Net Loss" mean, for each Accounting Period, an amount
equal to the Partnership's taxable income or loss for such Accounting Period,
with the following adjustments:
-17-
<PAGE>
(i) Any income of the Partnership that is exempt from federal income tax
and not otherwise taken into account in computing Net Income or Net Loss shall
be added to such taxable income or loss;
(ii) Any expenditures of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Net Income or Net Loss shall be subtracted from such taxable income
or loss;
(iii) In the event the Gross Asset Value of any Partnership asset is
adjusted pursuant to clauses (ii) or (iii) of the definition of Gross Asset
Value, the amount of such adjustment shall be taken into account as gain or loss
from the disposition of such asset for purposes of computing Net Income or Net
Loss;
(iv) Gain or loss resulting from any disposition of property with respect
to which gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Gross Asset Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Gross Asset Value;
(v) To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken
into account in determining Capital Accounts as a result of a distribution other
than in liquidation of a Partner's interest in the Partnership, the amount of
such adjustment shall be treated as an item of gain or loss from the disposition
of such asset and shall be taken into account for purposes of computing Net
Income or Net Loss; and
(vi) Notwithstanding any other provision of this definition, any items
which are specially allocated pursuant to a special allocation set forth in a
schedule on file with the General Partner shall not be taken into account in
computing Net Income or Net Loss.
"Partners" means the General Partner and Limited Partners individually or
collectively, as the context requires.
"Partnership" means 1999 Internet Capital L.P.
"Partnership Assets" means all assets and property of the Partnership of
any and every kind.
"Partnership Interest" means any Partner's interest in the Partnership.
"Person" has the meaning ascribed to it in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934.
"Profit Percentage" means the percentage established for each Limited
Partner pursuant to Section 6.2 and set forth in a schedule on file with the
General Partner.
"Removed Partner" has the meaning ascribed to it in Section 7.5.
-18-
<PAGE>
"Securities" means any of one or more of the following: (a) capital stock
(both common and preferred); partnership interests (both limited and general);
limited liability company interests; interests in any acquisition, venture
capital or other investment funds; notes; bonds; debentures; other obligations,
instruments or evidences of indebtedness (whether convertible or otherwise); and
other securities and equity interests of whatever kind of any Person, whether
readily marketable or not; (b) any rights to acquire any of the Securities
described in clause (a) above (including, without limitation, options, warrants,
rights or other interests or other Securities convertible into any such
Securities); or (c) any Securities received by the Partnership upon conversion
of, in exchange for, as proceeds from the disposition of, as interest on, or
stock dividend or other distribution from, any of the Securities described in
clauses (a) or (b) above.
"Short-term Investment Income" means all items of Net Income, other than
Net Income with respect to an Investment Position.
"Short-term Investment Loss" means all items of Net Loss, other than Net
Loss with respect to an Investment Position.
"Substituted Limited Partner" means any transferee or assignee of a Limited
Partner's Partnership Interest who is then admitted to the Partnership as a
Limited Partner pursuant to Section 9.4 hereof.
"Termination Share" means the payments a Removed Partner is entitled to
receive from the Partnership from and after the date such Partner ceases to be a
Partner.
"Threshold Amount" means an amount equal to three hundred percent (300%) of
the Equity Cost Basis of an Investment Position, unless otherwise provided
Exhibit III.
"Treasury Regulation" means the income tax regulations promulgated under
the Code and effective as of the date hereof. Unless the General Partner
determines otherwise after consultation with the Limited Partner, such term
shall be deemed to include any amendments to such regulations and any
corresponding provisions of succeeding regulations.
"Vested Profit Percentage" has the meaning specified in Section 6.1.
"Voluntary Removal" has the meaning ascribed to it in Section 7.4.
[Signature Page Follows]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of
Limited Partnership as of the 1st day of March, 2000.
GENERAL PARTNER:
ICG HOLDINGS, INC.
/s/ Henry Nassau
-----------------------------------------
Henry Nassau
Secretary
LIMITED PARTNERS:
[See counterpart signature pages]
---------------------------------
-20-
<PAGE>
EXHIBIT I
to
Agreement of Limited Partnership
of
1999 Internet Capital L.P.
Partners Capital Contribution/Capital Accounts
- -------- -------------------------------------
General Partner: Capital Contribution
- --------------- --------------------
Securities described in Exhibit III as
amended from time to time or purchase
price of such securities.
Limited Partners: Initial Capital Account
- ---------------- -----------------------
Schedule on file with the General Partner.
-21-
<PAGE>
EXHIBIT II
Limited Partners
----------------
------------------------------------------------
Names
------------------------------------------------
Alexander, Douglas A.
------------------------------------------------
Allgaier, Matthias
------------------------------------------------
Buckley, Walter W.
------------------------------------------------
Bunker, Richard G.
------------------------------------------------
Devine, Richard
------------------------------------------------
Duckett, Stephen
------------------------------------------------
Fox, Kenneth A.
------------------------------------------------
Gathman, David D.
------------------------------------------------
Harrington, Wendy
------------------------------------------------
Haskell, Bill
------------------------------------------------
Hewlin, Todd
------------------------------------------------
Hwang, Victor
------------------------------------------------
Jadallah, Sam
------------------------------------------------
Lotke, Mark
------------------------------------------------
Maner, Walter P.
------------------------------------------------
Morgan, Raymond K.
------------------------------------------------
Nassau, Henry N.
------------------------------------------------
Nickolas, John N.
------------------------------------------------
Pollan, Robert A.
------------------------------------------------
Risman, Michael
------------------------------------------------
Slaats, Paul H.
------------------------------------------------
Dated as of: March 1, 2000
-22-
<PAGE>
EXHIBIT III
Cost Basis and Threshold Amount
-------------------------------
- --------------------------------------------------------------------------------
Securities Equity Cost Basis Threshold Amount
- --------------------------------------------------------------------------------
Applied Intranet
(Animated Images, Inc.)
- --------------------------------------------------------------------------------
Ag Producer Network
- --------------------------------------------------------------------------------
asseTrade.com
- --------------------------------------------------------------------------------
Net Vendor Systems
- --------------------------------------------------------------------------------
Purchasing Solutions, Inc.
- --------------------------------------------------------------------------------
traffic.com
- --------------------------------------------------------------------------------
Dated as of: March 1, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 858,567
<SECURITIES> 0
<RECEIVABLES> 3,403
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 903,514
<PP&E> 10,389
<DEPRECIATION> 930
<TOTAL-ASSETS> 2,471,057
<CURRENT-LIABILITIES> 58,936
<BONDS> 568,940
0
0
<COMMON> 264
<OTHER-SE> 1,748,799
<TOTAL-LIABILITY-AND-EQUITY> 2,471,057
<SALES> 0
<TOTAL-REVENUES> 1,830
<CGS> 0
<TOTAL-COSTS> 33,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,460
<INCOME-PRETAX> 561,474
<INCOME-TAX> 209,499
<INCOME-CONTINUING> 351,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351,975
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.30
</TABLE>
