<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-26929
----------
INTERNET CAPITAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2996071
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
600 BUILDING, 435 DEVON PARK DRIVE, WAYNE, PA 19087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(610) 989-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Number of shares of Common Stock outstanding as of November 10, 2000:
286,530,575 shares.
================================================================================
<PAGE> 2
================================================================================
INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM PAGE NO.
---- --------
<S> <C>
ITEM 1--FINANCIAL STATEMENTS:
Consolidated Balance Sheets--September 30, 2000 (unaudited) and December 31, 1999...................... 4
Consolidated Statements of Operations (unaudited)--Three and Nine Months Ended September 30, 2000
and 1999............................................................................................ 5
Consolidated Statements of Cash Flows (unaudited)--Nine Months Ended September 30, 2000 and 1999....... 6
Notes to Consolidated Financial Statements............................................................. 7
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22
Item 3--Quantitative and Qualitative Disclosures About Market Risk..................................... 37
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.............................................................................. 38
Item 2--Changes in Securities and Use of Proceeds...................................................... 38
Item 3--Defaults Upon Senior Securities................................................................ 38
Item 4--Submission of Matters to a Vote of Security Holders............................................ 38
Item 5--Other Information.............................................................................. 38
Item 6--Exhibits and Reports on Form 8-K............................................................... 38
SIGNATURES............................................................................................. 39
Exhibit Index.......................................................................................... 40
</TABLE>
2
<PAGE> 3
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our partner companies, that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue," or the negative of such terms
or other similar expressions. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed elsewhere in this
Report and the risks discussed in our other Securities and Exchange Commission
("SEC") filings, including our Registration on Form S-4 declared effective on
August 10, 2000 by the SEC (File No. 333-42528).
Although we refer in this Report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and that we indicate
that we have a "partnership" with these companies, we do not act as an agent or
legal representative for any of our partner companies, and we do not have the
power or authority to legally bind any of our partner companies, and we do not
have the types of liabilities in relation to our partner companies that a
general partner of a partnership would have.
3
<PAGE> 4
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 566,632 $ 1,343,459
Short-term investments........................................ 9,593 3,359
Accounts receivable, net...................................... 33,962 1,207
Prepaid expenses and other current assets..................... 22,929 6,347
----------- -----------
Total current assets..................................... 633,116 1,354,372
Fixed assets, net.................................................. 45,445 4,015
Ownership interests in and advances to Partner Companies........... 1,793,653 547,339
Available-for-sale securities...................................... 359,905 46,767
Goodwill and other intangible assets, net.......................... 1,262,042 23,649
Deferred taxes..................................................... -- 34,388
Other.............................................................. 69,963 39,854
----------- -----------
Total Assets............................................. $ 4,164,124 $ 2,050,384
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt.......................... $ 2,861 $ 3,000
Accounts payable.............................................. 27,620 6,750
Accrued expenses.............................................. 56,366 4,205
Notes payable to Partner Companies............................ 46,256 34,134
Other......................................................... 12,095 903
----------- -----------
Total current liabilities................................ 145,198 48,992
Long-term debt..................................................... 1,240 3,185
Other liabilities.................................................. 623 4,255
Deferred taxes..................................................... 298,973 --
Minority interest.................................................. 296,468 7,481
Convertible subordinated notes..................................... 566,250 566,250
----------- -----------
Total Liabilities........................................ $ 1,308,752 $ 630,163
Commitments and contingencies......................................
Stockholders' Equity
Preferred stock, $.01 par value; 10,000 shares authorized;
None issued................................................ -- --
Common stock, $.001 par value; authorized 2,000,000 shares;
286,088 (2000) and 263,579 (1999) issued and outstanding... 286 264
Additional paid-in capital.................................... 3,076,350 1,513,615
Common stock to be issued..................................... 11,325 --
Accumulated deficit........................................... (125,283) (26,539)
Unamortized deferred compensation............................. (10,106) (11,846)
Notes receivable--stockholders................................ (69,383) (79,790)
Accumulated other comprehensive income (loss)................. (27,817) 24,517
----------- -----------
Total stockholders' equity............................... 2,855,372 1,420,221
----------- -----------
Total Liabilities and Stockholders' Equity.......... $ 4,164,124 $ 2,050,384
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue $ 16,468 $ 7,192 $ 21,673 $ 14,783
--------- --------- --------- ---------
Operating expenses..............................................
Cost of revenue............................................ 9,843 3,421 12,445 7,425
Selling, general and administrative........................ 89,088 15,622 186,896 27,308
Amortization of goodwill and other intangibles............. 203,950 8,327 336,718 14,817
Research and development expenses.......................... 14,682 -- 25,840 --
Purchased in-process research and development.............. 620 -- 11,470 --
--------- --------- --------- ---------
Total operating expenses................................... 318,183 27,370 573,369 49,550
--------- --------- --------- ---------
(301,715) (20,178) (551,696) (34,767)
Other income (expense) net...................................... (3,980) 15,927 659,205 47,001
Interest income................................................. 11,187 2,892 43,502 4,177
Interest expense................................................ (10,037) (803) (31,481) (1,770)
--------- --------- --------- ---------
Income (loss) before income taxes, minority interest and
equity loss.................................................. (304,545) (2,162) 119,530 14,641
Income taxes.................................................... 132,228 7,044 15,367 12,840
Minority interest............................................... 29,261 2,685 46,538 4,133
Equity loss..................................................... (120,797) (22,841) (280,179) (38,019)
--------- --------- --------- ---------
Net Loss........................................................ $(263,853) $ (15,274) $ (98,744) $ (6,405)
========= ========= ========= =========
Net Loss Per Share
Basic...................................................... $ (0.94) $ (0.07) $ (0.36) $ (0.03)
Diluted.................................................... $ (0.94) $ (0.07) $ (0.36) $ (0.03)
Weighed Average Shares Outstanding
Basic...................................................... 281,271 232,827 271,361 185,104
Diluted.................................................... 281,271 232,827 271,361 185,104
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Operating Activities
Net Loss.................................................................... $ (98,744) $ (6,405)
Adjustments to reconcile net loss to cash used in operating activities
Amortization of goodwill and other intangibles......................... 336,718 14,817
Purchased in process research and development 11,470 --
Depreciation and amortization.......................................... 29,626 4,410
Deferred taxes......................................................... (14,597) (13,091)
Equity loss............................................................ 280,179 38,019
Other income........................................................... (659,205) (46,974)
Minority interest...................................................... (46,538) (4,133)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net............................................... (23,673) (5,528)
Prepaid expenses and other assets...................................... (2,573) (7,283)
Accounts payable....................................................... (14,155) 3,151
Accrued expenses....................................................... 43,624 9,118
Other.................................................................. 29,828 (78)
----------- -----------
Cash used in operating activities........................................... (128,040) (13,977)
----------- -----------
Investing Activities
Capital expenditures................................................... (62,943) (5,187)
Proceeds from sales of available-for-sale securities................... 89,166 2,496
Proceeds from sales of Partner Company ownership interests............. 15,829 3,447
Advances to Partner Companies.......................................... (12,249) (3,759)
Repayment of advances to Partner Companies(net)........................ -- 4,590
Acquisitions of ownership interests in Partner Companies............... (828,298) (123,976)
Other acquisitions..................................................... -- (2,103)
Proceeds from maturities of short-term investments..................... 2,748 (22,845)
Borrowing on Long-term debt............................................ 274 --
Reduction in cash due to deconsolidation of Partner Companies.......... (4,583) (5,646)
----------- -----------
Cash used in investing activities........................................... (812,855) (152,983)
----------- -----------
Financing Activities
Issuance of common stock, net.......................................... 3,359 241,227
Purchase of short-term investments.................................... (12,525) --
Repayments of Long-term debt and capital lease obligations............. (13,084) (449)
Line of credit activity, net .......................................... 553 (281)
Proceeds from subordinated convertible notes........................... 30,660 90,000
Distribution to former LLC members..................................... -- (10,676)
Repayment of advances and loans to employees........................... 12,120
Advances and loans to employees........................................ (6,756) (8,766)
Treasury stock purchase by subsidiary.................................. -- (4,469)
Issuance of stock by subsidiary........................................ 136,942 19,670
----------- -----------
Cash provided by financing activities....................................... 164,068 326,256
----------- -----------
Net increase (decrease) in Cash and Cash Equivalents........................ (776,827) 159,296
Cash and Cash Equivalents at the beginning of period........................ 1,343,459 26,841
----------- -----------
Cash and Cash Equivalents at the end of period.............................. $ 566,632 $ 186,137
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
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
September 30, 2000, the Company owned interests in 80 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 a
convertible debt or an equity ownership interest as its "Partner Companies" and
indicates that it has a "partnership" with these companies, it does not act as
an agent or legal representative for any of its Partner Companies, it does not
have the power or authority to legally bind any of its Partner Companies and it
does not have the types of liabilities in relation to its Partner Companies that
a general partner of a partnership would have.
Basis of Presentation
On February 2, 1999, the Company converted from a limited liability company
("LLC") to a corporation. All stockholder transactions have been presented as if
the conversion occurred on March 4, 1996 (inception).
The accompanying unaudited consolidated financial statements of the Company
for the three and nine months ended September 30, 2000 and 1999, included
herein, have been prepared by the Company pursuant to the interim financial
statements rules and regulations of the SEC. In the opinion of management, the
accompanying unaudited consolidated interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the three and nine months ended September 30, 2000 and 1999 and are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000 or for any interim period. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. The information included in this Form 10-Q
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's financial
statements and notes thereto included in the Company's 1999 Annual Report on
Form 10-K/A.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries Internet Capital Group Operations, Inc.
(the "Operations Company") for the nine months ended September 30, 1999 and the
Operations Company, 1999 Internet Capital L.P., ICG Holdings, Inc., and 1999
Internet Capital Group (Europe), Limited, Internet Capital Group Japan, K.K. for
the nine months ended September 30, 2000. The consolidated financial statements
also include the following majority owned subsidiaries for the periods
indicated, each of which was consolidated since its date of acquisition
(collectively, the "Consolidated Subsidiaries"):
Three Months Ended September 30, 2000
<TABLE>
<S> <C>
Animated Images, Inc. ("Animated Images") ICG AsiaWorks Limited ("ICG AsiaWorks")
CyberCrop.com, Incorporated ("CyberCrop.com") Industrial America.com LLC ("Industrial America")
Delphion, Inc. ("Delphion") iParts, Inc. ("iParts")
</TABLE>
7
<PAGE> 8
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<S> <C>
Emptoris, Inc. ("Emptoris") iVOWS Interactive Limited (dba Mesania) ("Mesania")
eu-Supply.com Svenska AB ("eu-Supply") Onmedica Group PLC ("Onmedica")
eMarket Capital, Inc. ("eMarket Capital") PaperExchange.com, Inc. ("PaperExchange.com")
ICG Commerce Holdings, Inc. ("ICG Commerce") RightWorks Corporation ("RightWorks")
</TABLE>
Nine Months Ended September 30, 2000
<TABLE>
<S> <C>
Animated Images Inc. ICG Commerce
AssetTRADE.com, Inc. ("AssetTRADE") ICG AsiaWorks
CyberCrop.com IndustrialAmerica
Delphion, Inc., iParts
EmployeeLife.com, Inc. ("EmployeeLife.com") Mesania
Emptoris Onmedica
eu-Supply PaperExchange.com
eMarket Capital RightWorks
</TABLE>
Three and Nine Months Ended September 30, 1999
<TABLE>
<S> <C>
Breakaway Solutions, Inc. ("Breakaway Solutions") EmployeeLife.com
CyberCrop.com iParts
</TABLE>
During the three months ended June 30, 2000 the Company's ownership in
EmployeeLife.com dropped below 50% and during the three months ended September
30, 2000, the company's ownership in AssetTRADE dropped below 50% and the
Company has accounted for its ownership in EmployeeLife.com and AssetTRADE as
equity method investments since the date the Company's ownership dropped below
50%.
In December 1999, the Company recorded a two for one stock split effected
as a one hundred percent (100%) stock dividend. The common stock and additional
paid-in capital accounts and all share and per share amounts have been
retroactively restated in these financial statements to give effect to this
stock dividend.
Principles of Accounting for Ownership Interests in Partner Companies
The various interests that the Company acquires in its Partner Companies
are accounted for under three broad methods: consolidation, equity method and
cost method. The applicable accounting method is generally determined based on
the Company's voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities or those the
Company has effective control over are generally accounted for under the
consolidation method of accounting. Under this method, a Partner Company's
results of operations are reflected within the Company's Consolidated Statements
of Operations. All significant intercompany accounts and transactions have been
eliminated. Participation of other Partner Company stockholders in the earnings
or losses of a consolidated Partner Company is reflected in the caption
"Minority interest" in the Company's Consolidated Statements of Operations.
Minority interest adjusts the Company's consolidated results of operations to
reflect only the Company's share of the earnings or losses of the consolidated
Partner Company. The results of operations and cash flows of a consolidated
Partner Company are included through the latest interim period in which the
Company owned a greater than 50% direct or indirect voting interest for the
entire interim period or otherwise exercised control over the Partner Company.
Upon dilution of control below 50%, the accounting method is adjusted to the
equity or cost method of accounting, as appropriate, for subsequent periods.
In 1999, the Company acquired a controlling majority interest in Breakaway
Solutions for $17.2 million and in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts for $29.8 million in the aggregate. In
2000, the Company acquired a controlling interest in RightWorks for cash and
common stock valued at $776.0 million, in PaperExchange.com for common stock
valued at approximately $165.8 million, and in AssetTRADE, Delphion, Emptoris,
eu-Supply, eMarket Capital, Industrial America, ICG AsiaWorks, Mesania and
OnMedica for cash and 1,746,042 shares of the Company's common stock valued at
$300 million in the aggregate. Breakaway Solutions' operations have historically
consisted primarily of implementation of customer relational
8
<PAGE> 9
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
management systems and custom integration to other related applications. In
1999, Breakaway Solutions expanded to provide service offerings in custom web
development and application hosting both through internal expansion and
acquisitions. Animated Images operations include software development and
consulting services. Emptoris develops procurement management systems and
provides consulting services to power e-market places. ICG Commerce provides
strategic sourcing consulting and online Internet purchasing. RightWorks
provides internet based software for powering B2B digital marketplaces.
PaperExchange.com operates an e-business marketplace for the pulp and paper
industry. The other consolidated subsidiaries are development stage companies
that have generated negligible revenue since their inception.
The Company's direct and indirect voting interest in Animated Images,
CyberCrop.com, Delphion, eMarket Capital, Emptoris, eu-Supply, ICG AsiaWorks,
ICG Commerce, Industrial America, iParts, Mesania, OnMedica, PaperExchange.com
and RightWorks at September 30, 2000 was 56%, 78%, 33%, 54%, 63%, 51%, 54%, 54%,
71%, 67%, 56%, 80%, 83% and 90%, respectively. Delphion is accounted for as a
consolidated Partner Company based on the Company's representation on Delphion's
Board of Directors.
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are accounted for under
the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an evaluation
of several factors including, among others, representation on the Partner
Company's Board of Directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the Partner Company, including voting
rights associated with the Company's holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, the Company's share of the
earnings or losses of the Partner Company is reflected in the caption "Equity
income (loss)" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the consolidation
or equity method of accounting is amortized on a straight-line basis generally
over three to five years. Equity method Partner Company goodwill that was
previously classified in equity loss in the Company's consolidated statements of
operation has been reclassified to amortization of goodwill and intangibles for
all periods presented. The amortization related to equity method Partner
Companies for three and nine months ended September 30, 2000 was $99.0 million
and $203.2 million and for the three and nine months ended September 30, 1999
was $2.8 million and $4.2 million.
Cost Method. Partner Companies not accounted for under the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method Partner Company impairment charges are recognized in the
Consolidated Statement of Operations. If circumstances suggest that the value of
the Partner Company has subsequently recovered, such recovery is not recorded.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost because it has the ability
and intent to hold these securities until maturity. The Company records its
ownership interest in equity securities of Partner Companies accounted for under
the cost method at cost, unless these securities have readily determinable fair
values based on quoted market prices, in which case these interests are valued
at fair value and classified as available-for-sale securities or some other
classification in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In addition to the Company's
investments in voting and non-voting equity and debt securities, it also
periodically makes advances to its Partner Companies in the form of promissory
notes which are accounted for in accordance with SFAS No. 114, "Accounting By
Creditors for Impairment of a Loan".
9
<PAGE> 10
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have invested or have committed to invest in the Partner Companies.
During the three and nine months ended September 30, 2000, the Company recorded
impairment charges of $44.2 million and $46.4 million, respectively, which are
included in other income (expenses), net in the accompanying Unaudited
Statements of Operations. The majority of the impairment charges relate to the
Company's cost method Partner Company Deja.com, Inc. ("Deja.com") ($21.6
million) and equity method Partner Company E-Chemicals, Inc. ("E-Chemicals")
($20.1 million). Management concluded the carrying value of these Partner
Companies were permanently impaired based on the achievement of business plan
objectives and milestones and the fair value of the Partner Companies relative
to their carrying values.
The Company operates in an industry that is rapidly evolving and extremely
competitive. Recently, many Internet based businesses, including some with B2B
business models, have experienced difficulty in raising additional capital
necessary to fund operating losses and continued investments than their
management teams believe are necessary to sustain operations. Valuations of
public companies operating in the Internet B2B e-commerce sector have declined
significantly since the first quarter of 2000. In the first quarter of 2000 the
Company announced several significant acquisitions that were financed
principally with shares of the Company's stock and, based on the price of the
Company's stock at that time were valued in excess of $1 billion. Based on our
periodic review of our Partner Company holdings, including those valued in the
first quarter, as of September 30, 2000, an impairment charge of $44.2 million
was recorded in the third quarter to write off certain Partner Company holdings.
It is reasonably possible that the Company's accounting estimates with respect
to the useful life and ultimate recoverability of our carrying basis including
goodwill in other Partner Companies could change in the near term and that the
effect of such changes on the financial statements could be material. While the
Company currently believes that the recorded amount of carrying basis including
goodwill is not impaired, there can be no assurance that our future results will
confirm this assessment or that a significant write-down or write-off of Partner
Company carrying basis including goodwill will not be required in the future.
Revenue Recognition
The Company's revenues were primarily attributable to Breakaway Solutions,
Animated Images, ICG Commerce, Emptoris, PaperExchange.com and RightWorks for
the periods each of these Partner Companies were accounted for under the
consolidation method.
RightWorks and Emptoris derive revenue from software license fees and
services. Fees from licenses are recognized as revenue upon contract execution,
provided all shipment obligations have been met, fees are fixed or determinable,
collection is probable, and vendor-specific objective evidence exists to
allocate the total fee between all elements of the arrangement. Maintenance
revenue is recognized ratably over the term of the maintenance contract.
Consulting and training revenue is recognized when the services are performed.
PaperExchange.com operates an e-business marketplace for the pulp and paper
Industry. PaperExchange.com acts as a principal or as an agent under agreements
with certain suppliers. Revenues are recognized when products are shipped.
Animated Images, ICG Commerce and Breakaway Solutions revenues are
generally recorded as services are rendered.
Available-for-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
Unrealized gains or losses related to available-for-sale securities are
recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a corporation.
Short-term investments
Short-term investments are debt securities maturing in less than one year
and are carried at amortized cost, which approximates fair value.
10
<PAGE> 11
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Derivative Financial Instruments
The Company selectively uses derivative financial instruments, including
cashless collar agreements ("Collars") to manage its exposure to fluctuations in
certain of its investments in publicly held equity securities. The Company has
recorded these Collars at their estimated fair market value, with unrealized
gains and losses resulting from changes in fair value recorded as a component of
accumulated other comprehensive income (loss). Unrealized gains and losses as a
result of these instruments are recognized in the consolidated statement of
operations when the underlying hedged item is extinguished or otherwise
terminated. The Company does not hold or issue any derivative financial
instruments for trading purposes and is not a party to leveraged instruments.
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counter parties. Although the Company may be exposed to
losses in the event of nonperformance by the counter parties, 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.
("Ariba") accounted for at fair value. The Equity Collars limit the Company's
exposure to and benefits from price fluctuations in the underlying equity
securities. The Equity Collars mature between 2001 and 2003. As the Company
accounts for the Equity Collars as a hedge, changes in the value of the Equity
Collars are substantially offset by changes in the value of the underlying
investment securities. Each of these changes are marked-to-market through
accumulated other comprehensive income (loss) in the Company's Consolidated
Balance Sheets.
Research and Development
Research and development costs are charged to expense as incurred.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, and
other intangible assets are amortized on a straight-line basis generally over
three to five years. Goodwill and other intangible assets at September 30, 2000
of $1.3 billion, net of accumulated amortization of $337.8 million, is
attributable to the Company's acquisitions of ownership interests in Animated
Images ($4.8 million), CyberCrop.com ($5.6 million), Delphion ($75 million),
eMarket Capital ($1.7 million), Emptoris ($31.1 million), eu-Supply ($8.2
million), ICG AsiaWorks ($14.6 million), ICG Commerce ($32.7 million),
Industrial America, ($(1.3) million), Mesania ($3.4 million), OnMedica ($18.6
million), PaperExchange.com ($158.5 million) and RightWorks ($908.0 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 discounted cash flows.
11
<PAGE> 12
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Income Taxes
From the Company's inception in March 1996 to February 1999, the Company
was not subject to federal and state income taxes. On February 2, 1999, the
Company converted from an LLC to a corporation. The Company's accumulated
deficit of $8.7 million at that date was reclassed to additional paid-in
capital.
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company's effective tax rate for the three and nine months ended
September 30, 2000 differed from the federal statutory rate of 35% principally
due to the impact of state taxes and certain nondeductible expenses. The
Company's effective tax rate for the three and nine months ended September 30,
1999 differed from the federal statutory rate of 35% principally due to the
impact of changing its tax status from an LLC to a corporation on February 2,
1999 and nondeductible permanent differences, principally related to stock
compensation. On February 2, 1999, the Company recorded a deferred tax benefit
and related deferred tax asset of $7.7 million, which primarily represented the
excess of tax basis over book basis of its ownership interests in and advances
to Partner Companies.
The Company's net deferred tax liability of $299.0 million at September 30,
2000 primarily consists of deferred tax liabilities of $113.2 million relating
primarily to the gain on the sale of a Partner Company for marketable securities
partially offset by tax assets resulting from net unrealized depreciation in
available-for-sale securities and deferred tax liabilities of $185.8 million
relating primarily to the excess of book carrying values over tax carrying
values of its Partner Companies.
12
<PAGE> 13
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income (Loss) Per Share
Basic net income (loss) per share (EPS) is computed using the weighted
average number of common shares outstanding during each period. Diluted EPS
includes common stock equivalents (unless anti-dilutive) that would arise from
the exercise of stock options and conversion of other convertible securities and
is adjusted, if applicable, for the effect on net income (loss) of such
transactions.
If a consolidated or equity method Partner Company has dilutive options or
securities outstanding, diluted net income per share is computed by deducting
from income (loss) from continuing operations the income attributable to the
potential exercise of the dilutive options or securities of the Partner Company.
Gain or Loss on Issuances of Stock By Partner Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner
Company accounted for under the consolidation or equity method of accounting
issues its common stock at a price different from the Partner Company's book
value per share, the Company's share of the Partner Company's net equity
changes. If at that time, the Partner Company is not a newly-formed,
non-operating entity, nor a research and development, start-up or development
stage company, nor is there question as to the Company's ability to continue in
existence, the Company records the change in its share of the Partner Company's
net equity as a gain or loss in its Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Certain amounts recorded to reflect the Company's share of
the income (loss) of its Partner Companies accounted for under the equity method
are based on estimates and unaudited results of operations of those Partner
Companies and may require adjustments in the future.
2. COMPREHENSIVE LOSS
Comprehensive loss is the change in equity of a business enterprise
during a period resulting from transactions and other events and circumstances
from non-owner sources. Excluding net loss, the Company's principal source of
comprehensive loss is net unrealized appreciation (depreciation) related to its
available-for-sale securities. The following summarizes the components of
comprehensive loss:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss.................................................. $(263,853) $ (15,274) $ (98,744) $ (6,405)
Other comprehensive loss
Unrealized appreciation (depreciation) net of tax.... 32,877 5,998 (62,728) 4,889
Reclassification adjustments, net of tax............. (4,738) -- 10,952 --
Foreign currency translation adjustment.............. (1,018) -- (558) --
--------- --------- --------- ---------
Comprehensive loss........................................ $(236,732) $ (9,276) $(151,078) $ (1,516)
========= ========= ========= =========
</TABLE>
13
<PAGE> 14
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. NET LOSS PER SHARE
The calculations of Net Loss Per Share were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Basic
Net loss.............................. $ (263,853) $ (15,274) $ (98,744) $ (6,405)
============ ========= ========== =========
Average common shares outstanding..... 281,271 232,827 271,361 185,104
============ ========= ========== =========
Basic................................. $ (0.94) $ (0.07) $ (0.36) $ (0.03)
============ ========= ========== =========
Diluted
Net loss.............................. (263,853) $ (15,274) $ (98,744) (6,405)
============ ========= ========== =========
Average common shares outstanding.......... 281,271 232,827 271,361 185,104
Effect of:
Dilutive options ..................... -- -- -- --
Dilutive securities .................. -- -- -- --
------------ --------- ---------- ---------
Average common shares assuming dilution.... 281,271 232,827 271,361 185,104
============ ========= ========== =========
Diluted............................... $ (0.94) $ (0.07) $ (0.36) $ (0.03)
============ ========= ========== =========
</TABLE>
For the three and nine months ended September 30, 2000,the impact of the
conversion of the Company's convertible subordinated notes and other dilutive
instruments have not been included as their 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 methods of
accounting. The ownership interests are classified according to applicable
accounting methods at the respective dates presented. Cost basis represents the
Company's original acquisition cost less any impairment charges recognized for
such companies to date.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
CARRYING CARRYING
VALUE COST BASIS VALUE COST BASIS
----- ---------- ----- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Equity Method ........ $1,611,901 $1,941,203 $ 491,977 $ 578,922
Cost Method .......... 181,752 $ 205,848 55,362 55,362
---------- ---------- ---------- ----------
$1,793,653 $2,147,051 $ 547,339 $ 634,284
========== ========== ========== ==========
</TABLE>
At September 30, 2000, the Company's carrying value in its Partner
Companies accounted for under the equity method exceeded its share of the
underlying equity in the net assets of such companies by $872 million. This
excess relates to ownership interests acquired through September 30, 2000 and is
generally being amortized over a three year period. Amortization expense of
$99.0 million and $203.2 million is included in amortization of goodwill and
intangibles of these equity method companies in the accompanying Consolidated
Statements of Operations for the three and nine months ended September 30, 2000,
respectively.
14
<PAGE> 15
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OWNERSHIP INTERESTS IN AND ADVANCES TO PARTNER COMPANIES (CONTINUED)
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at September 30,
2000 and 1999 has been compiled from the financial statements of the respective
Partner Companies:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue .......... $ 474,155 $ 34,851 $ 983,921 $ 73,393
Net Loss ......... $(323,218) $ (73,908) $(824,917) $(123,736)
</TABLE>
5. DEBT AND NOTES PAYABLE TO PARTNER COMPANIES
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 $8.0 million and $23.7 million relating to
these notes during the three and nine months ended September 30, 2000 with
interest payments due semi annually through December 21, 2004. Issuance costs of
$18.3 million were recorded in other assets and are being amortized as interest
expense over the term of the notes using the effective interest method. At
September 30, 2000, the fair value of the convertible subordinated notes is
approximately $137.1 million.
Credit Facilities
In March 2000, the Company's revolving bank credit facility was amended to,
among other things, increase the Company's credit facility to provide for
borrowings up to $250 million, including the issuance of letters of credit up to
$125 million. The agreement includes a $125 million 364-day secured line of
credit and a $125 million two-year secured revolving credit facility. Prior to
this amendment, the credit facility was structured as a $50 million term
revolving credit facility bearing interest at the Company's option at prime or
LIBOR plus 2.5%.
The revolving facility and line of credit are subject to .375% and .25%
unused commitment fees, respectively, bear interest, at the Company's option at
LIBOR plus 2.0% or the lenders' Base Rate (the lenders' Base Rate being the
greater of (i) the prime rate or (ii) the Federal Funds Rate plus .5%) and are
secured by substantially all of the Company's assets (including the Company's
holdings in its domestic Partner Companies). Borrowing availability under the
facility is based on the fair market value of the Company's holdings of publicly
traded Partner Companies and the value, as defined in the facility, of the
Company's private Partner Companies. The credit facility contains certain
financial covenants which include restrictions on, among other things,
dispositions, certain other indebtedness and payment of dividends and similar
distributions. At September 30, 2000, based on the provisions of the borrowing
base, the full borrowing base was available less outstanding letters of credit
of $6.0 million.
15
<PAGE> 16
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT AND NOTES PAYABLE TO PARTNER COMPANIES (CONTINUED)
Long-Term Debt
The Company's long-term debt of $1.2 million (net of current portion of
$2.9 million) relates to its Consolidated Partner Companies, is non-recourse to
the Company, and primarily consists of secured notes due to stockholders and
outside lenders of ICG Commerce and RightWorks and capital lease commitments.
Notes Payable to Partner Companies
Notes payable to Partner Companies of approximately $46.3 million at
September 30, 2000 consists of a $22.9 million non-interest bearing note to
eMerge Interactive, Inc. ("eMerge Interactive") due November 16, 2000, a $12.1
million non-interest bearing funding obligation to VerticalNet Europe BV
("VerticalNet") due in two equal installments on June 30, 2001 and 2002 or
earlier upon certain events of acceleration, a $9.4 million note payable to
Investor Force Holdings, Inc. ("Investor Force Holdings") bearing interest at
prime rate plus 1% due October 15, 2000, a $1.4 million note payable to former
shareholders of Industrial America, and $0.5 million 90-day note bearing
interest at an annual rate of 8% due to a eCatalogs, Inc.
6. ACQUISITIONS
In May 2000, the Company acquired a 50.2% interest in Harbour Ring
International Holdings Limited, a listed company on the Hong Kong Stock Exchange
which was renamed ICG AsiaWorks, for approximately $116.5 million in cash. ICG
AsiaWorks will be the Company's platform for acquiring and building market maker
and internet infrastructure companies in the Asia region, excluding Japan. While
there is no immediate plan for disposal, it is the intention of ICG AsiaWorks to
dispose of two subsidiaries of ICG AsiaWorks that operate unrelated businesses.
Due to its intention to dispose of these businesses as well as certain
contractual arrangements which result in a lack of effective control and
substantial restrictions on management with regard to the unrelated businesses,
ICG AsiaWorks does not consolidate these businesses for financial reporting
purposes.
In June 2000, the Company acquired a 62% interest in RightWorks for
5,892,048 shares of the Company's common stock valued at approximately $754
million and $22 million in cash. RightWorks is a provider of B2B exchange
software which offers an extensive range of capabilities to market makers.
In September 2000, the Company increased its interest in PaperExchange.com,
from approximately 20% to approximately 83% for 4,864,221 shares of the
Company's common stock valued at approximately $165.8 million. PaperExchange.com
is a leading global e-business marketplace for the pulp and paper industry.
Due to the Company's majority ownership positions in the above Partner
Companies it has accounted for interests in these companies under the
consolidation method of accounting. The Company utilized the purchase method of
accounting for the acquisition of these Partner Companies and, accordingly, the
purchase prices have been allocated to the assets purchased and the liabilities
assumed based upon their fair value at the date of acquisition. The purchase
price allocations for each of the above acquisitions was allocated as follows:
<TABLE>
<CAPTION>
ICG
RIGHTWORKS ASIAWORKS PAPEREXCHANGE.COM
---------- ---------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital............................. $ 19,829 $183,772 (160)
Other assets (liabilities), net............. 2,620 28,989 1,142
Deferred tax liabilities.................... 265,480 -- 4,975
Developed technology........................ 22,010 -- 4,024
Other identifiable intangible assets........ 16,120 -- 200
Goodwill.................................... 969,413 9,876 165,546
In-process research and development......... 11,470 -- --
</TABLE>
16
<PAGE> 17
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACQUISITIONS (CONTINUED)
Purchased in-process research and development (IPR&D) represents the value
assigned to research and development projects of RightWorks which were not
complete at the acquisition date and had no alternative future use. In
accordance with SFAS No. 2, "Accounting for Research and Development Costs," and
FASB interpretation No.4 "Applicability of SFAS No.2 to Business Combinations
Accounted For By The Purchase Method," amounts assigned to IPR&D meeting the
above stated criteria must be charged to expense as part of the allocation of
purchase price of a business combination. The IPR&D was valued using the income
approach, which includes an analysis of the markets, cash flows, risks
associated with achieving such cash flows, fair returns on all identifiable
assets and consideration of the stage of completion of such projects. The IPR&D
charge, which had no associated tax benefit, was classified as an operating
expense on the Company's consolidated statement of operations.
The above allocations of purchase price are preliminary and subject to
adjustment upon finalization of the purchase accounting. Goodwill and other
intangible assets are being amortized on a straight-line basis over a period of
three years.
In June 2000 the Company acquired a 39% interest in eCredit.com, Inc.
("eCredit") for 4,655,558 shares of the Company's common stock valued at
approximately $424.7 million. eCredit provides real-time credit, financing and
related services to e-businesses over an Internet-based platform which connects
businesses to financing partners and information sources at the point of sale.
The Company also obtained a warrant to purchase an additional 1.6 million shares
of eCredit, from time to time at any time from the effective date of a qualified
initial public offering, as defined in the warrant agreement, or a change in
control for a period of four years. The investment in eCredit, has been
accounted for using the equity method of accounting.
In addition to the above transactions, the Company paid $1.0 billion in
cash and notes in the aggregate to acquire interests in or make advances to new
and existing partner companies during the nine months ended September 30, 2000.
These companies included: Agribuys, Inc., Arbinet-thexchange, Inc., AssetTRADE,
Autovia Corporation, DNI Holdings, Inc. (dba Blackbird), Blackboard, Inc.,
Breakaway Solutions, buy.co.UK Limited, BuyMedia, Inc. ("BuyMedia"),
Cargobiz.com AG, CentriMed.com, Inc., ("CentriMed.com"), ClearCommerce
Corporation, Collabria, Inc., CommerceQuest, Inc., ComputerJobs.com, Data West
Corporation (dba Courtlink), CreditTrade, Inc., CyberCrop.com, Delphion,
Deja.com, ("Deja.com"), eCatalogs, Inc., E-Chemicals, Inc., ("E-Chemicals"),
eColony, Inc., eMarket Capital, eMetra Limited, EmployeeLife.com, Emptoris,
Entegrity Solutions Corporation, Eumedix.com BV, eu-Supply, FOL Networks
Limited, Freeborders.com, Inc., Fuelspot.com, Inc., GoIndustry AG, ICG Commerce,
Internet Commerce Systems, Inc., inOvate Communications Group, Inc., Mesania,
Industrial America, InfoMart Corporation, Internet Healthcare Group, L.L.C.,
Investor Force Holdings, Inc., iSky, Inc., LinkShare Corporation, Jamcracker,
Inc., Logistics.com, Inc., MetalSite, Inc. NationStreet, Inc., NetVendor Inc.,
OnMedica, Onvia.com, Inc., ("Onvia.com"), PaperExchange.com, Print Mountain
Ltd., RetailExchange.com, Inc., ServiceSoft, Inc., Simplexis.com, Sourceree
Limited, StarCite, Inc., Surgency, Inc. (formerly Benchmarking Partners, Inc.),
Syncra Systems, Inc., TALPX, Inc., TeamOn.com, Inc., Tibersoft Corporation,
traffic.com, Inc., Universal Access, Inc., USgift.com Corporation, VerticalNet
Europe BV, and Vivant! Corporation. During the nine months ended September 30,
2000, the Company also acquired interests in new and existing partner companies
for 5,675,027 shares of the Company's common stock valued at approximately
$216.0 million. These companies included: AssetTRADE, Breakaway Solutions,
BuyMedia, CommerceQuest, Inc., ComputerJobs.com, Inc., E-Chemicals,
eCredit, Emptoris and OnMedica.
17
<PAGE> 18
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACQUISITIONS (CONTINUED)
Presented below is unaudited selected proforma financial information for
the nine month periods ended September 30, 2000 as if the above noted
acquisitions occurred at the beginning of the period. The unaudited selected
financial information are not indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of the period
presented and is not intended to be a projection of future results.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 2000
---- ----
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenue.................. $ 31,984 $ 51,879
Net loss................. (298,765) (246,935)
Net Loss per share
Basic............... (1.06) (.88)
Diluted............. (1.06) (.88)
</TABLE>
7. SEGMENT INFORMATION
The Company's reportable segments, using the "management approach" under
SFAS 131, "Disclosures About Segments of a Business Enterprise and Related
Information," consist of Partner Company Operations and General ICG Operations.
Partner Company operations represent the results of operations for the Company's
Consolidated Partner Companies and the Company's share of losses for Partner
Company's accounted for under the equity method. General ICG Operations
represents the expenses of providing strategic and operational support to the
Partner Companies, as well as the related administrative costs. General ICG
Operations also includes the effect of transactions and other events incidental
to the Company's general operations and the Company's ownership interests in and
advances to Partner Companies. The Company's and Partner Companies' operations
were conducted principally in the United States of America during all periods
presented. In the three months ended March 31, 2000, we acquired ICG AsiaWorks.
In addition we have begun to acquire partner companies in Japan and Europe. To
date the operations of ICG AsiaWorks and the companies acquired in Japan and
Europe have not been material to our financial statements.
18
<PAGE> 19
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SEGMENT INFORMATION (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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Partner Company Operations
Revenue........................................... $ 16,468 $ 7,192 $ 21,673 $ 14,783
--------- --------- --------- ---------
Operating expenses
Cost of revenue................................... 9,843 3,421 12,445 7,425
Selling general and administrative................ 66,123 8,405 120,733 14,573
Amortization of goodwill and other intangibles.... 203,950 8,327 336,718 14,817
Research and development.......................... 12,553 -- 14,750 --
Purchased in process research and development..... 620 -- 11,470 --
--------- --------- --------- ---------
Total operating expenses.......................... 293,089 20,153 496,116 36,815
--------- --------- --------- ---------
(276,621) (12,961) (474,443) (22,032)
Other income (expense), net....................... (164) 35 (162) 28
Interest income................................... 5,070 25 7,969 87
Interest expense.................................. (150) -- (2,222) (54)
--------- --------- --------- ---------
Loss before income taxes, minority interest and
equity loss.................................... (271,865) (12,901) (468,858) (21,971)
Income taxes...................................... -- -- 770 --
Minority interest................................. 29,261 2,685 46,538 4,133
Equity loss....................................... (120,797) (22,841) (280,179) (38,019)
--------- --------- --------- ---------
Loss from Partner Company Operations................... $(363,401) $ (33,057) $(701,729) $ (55,857)
========= ========= ========= =========
General ICG Operations
Research and development.......................... $ 2,129 $ -- $ 11,090 $ --
General and administrative........................ 22,965 7,217 66,163 12,735
Other income (expense), net....................... (3,816) 15,891 659,367 46,973
Interest income (expense), net.................... (3,770) 2,065 6,274 2,374
Income taxes...................................... 132,228 7,044 14,597 12,840
--------- --------- --------- ---------
Income from General ICG Operations..................... $ 99,548 $ 17,783 $ 602,985 $ 49,452
========= ========= ========= =========
Net loss............................................... $(263,853) $ (15,274) $ (98,744) $ (6,405)
========= ========= ========= =========
</TABLE>
19
<PAGE> 20
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Partner Company Operations
Cash, cash equivalents and short-term investments......... $ 345,868 $ 16,899
Carrying value of equity method Partner Companies......... 1,611,901 491,977
Goodwill and other intangible assets...................... 1,262,042 23,649
Other..................................................... 111,153 4,527
---------- ----------
3,330,964 537,052
---------- ----------
General ICG Operations
Cash, cash equivalents and short-term investments......... 230,357 1,326,560
Carrying value of cost method Partner Companies........... 181,752 55,362
Available for sale securities.......................... 359,905 47
Other..................................................... 61,146 131,363
---------- ----------
833,160 1,513,332
---------- ----------
$4,164,124 $2,050,384
========== ==========
</TABLE>
Included in available for sale securities is approximately $76.3 million
relating to our ownership interest in Onvia.com, Inc.
8. PARENT COMPANY FINANCIAL INFORMATION
Parent company financial information is provided to present the financial
position and results of operations of the Company as if the Partner Companies
accounted for under the consolidation method of accounting were accounted for
under the equity method of accounting for all applicable periods presented. The
Company's share of the consolidated Partner 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 September 30, 2000 and
December 31, 1999 is included in "Ownership interests in and advances to Partner
Companies" in the Parent Company Balance Sheets.
Parent Company Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets............................................. $ 254,837 $1,332,803
Ownership interests in and advances to Partner Companies... 3,144,116 571,706
Available for sale securities.............................. 359,905 47
Other...................................................... 36,666 125,119
---------- ----------
Total assets.......................................... 3,795,524 2,029,675
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities........................................ 74,597 43,204
Non-current liabilities.................................... 865,555 566,250
Stockholders' equity....................................... 2,855,372 1,420,221
---------- ----------
Total liabilities and stockholders' equity............ $3,795,524 $2,029,675
========== ==========
</TABLE>
20
<PAGE> 21
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Parent Company Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (IN TBOUSANDS)
<S> <C> <C> <C> <C>
Revenue................................................ $ -- $ -- $ -- $ --
Operating expenses..................................... -- -- -- --
Research and development.......................... 2,129 -- 11,090 --
In process research and development............... 620 -- 11,470 --
Amortization of goodwill and intangibles.......... 195,800 7,441 321,667 13,623
General and administrative........................ 22,965 7,217 66,163 12,735
--------- --------- --------- ---------
Total operating expenses..................... 221,514 14,658 410,390 26,358
--------- --------- --------- ---------
Other income net....................................... (3,816) 15,891 659,367 46,974
Interest income, net................................... (3,770) 2,065 6,274 2,374
--------- --------- --------- ---------
Income (loss) before income taxes, and equity loss..... (229,100) 3,298 255,251 22,990
Income taxes........................................... 132,228 7,044 14,597 12,840
Equity loss............................................ (166,981) (25,616) (368,592) (42,235)
--------- --------- --------- ---------
Net loss............................................... $(263,853) $ (15,274) $ (98,744) $ (6,405)
========= ========= ========= =========
</TABLE>
21
<PAGE> 22
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. We have based these forward-looking statements on our current
expectations and projections about future events. These forward looking
statements are subject to risks, uncertainties and assumptions about us and our
partner companies, including, among other things:
-- development of an e-commerce market,
-- our ability to identify trends in our markets and the markets of our
partner companies and to offer new solutions that address the changing
needs of these markets,
-- our ability to successfully execute our business model,
-- our partner companies' ability to compete successfully against direct
and indirect competitors,
-- our ability to acquire interests in additional companies,
-- growth in demand for Internet products and services,
-- adoption of the Internet as an advertising medium,
-- our ability to successfully expand our business internationally, and
-- our ability to effectively manage existing capital resources and to
raise additional capital if necessary.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of these factors.
GENERAL
Internet Capital Group, Inc. ("ICG") is an internet company actively
engaged in B2B e-commerce through a network of partner companies. As of
September 30, 2000 we owned interests in 80 B2B e-commerce companies that we
refer to as our partner companies. We focus on three types of B2B e-commerce
companies, which we call technology infrastructure companies, horizontal
services and vertical market makers.
Although we refer in this report to the companies in which we have acquired
a convertible debt or an equity ownership interest as our "partner companies"
and indicate that we have a "partnership" with these companies, we do not act as
an agent or legal representative for any of our partner companies, and we do not
have the power or authority to legally bind any of our partner companies, and we
do not have the types of liabilities in relation to our partner companies that a
general partner of a partnership would have.
Because we acquire significant interests in B2B e-commerce companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. While our partner
companies have consistently reported losses, we have recorded net income in
certain periods and experienced significant volatility from period to period due
to one-time transactions and other events incidental to our ownership interests
in and advances to partner companies. We do not know if we will report net
income in any period. These transactions and events are described in more detail
under "Net Results of Operations--General ICG Operations--Other Income" and
include dispositions of, and changes to, our partner company ownership
interests, dispositions of our holdings of available-for-sale securities, and
impairment charges. On a continuous basis, but no less frequently than at the
end of each quarterly reporting period, we evaluate the carrying value of our
ownership interests in and advances to each of our partner companies for
possible impairment based on achievement of
22
<PAGE> 23
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.
We operate in an industry that is rapidly evolving and extremely
competitive. Recently, many Internet based businesses, including some with B2B
business models, have experienced difficulty in raising additional capital
necessary to fund operating losses and continued investments that their
management teams believe are necessary to sustain operations. Valuations of
public companies operating in the Internet B2B e-commerce sector have declined
significantly since the first quarter of 2000. In the first quarter of 2000,
we announced several significant acquisitions that were financed
principally with shares of our stock and, based on the price of our stock at
that time, were valued in excess of $1 billion. Based on our periodic review of
our partner company holdings, including those valued in the first quarter, as of
September 30, 2000, an impairment charge of $44.2 million was recorded in the
third quarter to write off certain partner company holdings. It is reasonably
possible that our accounting estimates with respect to the useful life and
ultimate recoverability of our carrying basis, including goodwill in other
partner companies, could change in the near term and that the effect of such
changes on the financial statements could be material. While we currently
believe that the recorded amount of carrying basis including goodwill is not
impaired, a significant write-down or write-off of partner company
carrying basis including goodwill may be required in the future.
The presentation and content of our financial statements is largely a
function of the presentation and content of the financial statements of our
partner companies. To the extent our partner companies change the presentation
or content of their financial statements, as may be required upon review by the
Securities and Exchange Commission or changes in accounting literature, the
presentation and content of our financial statements may also change.
On August 23, 1999 we received an exemptive order from the Securities and
Exchange Commission under Section 3(b)(2) of the Investment Company Act of 1940
declaring us to be primarily engaged in a business other than that of investing,
reinvesting, owning, holding or trading in securities.
EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities or those where we have
effective control are generally accounted for under the consolidation method of
accounting. Under this method, a partner company's accounts are reflected within
our Consolidated Statements of Operations. Participation of other partner
company stockholders in the earnings or losses of a consolidated partner company
is reflected in the caption "Minority interest" in our Consolidated Statements
of Operations. Minority interest adjusts our consolidated net results of
operations to reflect only our share of the earnings or losses of the
consolidated partner company.
We acquired controlling majority ownership interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts during
the three months ended June 30, 1999, CyberCrop.com during the three months
ended September 30, 1999, Animated Images and ICG Commerce during the three
months ended December 31, 1999, AssetTRADE, Emptoris, ICG AsiaWorks, Industrial
America and RightWorks during the three month period ended June 30, 2000 and
eu-Supply, eMarket Capital, Mesania, OnMedica and PaperExchange.com during the
three month period ended September 30, 2000, each of which was consolidated from
the date of its acquisition. Due to Breakaway Solutions' initial public offering
in October 1999, our voting
23
<PAGE> 24
ownership interest in Breakaway Solutions decreased below 50% and we have
accounted for Breakaway Solutions under the equity method of accounting since
October 1999. In the three months ended June 30, 2000, we acquired a minority
interest in Delphion. Due to provisions which give us control of Delphion's
Board of Directors, we have consolidated since the date of acquisition. During
the three months ended June 30, 2000, our ownership in EmployeeLife.com dropped
below 50% and during the three months ended September 30, 2000, our ownership in
AssetTRADE dropped below 50%. We have accounted for our ownership in
EmployeeLife.com and AssetTRADE as equity method investments since the date our
ownership dropped below 50%. As of September 30, 2000, Animated Images,
CyberCrop.com, Delphion, Emptoris, eu-Supply, eMarket Capital, ICG AsiaWorks,
Industrial America, ICG Commerce, iParts, Mesania, OnMedica, PaperExchange.com
and RightWorks were our only consolidated partner companies.
The effect of a partner company's net results of operations on our net
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each of
these methods only our share of the earnings or losses of a partner company is
reflected in our net results of operations in the Consolidated Statements of
Operations.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we 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 September 30, 2000, we
accounted for 48 of our partner companies under this method.
24
<PAGE> 25
Our partner companies accounted for under the equity method of accounting
at September 30, 2000 and December 31, 1999 included:
<TABLE>
<CAPTION>
VOTING OWNERSHIP
PARTNER
COMPANY SEPTEMBER 30, DECEMBER 31,
SINCE 2000 1999
------ ----- ----
<S> <C> <C> <C>
EQUITY METHOD:
AssetTRADE.com, Inc............................................... 1999 49% 17%
Blackboard, Inc................................................... 1998 26% 29%
Breakaway Solutions, Inc.......................................... 1999 32% 40%
buy.co.uk Limited................................................. 2000 33% N/A
BuyMedia, Inc..................................................... 2000 40% N/A
Bidcom, Inc....................................................... 1999 27% 35%
CommerceQuest, Inc................................................ 1998 33% 28%
Commerx, Inc...................................................... 1998 38% 40%
ComputerJobs.com, Inc............................................. 1998 46% 33%
CreditTrade, Inc.................................................. 2000 30% N/A
Data West Corporation (dba CourtLink, Inc)........................ 1999 32% 19%
eCatalogs, Inc.................................................... 2000 25% N/A
E-Chemicals, Inc.................................................. 1998 49% N/A
eCredit.com, Inc.................................................. 2000 40% N/A
eMarketWorld.com, Inc............................................. 1999 42% 42%
eMerge Interactive, Inc........................................... 1999 36% 45%
eMetra Limited.................................................... 2000 45% N/A
EmployeeLife.com, Inc............................................. 1999 49% N/A
Eumedix.com BV.................................................... 2000 39% N/A
FOL Networks Limited.............................................. 2000 32% N/A
Freeborders.com, Inc.............................................. 2000 36% N/A
FuelSpot.com, Inc................................................. 2000 31% N/A
InfoMart Corporation.............................................. 2000 45% N/A
Internet Commerce Systems, Inc.................................... 1999 47% 43%
Internet Healthcare Group L.L.C. ................................. 2000 39% N/A
Investor Force Holdings, Inc...................................... 1999 39% 49%
iSky, Inc......................................................... 1996 26% 31%
Jamcracker, Inc................................................... 1999 N/A 24%
Justice Link...................................................... 1999 N/A 37%
LinkShare Corporation............................................. 1998 39% 34%
Logistics.com, Inc................................................ 2000 29% N/A
MetalSite, Inc. .................................................. 1999 38% 44%
NationStreet, Inc................................................. 1999 49% 38%
NetVendor, Inc.................................................... 1999 37% 27%
Onvia.com, Inc.................................................... 1999 N/A 23%
PrintMountain Ltd................................................ 2000 28% N/A
RetailExchange.com, Inc........................................... 1999 32% 30%
SageMaker, Inc.................................................... 1998 20% 21%
Simplexis.com..................................................... 2000 47% N/A
Sourceree Limited ............................................... 2000 39% N/A
StarCite, Inc..................................................... 1999 50% 43%
Syncra Systems, Inc............................................... 1998 36% 35%
TALPX, Inc........................................................ 2000 28% N/A
TeamOn.com, Inc................................................... 2000 34% N/A
Tibersoft Corporation............................................. 2000 28% N/A
traffic.com, Inc.................................................. 1999 26% 20%
United Messaging, Inc............................................. 1999 36% 37%
Universal Access, Inc............................................. 1999 23% 24%
USgift.com Corporation............................................ 1999 35% 38%
VerticalNet, Inc.................................................. 1996 28% 34%
Vivant! Corporation............................................... 1998 38% 31%
</TABLE>
As of September 30, 2000, we owned voting convertible preferred stock in
all companies listed except Breakaway Solutions, eMerge Interactive, Onvia.com
Inc., Universal Access Inc. and VerticalNet, Inc. ("VerticalNet") in which we
owned voting common stock and CommerceQuest 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.
Those partner companies listed with a voting ownership of "N/A" reflects
that either these companies were accounted for under a different method at that
25
<PAGE> 26
time (E-Chemicals was accounted for under the cost method of accounting at
December 31, 1999 and Jamcracker, Inc. and Onvia.com, Inc. changed from equity
method companies at September 30, 2000) or we had not acquired an interest in
the partner company as of December 31, 1999. In April 2000 Justicelink merged
with Courtlink.
On October 24, 2000, Bidcom, Inc. announced an agreement to merge with
Cephien, Inc. to form Citadon, Inc.
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
September 30, 2000 and December 31, 1999 included:
<TABLE>
<CAPTION>
VOTING OWNERSHIP
PARTNER ---------------------------
COMPANY SEPTEMBER 30, DECEMBER 31,
SINCE 2000 1999
----- ---- ----
<S> <C> <C> <C>
COST METHOD:
Arbinet-thexchange, Inc.............................................. 1999 8% 8%
Autovia Corporation.................................................. 1998 20% 16%
Cargobiz.com AG...................................................... 2000 19% N/A
ClearCommerce Corporation............................................ 1997 11% 15%
Collabria, Inc....................................................... 1999 8% 11%
Context Integration, Inc. ........................................... 1997 15% 14%
Deja.com, Inc. ...................................................... 1997 2% 2%
DNI Holdings, Inc. (dba Blackbird) ................................. 2000 19% N/A
eColony, Inc......................................................... 2000 15% N/A
E-Chemicals, Inc. ................................................... 1998 N/A 0%
Entegrity Solutions Corporation...................................... 1996 9% 11%
GoIndustry AG........................................................ 2000 20% N/A
Jamcracker, Inc. .................................................... 1999 17% N/A
Onvia.com, Inc. ..................................................... 1999 20% N/A
Persona, Inc......................................................... 1998 8% 8%
Servicesoft, Inc..................................................... 1998 5% 5%
Surgency, Inc. ...................................................... 1996 12% 12%
TRADEX Technologies, Inc. ........................................... 1999 N/A 10%
U.S. Interactive, Inc................................................ 1996 2% 3%
VerticalNet Europe BV................................................ 2000 11% N/A
</TABLE>
As of September 30, 2000, we owned voting convertible preferred stock in
all companies listed except Deja.com and Surgency, in which we owned non-voting
convertible preferred stock and voting common stock and Onvia.com and U.S.
Interactive, 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 no
advances to cost method partner companies at September 30, 2000. In October 2000
we sold our remaining interest in U.S. Interactive.
Those Partner Companies listed with a voting ownership of "N/A" reflects
that either these companies were accounted for under a different method at that
time. We sold our ownership interest in TRADEX Technologies, Inc.
26
<PAGE> 27
("TRADEX") during the period ended June 30, 2000. During the three months ended
September 30, 2000, Benchmarking Partners, Inc. changed its name to Surgency,
Inc.
Most of our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most cost
method partner companies incurred substantial losses in 1999 and in the nine
months ended September 30, 2000 and are expected to continue to incur
substantial losses in 2000. None of our cost method partner companies have paid
dividends during our period of ownership and they generally do not intend to pay
dividends in the foreseeable future. Onvia.com and U.S. Interactive, which are
publicly traded, are accounted for under Statement of Financial Accounting
Standards No. 115.
EFFECT OF VARIOUS ACCOUNTING METHODS ON THE PRESENTATION OF OUR FINANCIAL
STATEMENTS
The presentation of our financial statements may differ from period to
period primarily due to whether or not we apply the consolidation method of
accounting or the equity method of accounting. For example, we consolidated
Breakaway Solutions' financial statements from the date of acquisition through
September 30, 1999 and EmployeeLife.com from the date of acquisition through
March 31, 2000. Due to Breakaway Solutions' initial public offering in October
1999, additional equity transactions effected for EmployeeLife.com subsequent to
March 31, 2000 and equity securities issued for new acquisitions in September
2000 made by AssetTRADE, our voting ownership interest in AssetTRADE, Breakaway
Solutions and EmployeeLife.com decreased to below 50%. Therefore, we have
applied the equity method of accounting since these dates.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts during
the three months ended June 30, 1999, CyberCrop.com during the three months
ended September 30, 1999, Animated Images and ICG Commerce during the three
months ended December 31, 1999, Emptoris, AssetTRADE, IndustrialAmerica, ICG
AsiaWorks and RightWorks during the three months ended June 30, 2000 and
eu-supply, eMarket Capital, Mesania, OnMedica and PaperExchange.com during the
three month period ended September 30, 2000 each of which was consolidated from
the date of its acquisition. In the three months ended June 30, 2000, we
acquired a minority interest in Delphion. Due to provisions which give us
control of Delphion's Board of Directors, we have consolidated since the date of
acquisition. The presentation of our consolidated financial statements looks
substantially different as a result of consolidating Animated Images,
CyberCrop.com, Delphion, Emptoris, eu-supply, eMarket Capital, ICG AsiaWorks,
ICG Commerce, Industrial America, iParts, Mesania, OnMedica, PaperExchange.com
and RightWorks and no longer consolidating AssetTRADE, Breakaway Solutions and
EmployeeLife.com in our financial statements for the three and nine months ended
September 30, 2000 versus comparable periods in the prior year.
To understand our net results of operations and financial position without
the effect of consolidating our majority owned subsidiaries, Note 8 to our
Consolidated Financial Statements summarizes our Parent Company Statements of
Operations and Balance Sheets which treat our majority owned subsidiaries as if
they were accounted for under the equity method of accounting for all periods
presented. Our share of the losses of Animated Images, AssetTRADE, Breakaway
Solutions, CyberCrop.com, Delphion, Emptoris, eu-Supply, eMarket Capital, ICG
AsiaWorks, ICG Commerce, Industrial America, iParts and RightWorks is included
in "Equity income (loss)" in the Parent Company Statements of Operations. The
carrying value of Animated Images, Breakaway Solutions, CyberCrop.com,
EmployeeLife.com, Delphion, Emptoris, ICG AsiaWorks, ICG Commerce, Industrial
America, iParts OnMedica, PaperExchange.com and RightWorks, as of September 30,
2000, is included in "Ownership interests in and advances to Partner Companies"
in the Parent Company Balance Sheets.
NET RESULTS OF OPERATIONS
Our reportable segments determined in accordance with Statement of
Financial Accounting Standards No. 131 are Partner Company Operations and
General ICG Operations. Partner Company Operations includes the effect of
consolidating Animated Images, AssetTRADE, Breakaway Solutions, CyberCrop.com,
Delphion, EmployeeLife.com, Emptoris, eu-Supply, eMarket Capital, ICG AsiaWorks,
ICG Commerce, Industrial America, iParts, Mesania, OnMedica, PaperExchange.com
and RightWorks from their dates of acquisition, and recording our
27
<PAGE> 28
share of earnings or losses of partner companies accounted for under the equity
method of accounting. General ICG Operations represents the expenses of
providing strategic and operational support to our partner companies, as well as
the related administrative costs related to these expenses. General ICG
Operations also includes the effect of transactions and other events incidental
to our ownership interests in our partner companies and our operations in
general.
NET RESULTS OF OPERATIONS-PARTNER COMPANY OPERATIONS
Consolidated Companies--Analysis of the periods ended September 30, 2000 and
1999.
For the three and nine months ended September 30, 1999, Breakaway Solutions
was consolidated and accounted for nearly all of our consolidated revenue and a
significant portion of our consolidated operating expenses. Breakaway Solutions
had been accounted for under the equity method since October 1999 and discussion
related to Breakaway Solutions' results of operations can be found under the
heading "Equity Income (Loss)".
Animated Images, CyberCrop.com, ICG Commerce and iParts were consolidated
during the three and nine month period ended September 30, 2000, and Emptoris,
Delphion, ICG AsiaWorks, Industrial America and RightWorks were consolidated
from their dates of acquisition during the three months ended June 30, 2000.
eu-supply, eMarket Capital, OnMedica, Mesania and PaperExchange.com were
consolidated from their dates of acquisition during the three months ended
September 30, 2000. EmployeeLife.com was consolidated from its date of
acquisition through March 31, 2000. AssetTRADE was consolidated during the three
months ended June 30, 2000 only. The consolidated partner companies accounted
for $16.5 million and $96.7 million for the three months ended September 30,
2000 and $21.7 million and $163 million for the nine months ended September 30,
2000, of our Partner Company Operations' revenue and operating expenses,
respectively. AssetTRADE, CyberCrop.com, Delphion, eMarket Capital,
EmployeeLife.com, eu-Supply, ICG AsiaWorks, Industrial America, iParts, Mesania,
and OnMedica have generated negligible revenue since their inception, and
incurred aggregate operating expenses of $30.5 million, and $51.8 million,
during the three and nine months ended September 30, 2000, respectively.
Animated Images, Emptoris, ICG Commerce, PaperExchange.com and RightWorks
generated aggregate revenues of approximately $15.9 million and $21 million
during the three and nine months ended September 30, 2000, respectively, and
incurred aggregate operating expenses of $66.2 million and $111.2 million,
consisting primarily of selling, general and administrative expenses as they
deploy their business models.
Our consolidated partner companies have recorded deferred compensation
which will result in future amortization expenses of approximately $66 million.
Included in selling, general and administration expenses was $5.3 million and
$6.3 million of amortization of deferred compensation, and $5.6 million and $5.6
million of stock option acceleration charges for the three and nine months ended
September 30, 2000, respectively. Deferred compensation relates to the grant of
stock options to non-employees and the grant of employee stock options with
exercise prices less than deemed fair value.
During 1999 and 2000, we acquired consolidated partner company interests
resulting in goodwill and other intangibles totaling approximately $1.3 billion
at September 30, 2000 which is being amortized generally over 3 years.
Amortization expense related to the consolidated companies for the three and
nine months ended September 30, 2000 was $104.9 million and $133.5 million,
respectively, and for the three and nine months ended September 30, 1999 was
$2.1 million and $9.9 million, respectively. Without giving effect to additional
acquisitions in consolidated companies subsequent to September 30, 2000, we
expect goodwill amortization related to consolidated companies to be
approximately $120.0 million through the remainder of 2000.
During the three months ended June 30, 2000 we acquired a majority interest
in RightWorks. Purchased in-process research and development represents the
value assigned to research and development projects of RightWorks which were not
complete at the acquisition date and had no alternative future use. In
accordance with SFAS No. 2, "Accounting for Research and Development Costs," and
FASB Interpretation No. 4 "Applicability of SFAS No. 2 to Business Combinations
Accounted for by the Purchase Method," amounts assigned to purchased in-process
research and development meeting the above stated criteria must be charged to
expense as part of the allocation of purchase price of a business combination.
The purchased in-process research and development was valued using the income
approach, which includes an analysis of the markets, cash flows and risks
associated with achieving such cash flows, fair returns on all identifiable
assets and consideration of the state of completion of such projects. The
purchased in-process research and development charge, which had no associated
tax benefit, was classified as an operating expense on our consolidated
statement of operations. The current purchase price allocation, including the
purchased in-process research and development charge, is preliminary and subject
to adjustment upon finalization of our purchase accounting.
28
<PAGE> 29
Equity Method Companies
A significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership interest. These
companies are accounted for under the equity method of accounting. Equity income
(loss) fluctuates with the number of companies, and the net results of
operations of these companies. Certain amounts recorded to reflect our share of
the income (loss) of our partner companies accounted for under the equity method
are based on estimates and on unaudited results of operations of those partner
companies and may require adjustments in the future when audits of these
entities are made final. During 1999 and 2000, we acquired equity method partner
company interests resulting in goodwill and other intangibles totaling
approximately $872 million as at September 30, 2000 which is being amortized
generally over 3 years. Amortization expense related to the equity method
companies for the three and nine months ended September 30, 2000 was $99.0
million and $203.2 million, respectively, and for the three and nine months
ended September 30, 1999 was $6.2 million and $11.1 million, respectively.
Without giving effect to additional acquisitions in equity method companies
subsequent to September 30, 2000, we expect goodwill amortization related to
equity method companies to approximately $100 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. Equity method partner company goodwill
which was previously classified in equity loss in our consolidated statements of
operation has been reclassified to amortization of goodwill and intangibles for
all periods presented. The amortization related to equity method partner
companies for three and nine months ended September 30, 2000 was $99.0 million
and $203.2 million and for the three and nine months ended September 30, 1999
was $6.2 million and $10.9 million.
During the period ended September 30, 2000 we accounted for 48 companies
under the equity method of accounting, compared to 22 for the period ended
September 30, 1999. All of the companies incurred losses in the three and nine
months ended September 30, 2000. Our equity loss is related to our share of the
equity method companies' income and losses for the period. Of the $120.8 million
and $280.2 million equity loss related to our share of the income and losses of
companies accounted for under the equity method for the three and nine months
ended September 30, 2000, $(20.6) million and $(32.4) million in income (loss)
was attributable to VerticalNet and $(4.3) million and $(17.2) million, $(2.9)
million and $(7.4) million, $(6.5) million and $(13.4) million and $(1.6)
million and $(4.4) million, respectively, were attributable to Onvia.com's,
Universal Access', Breakaway Solutions' and eMerge Interactive's net losses for
the three and nine months ended September 30, 2000, respectively, while the
other 43 companies accounted for the remaining equity losses ranging from less
than $(.1) million to $(5.8) million and less than $(.1) million to $(15.8)
million for the three and nine month periods ended September 30, 2000,
respectively.
During the three months ended September 30, 2000 our ownership in Onvia.com
dropped below 20% and accordingly, we have accounted for our ownership in
Onvia.com as a cost method investment since the date our ownership dropped below
20%.
29
<PAGE> 30
For the three and nine months ended September 30, 2000, VerticalNet had net
revenues of $73.7 million and $154.7 million, respectively, and a loss
attributable to common shareholders of $76.0 million and $121.1 million,
respectively compared to revenues of $5.2 million and $10.7 million and a loss
attributable to common shareholders of $25.8 million and $38.2 million in the
comparable periods in 1999. In September 2000, VerticalNet announced plans to
organize the business into three strategic business units:VerticalNet Markets,
VerticalNet Solutions and VerticalNet Exchanges. Due to the early stage of
VerticalNet Solutions formation, management will continue to operate and measure
the performance of VerticalNet Markets and Solutions as one segment for the
remainder of 2000. VerticalNet's revenue increased from the three months ended
June 30, 2000 to the three months ended September 30, 2000 due to increases in
its primary revenue streams, including: e-enablement and e-commerce; advertising
and services; and exchange transactions. Net exchange transaction revenues from
VerticalNet Exchanges reached $39.3 million or 53 percent of total revenues for
the quarter. This increase was in part attributable to an acquisition made by
the subsidiary during the quarter. VerticalNet Markets revenues including
e-enablement, e-commerce, advertising and services reached $34.5 million for the
quarter ended September 30, 2000. VerticalNet's losses increased period to
period due to its cost of maintaining, operating and promoting an increased
number of vertical trade community features and horizontal business services, as
well as continuing growth in the VerticalNet Exchange operations and the
development of the VerticalNet Solutions unit. Operational and customer service
costs also increased due to the increased number of customers that resulted from
VerticalNet's commercial relationship with Microsoft. Additional costs include
increased amortization expense associated with acquisitions.
For the three and nine months ended September 30, 2000, Onvia.com had
revenues of $45.3 million and $96.1 million, respectively, and net losses of
$30.5 million and $91.4 million, respectively, compared to revenue of $8.1
million and $13.2 million, respectively, and a net loss of $10.8 million and
$16.2 million, respectively, for the comparable periods in 1999. The company has
generated substantially all of its revenue from product sales. Onvia.com's
revenue increased period to period due to increased product sales to new and
existing customers. Onvia.com's losses increased period to period despite
improvement in negative gross margins due to additional selling, general and
administrative and technology costs incurred as it builds its customer base and
increases its operating expenses related to marketing and advertising programs
designed to build its brand and drive customer acquisition as well as increases
in personnel and non-cash equity compensation charges.
For the three and nine months ended September 30, 2000, Universal Access
had revenues of $14.0 million and $30.8 million, respectively, and net losses of
$12.5 million and $32.0 million, respectively, compared to revenues of $4.3
million and $8.6 million, respectively and net losses of $9.4 million and $13.1
million, respectively, for the comparable periods in 1999. The company has
generated substantially all of its revenue from providing ongoing, dedicated
circuit access. Monthly recurring circuit revenues are generated under client
contracts with terms ranging from 12 to 60 months and averaging 26 months. The
increase in revenues was attributable to an increase in the volume of circuits
sold due to an increase in the number of customers as well as additional sales
to existing customers. Universal Access' losses increased period to period as a
result of increased operating expenses attributable to increases in personnel,
depreciation and amortization.
For the three and nine months ended September 30, 2000, Breakaway Solutions
had revenues of $34.6 million and $87.9 million, respectively, and net losses of
$20.0 million and $40.1 million, respectively, compared to revenues of $7.2
million and $14.7 million, respectively, and net losses of $4.5 million and $7.0
million for the comparable periods in 1999. Breakaway Solutions is a full
service provider of e-business solutions and application hosting. Prior to
Breakaway Solutions' acquisition of Applica in 1999, Breakaway Solutions derived
no revenues from application hosting. Breakaway Solutions believes, however,
that application hosting will account for a significantly greater portion of
revenues in the future. For the three and nine months ended September 30, 2000,
application hosting services generated $7.6 million and $15.6 million,
respectively, and revenues from services generated $27.0 million and $72.4
million, respectively. The increase in revenues from services was attributable
to increases in billable consultants and billing rates as the market demand for
internet professional services continued to increase. Breakaway Solutions'
losses increased period to period as a result of increases in personnel,
marketing and increased depreciation and amortization expenses.
For the three and nine months ended September 30, 2000, eMerge Interactive
had revenues of $277 million and $473 million, respectively, and net losses of
$7.3 million and $20.7 million, respectively, compared to revenues of $15.8
million and $18.3 million, respectively, and net losses of $4.7 million and
$10.7 million, respectively, for the
30
<PAGE> 31
comparable periods in 1999. Substantially all revenue for the period was derived
from cattle sales and comparisons to the comparable periods in 1999 are not
meaningful. During the three months ended September 30, 2000, the number of
cattle sold by eMerge Interactive rose to 632,800 head, an increase of 85%
from the 342,500 head sold in the three months ended June 30, 2000. 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. During the three months ended September 30, 2000, eMerge Interactive
launched a live-networked Internet cattle auction and acquired the cattle
marketing networks.
Due to the early stage of development of the other companies in which we
acquire interests, new and existing partner companies accounted for under the
equity method are expected to incur substantial losses. Our share of these
losses is expected to be significant.
While most of the companies accounted for under the equity method of
accounting have generated losses to date, and therefore in most cases did not
incur income tax liabilities, these companies may generate taxable income in the
future. Our share of these companies' net income, if generated, would be reduced
to the extent of our share of these companies' tax expense.
NET RESULTS OF OPERATIONS-GENERAL ICG OPERATIONS
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. We commenced operations in March 1996 with offices in
Wayne, Pennsylvania and San Francisco, California. As the number of our
employees grew to support our operations and those of our partner companies, our
general and administrative costs increased. In late 1998, we opened an office in
Boston, Massachusetts, and in 1999 we established operations in Seattle,
Washington and London, England and in 2000 we established operations in Munich,
Germany, Paris, France and Tokyo, Japan and we significantly increased the
number of our employees. As a result of these initiatives, our general and
administrative costs increased $15.8 million and $53.5 million for the three and
nine months ended September 30, 2000 compared to the comparable periods in 1999.
Also, included in this increase for the nine months ended September 30, 2000 was
approximately $6.3 million in non-cash compensation relating to the acceleration
of stock option vesting.
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 three
and nine months ended September 30, 2000 and 1999 included $1.6 million, $5.2
million, $2.6 million and $3.3 million, respectively, of amortization expense
related to stock option grants.
On November 8, 2000 we announced plans to reduce our workforce by
approximately 35%, consolidate certain facilities (primarily through the closure
of our offices in Seattle, Washington) and write-down certain assets. As a
result of these initiatives we expect to record a charge of approximately
$25-$30 million in the fourth quarter of 2000.
Research and Development
During the three and nine months ended September 30, 2000, we expensed $2.1
million and $11.1 million, respectively, on research and development projects
principally relating to the development of a technology platform to allow market
makers to conduct business-to-business transactions. We anticipate we will
continue to devote resources to product development and that these costs may
increase in the future.
31
<PAGE> 32
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the issuances of stock by our partner companies to reflect the change in our
share of the net equity of these companies, and impairment charges related to
our ownership interests in and advances to partner companies.
General ICG Operations' other income consisted of the following (unaudited
in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales of Excite holdings......................... $ -- $ -- $ -- $ 2,051
Sale of Excite to @Home Corporation.............. -- -- -- 2,719
Sale of Smart Technologies to i2................. -- 2,942 -- 2,942
Sale of i2 Technologies holdings................. 7,521 -- 34,488 --
Issuance of stock by VerticalNet................. 4,854 14,992 225,856 44,596
Issuance of stock by Breakaway Solutions......... 4,621 -- 24,294 --
Issuance of stock by Universal Access............ 998 -- 998 --
Tradex Sale to Ariba............................. -- -- 449,284 --
Sales of Ariba holdings.......................... -- -- (51,701) --
Sale of CentriMed................................ 22,364 -- 22,364 --
Partner company impairment charges............... (44,174) (2,043) (46,367) (5,340)
Other............................................ -- -- 151 6
--------- --------- --------- ---------
$ (3,816) $ 15,891 $ 659,367 $ 46,974
========= ========= ========= =========
</TABLE>
In February 1998, we exchanged all of our holdings of Matchlogic, Inc. for
763,820 shares of Excite, Inc. ("Excite"). Throughout the remainder of 1998 we
sold 716,082 shares of Excite. During the three month period ended March 31,
1999, we sold 23,738 shares of Excite which resulted in $2.5 million of proceeds
and $2.1 million of gains.
In May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, we received
shares of @Home Corporation in exchange for our shares in Excite, resulting in a
non-operating gain before taxes of $2.7 million.
In August 1999, we divested our ownership interest in SMART Technologies,
Inc. due to the agreement of merger between 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 three and nine months
ended September 30, 2000, we sold 50,726 shares and 230,902 shares of i2
Technologies, respectively, which resulted in net proceeds of $8.5 million and
$39.4 million and gains of $7.5 million and $34.5 million respectively.
As a result of VerticalNet issuing additional shares for acquisitions and
during the three and nine months ended September 30, 2000, our share of
VerticalNet's net equity increased by approximately $4.9 million and $225.9
million, respectively. These increases adjust our carrying value in VerticalNet
and result in non-operating gains of $4.9 million and $225.9 million,
respectively, for the three and nine months ended September 30, 2000.
Additionally, as a result of VerticalNet completing its initial public offering
in February 1999 and issuing additional shares for acquisitions in 1999, our
share of VerticalNet's net equity increased by $14.9 million and $44.6 million,
respectively. This increase adjusts our carrying value in VerticalNet and
results in a non-operating gain of $14.9 million and $44.6 million, in the three
and nine months ended September 30, 1999. As a result of Breakaway Solutions
issuing additional shares for acquisitions during the three and nine months
ended September 30, 2000, our share of Breakaway Solutions' net equity increased
by approximately $4.6 million and $24.3 million, respectively. This increase
adjusts our carrying value in Breakaway Solutions and results in a non operating
gain of $4.6 and $24.3 million, respectively. As a result of Universal Access
issuing shares for acquisition during the three months ended September 30, 2000,
our share of Universal Access net equity increased by approximately $1 million.
These
32
<PAGE> 33
gains were recorded in accordance with SEC Staff Accounting Bulletin No. 84 and
our accounting policy with respect to such transactions. We believe there is a
high likelihood that transactions similar to these, in which a partner company
we account for under the consolidation or equity method of accounting issues
shares of its common stock, will occur in the future and we expect to record
gains or losses related to such transactions provided they meet the requirements
of SEC Staff Accounting Bulletin No. 84 and our accounting policy. In some
cases, as described in SEC Staff Accounting Bulletin No. 84, the occurrence of
similar transactions may not result in a non-operating gain or loss but would
result in a direct increase or decrease to our stockholders' equity.
In March 2000 we exchanged all of our interest in TRADEX for approximately
2.9 million shares of Ariba, Inc. ("Ariba") common stock. Based on Ariba's
closing price on March 9, 2000, the closing date of the transaction, we recorded
a pre-tax gain of $449.3 million. Our holdings of Ariba are accounted for as
available-for-sale securities and will be marked to market, with the difference
between carrying value and market value, net of deferred taxes, recorded in
"Accumulated other comprehensive income" in the stockholders' equity section of
our Consolidated Balance Sheets in accordance with Statement of Financial
Accounting Standards No. 115. During the three months ended June 30, 2000 we
sold approximately 631,530 shares of Ariba common stock at an average price of
$78.57 and recorded a loss of $51.7 million.
In September 2000, we sold all of our interest in CentriMed in exchange for
$15.2 million in cash $15.5 million in contingent consideration to be received
upon meeting certain levels of performance ($9.7 million was received in October
2000) and other consideration. We recorded a gain of $22.4 million, net of
potential payments relating to our long-term incentive plan, during the three
months ended September 30, 2000.
For the three and nine months ended September 30, 2000, we recorded
impairment charges of $44.2 million and $46.4 million for the other than
temporary decline in the fair value of certain cost method and equity method
partner companies. For the three and nine months ended September 30, 1999, we
recorded impairment charges of $2.0 million and $5.3 million, respectively, for
the other than temporary decline in the fair value of a cost method partner
company. We concluded that the carrying value of these partner companies was
permanently impaired based on the achievement of business plan objectives and
milestones and the fair value of the partner companies relative to their
carrying values. The impairment charges we recorded in 2000 were determined by
comparing the carrying value of our ownership interests in these partner
companies to the estimated fair values of our ownership interest. The impairment
charges we recorded in 1999 were determined by the decrease in net book values
of the partner company caused by its net losses.
Interest Income
Our cash and cash equivalents at September 30, 2000 are invested primarily
in money market accounts and highly liquid, high quality debt instruments.
During the three months ended December 31, 1999, we received approximately $831
million in our follow-on stock offering and approximately $549.9 million from
the sale of convertible subordinated notes. The increase in interest income in
the three and nine months ended September 30, 2000 was primarily due to the
significant increase in our cash and cash equivalents as a result of these
transactions.
Interest Expense
Interest expense increased during the period primarily as the result of the
December 1999 issuance of approximately $566.3 million in convertible
subordinated notes due 2004 bearing interest at 5.5%.
Income Taxes
From our inception in March 1996 to February 1999, we were not subject to
federal and state income taxes. On February 2, 1999, we converted from an LLC to
a Corporation. Our accumulated deficit of $8.7 million at that date was
reclassed to additional paid-in capital. 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,
33
<PAGE> 34
1999, we are subject to corporate federal and state income taxes. At the time of
our conversion to a corporation, we recorded a deferred tax benefit and related
deferred tax asset of $7.7 million which primarily represented the excess of tax
basis over book basis of our partner companies.
Our net deferred tax liability of $299.0 million at September 30, 2000
primarily consists of deferred tax liabilities of $113.2 million, relating
primarily to the gain on the sale of a partner company for marketable
securities, partially offset by tax assets resulting from net unrealized
depreciation in available-for-sale securities and deferred tax liabilities of
$185.8 million relating primarily to the excess of book carrying values over tax
carrying values of our partner companies.
We have not recorded a valuation allowance related to our gross deferred
tax assets because we believe it is more likely than not that we will realize
the benefits of these assets. The assets relate primarily to the excess of tax
basis over book basis of our partner companies. These differences in basis
represent capital losses for tax purposes which, if recognized, can only be
deducted to the extent of capital gains. Additionally, these losses may be
carried back three years and carried forward five years from the year in which
they occur. While selling any portion of our ownership interests in partner
companies is something we will not do in the ordinary course of business, we
would consider pursuing such a sale at the minimum amount necessary to prevent
any capital losses from expiring unutilized. If we do not believe such a
strategy, or an alternative strategy, will be available in the time periods
allowed for carrying back and carrying forward losses, we will establish a
valuation allowance at that time. Most of our partner companies are in an early
stage of development, currently generate significant losses and are expected to
generate significant losses in the future. The marketability of the securities
we own of our partner companies is generally limited as they primarily represent
ownership interests in companies whose stock is not publicly traded. As of
September 30, 2000, our only publicly traded partner companies are VerticalNet,
Breakaway Solutions, eMerge Interactive, ICG AsiaWorks, Onvia.com, Universal
Access, and U.S. Interactive. As a result, there is 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 proceeds from the
issuance of equity, proceeds from the issuance of convertible notes, proceeds
from the sales of available-for-sale securities, proceeds from the disposition
of our ownership interests in non-strategic assets, borrowings under bank credit
facilities and interest earned on excess cash. From 1996 through December 31,
1999 we received approximately $1.79 billion in proceeds including our initial
public offering, follow-on public offering and debt issuance.
In March 2000, our revolving bank credit facility was amended to, among
other things, increase our credit facility to provide for borrowings up to $250
million, including the issuance of letters of credit up to $125 million. The
agreement includes a $125 million 364-day secured line of credit and a $125
million two-year secured revolving credit facility. The revolving facility and
line of credit are subject to .375% and .25% unused commitment fees
respectively, bear interest, at our option at LIBOR plus 2.0% or the lenders'
Base Rate (the lenders' Base Rate being the greater of (i) the prime rate or
(ii) the Federal Funds Rate plus .5%) and are secured by substantially all of
our assets (including our holdings in domestic partner companies).
Borrowing availability under the facility is based on the fair market value
of our holdings of publicly-traded partner companies (VerticalNet, Breakaway
Solutions, eMerge Interactive, ICG AsiaWorks, Onvia.com, Universal Access and
U.S. Interactive as of September 30, 2000. All remaining holdings of U.S.
Interactive were sold in October 2000.) and the value, as defined in the
facility, of our private partner companies. If the market price of our publicly
traded partner companies declines, availability under the credit facility could
be reduced significantly and could have an adverse effect on our ability to
borrow under the facility and could require an immediate repayment of a portion
of our outstanding borrowings, if any. At September 30, 2000, based on the
provisions of the borrowing base, the full borrowing base was available less
outstanding letters of credit of $6.0 million.
Existing cash, cash equivalents and short-term investments, availability
under our revolving bank credit facility, proceeds from the potential sales of
all or a portion of our available-for-sale securities or 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. At
34
<PAGE> 35
November 7, 2000, we were obligated for approximately $30.4 million of
guarantee commitments and $31.0 million of funding commitments to existing
partner companies (includes a $23.0 million note payable to eMerge Interactive),
$7.6 million of which is payable in cash or stock at our option. At November 7,
2000, we were contingently obligated for additional purchase price consideration
of approximately $18.3 million payable in cash and $163.8 million payable in
cash or stock at our option. Our contingent obligations will become due in whole
or in part if certain existing partner companies meet agreed upon criteria, such
as revenue or market capitalization milestones. We will continue to evaluate
acquisition opportunities and may acquire additional ownership interests in new
and existing partner companies in the next 12 months; however, such acquisitions
will be made at our discretion. If we elect to make additional acquisitions, it
may become necessary for us to raise additional funds. We may not be able to
raise additional capital and failure to do so could have a material adverse
effect on our business. If additional funds are raised through the issuance of
equity securities, our existing shareholders may experience significant
dilution.
At September 30, 2000, our consolidated partner companies were obligated
for approximately $27.8 million of commitments related to acquisitions, of which
$15.0 million is payable in cash or stock at their option. They were also
consequently obligated to fund $4.5 million to a related party.
Consolidated working capital decreased to $473.1 million at September 30,
2000, compared to $1.3 billion at December 31, 1999 primarily as a result of the
cost of ownership interests we acquired and other net cash outflows during the
nine months ended September 30, 2000.
Cash used in operating activities in the nine months ended September 30,
2000 compared to the same prior year period increased due to the increased cost
of General ICG Operations' general and administrative expenses and research and
development.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies.
In May 2000, we acquired a majority interest in Harbour Ring International
Holdings, which was renamed ICG AsiaWorks Limited, for approximately $116.5
million in cash.
In June 2000, we acquired a significant interest in eCredit,.com, Inc., a
leading provider of Internet-based credit, financing and related services in
exchange for approximately $424.7 million of our common stock (valued at $91.22
per share). We also acquired a majority interest in RightWorks, a leading
provider of e-procurement software that powers B2B exchanges in exchange for
approximately $754.0 million of our common stock (valued at $127.97 per share)
and $22.0 million in cash.
In September 2000, we acquired a majority interest in PaperExchange.com,
which operates an e-business marketplace for the pulp and paper industry, in
exchange for approximately $165.8 million of our common stock (valued at $34.44
per share).
In addition to the above transactions, we utilized $1.0 billion in cash
and notes in the aggregate to acquire interests in or make advances to new and
existing partner companies during the nine months ended September 30, 2000.
These companies included: Agribuys Inc., Arbinet-thechange, Inc, AssetTRADE.com,
Autovia Corporation, DNI Holdings, Inc. (dba Blackbird), Blackboard, Inc.,
Breakaway Solutions, buy.co.UK, Limited, BuyMedia, CargoBiz.com AG,
CentriMed.com, Inc., ClearCommerce Corporation, Collabria, Inc., CommerceQuest,
Inc., ComputerJobs.com, Data West Corporation (dba Courtlink), CreditTrade,
Inc., CyberCrop.com, Delphion, Deja.com, Inc., eCatalogs, Inc., E-Chemicals,
Inc., eColony, Inc., eMarket Capital, eMetra Limited, EmployeeLife.com,
Emptoris, Entegrity Solutions Corporation, Eumedix.com BV, eu-Supply, FOL
Networks Limited, Freeborders.com, Inc., Fuelspot.com, Inc., GoIndustry AG, ICG
Commerce, Internet Commerce Systems, Inc., Industrial America, InfoMart
Corporation,, inOvate Communications Group, Inc., Internet Healthcare Group,
L.L.C., Investor Force Holdings, Inc., iSky, Inc.
35
<PAGE> 36
JamCracker, iVows Interactive Limited (dba mesania), LinkShare, Logistics.com,
Inc., MetalSite, Inc., NationStreet, Inc., NetVendor, Inc., OnMedica, Onvia.com,
Inc., PaperExchange.com, Print Mountain Ltd., RetailExchange.com, Inc.,
ServiceSoft Technologies, Inc., Simplexis.com, Sourceree Limited, StarCite,
Inc., Surgency, Inc., (formerly Benchmarking Partners, Inc.), Syncra Systems,
Inc., TALPX, Inc., TeamOn.com, Inc., Tibersoft Corporation, traffic.com, Inc.,
Universal Access, Inc., U.S. Gift.com, Corporation, VerticalNet Europe BV and
Vivant! Corporation.
During the nine months ended September 30, 2000, we also acquired interests
in new and existing partner companies by issuing 5,045,177 shares and committing
to issue 629,850 shares in the aggregate of our common stock with an aggregate
value of approximately $216.0 million. These companies included: AssetTRADE,
Breakaway Solutions, BuyMedia, CommerceQuest, ComputerJobs.com, E-Chemicals,
eCredit, Emptoris and OnMedica.
During the period from October 1, 2000 through November 7, 2000, we
utilized $85.8 million to acquire interests in or make advances to new and
existing partner companies. These companies included: Agribuys, AssetTRADE,
InvestorForce, Linkshare, Commerx, CyberCrop.com, eMarketWorld,
EmployeeLife.com, eu-Supply, FuelSpot.com, OnMedica, PaperExchange.com,
RetailExchange, Starcite and Textiles Online Marketplaces Ltd.
In September, we sold all of our ownership interest in CentriMed.com in
exchange for $15.1 million in cash, $15.5 million in contingent consideration to
be received upon meeting certain levels of performance, ($9.7 million was
received in October 2000) and other consideration.
In November 2000, VerticalNet announced it had signed a definitive
agreement to acquire all of the outstanding stock of SierraCities.com, Inc. in
exchange for $133 million VerticalNet stock. Consummation of the merger is
subject to the tender of two-thirds of the outstanding SierraCities.com shares
and customary closing conditions. The transaction had not been completed as of
November 8, 2000. Upon completion of the transaction, the Company's voting
ownership will decrease from 28% to 26%. In addition, the Company expects to
record a non-operating gain due to the increase in its share of VerticalNet's
net equity as a result of their issuance of shares.
During the year ended December 31, 1999, Ariba, Inc. announced its
intention to acquire all of the outstanding stock of one of our partner
companies, TRADEX in exchange for approximately $2.0 billion in Ariba stock.
Ariba closed its acquisition of TRADEX on March 9, 2000. Based on Ariba's
closing price of $160.4375 on March 9, 2000, we recorded a non-operating gain of
approximately $290 million, net of tax, during the quarter ended March 31, 2000.
Our holdings of Ariba after the transaction 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. We entered into cashless collar agreements with
respect to 2.2 million shares of our holdings of Ariba common stock at fair
value of $262.4 million. During the quarter ended June 30, 2000, we sold
approximately 631,530 shares of Ariba common stock at an average price of $78.57
and recorded a loss of $51.7 million. At September 30, 2000, our holdings of
Ariba common stock were valued at $278.6 million.
Our general operations are not capital intensive, and capital expenditures
in any year normally will not be significant in relation to our overall
financial position. There were no material capital asset purchase commitments as
of September 30, 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, is effective for all fiscal quarters
beginning after December 31, 2000. We are currently analyzing the potential
impact of SFAS No. 133 on our results of operations, financial position and cash
flows upon the adoption of this standard.
In October 1999, the Chief Accountant of the Securities and Exchange
Commission required that the Financial Accounting Standards Board Emerging
Issues Task Force, or the EITF, address a number of accounting and financial
reporting issues that the Securities and Exchange Commission believes has
developed with respect to Internet businesses. The Securities and Exchange
Commission identified twenty issues for which they believed some form of
standard setting or guidance may be appropriate either because (i) there
appeared to be diversity in practice or (ii) the issues are not specifically
addressed in current accounting literature or (iii) the Securities and Exchange
Commission staff is concerned that developing practice may be inappropriate
under generally accepted accounting principles. Many of the issues identified by
the Securities and Exchange Commission, including those which address
36
<PAGE> 37
barter and revenue recognition, are potentially applicable to us and our partner
companies. In addition, in December 1999, the Securities and Exchange Commission
staff issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which is required to be implemented in the quarter ended
December 31, 2000. Although we believe our historical accounting policies and
practices conform with generally accepted accounting principles, there can be no
assurance that final consensus reached by the EITF on the Internet issues
referred to above, or other actions by standard setting bodies, will not result
in changes to our historical accounting policies and principles or to the manner
in which certain transactions are presented and disclosed in our consolidated
financial statements.
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 September 30, 2000 include equity
positions in companies in the Internet industry sector, including: Ariba, Inc.,
Excite@Home Corporation; Breakaway Solutions, Inc.; i2 Technologies, Inc.;
eMerge Interactive, Inc.; ICG AsiaWorks; Universal Access, Inc.; Onvia.com,
Inc.; Lycos, Inc.; US Interactive, Inc. and VerticalNet, Inc., many of which
have experienced significant historical volatility in their stock prices. A 20%
adverse change in equity prices, based on a sensitivity analysis of our public
holdings as of September 30, 2000, would result in an approximate $416 million
decrease in the fair value of our public holdings. A significant portion of the
value of the potential decrease in equity securities, or $176.1 million and
$65.7 million, consisted of our holdings in VerticalNet and ICG AsiaWorks,
respectively.
Although we typically do not attempt to reduce or eliminate our market
exposure on these securities, particularly with respect to securities of our
partner companies, we did enter into cashless collar agreements with respect to
2.2 million shares of our holdings of Ariba's common stock. The collar
arrangements limit our exposure to and benefits from price fluctuations in the
underlying equity securities. The collar arrangements mature between 2001 and
2003. The combined value of the collars and the underlying hedged securities at
September 30, 2000 was $278.6 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. At
September 30, 2000, the fair value of convertible subordinated notes is
approximately $137.1 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
September 30, 2000, we had sufficient collateral to enable us to fully utilize
this facility. Additionally, we are exposed to interest rate risk primarily
through our bank credit facility. At September 30, 2000, there were no
borrowings outstanding. Letters of credit of $6 million have been issued as of
September 30, 2000 and have reduced our availability under the facility by the
same amounts.
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.
37
<PAGE> 38
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 August 29 2000, Internet Capital Group issued 122,789 shares of Common
Stock in a private placement to BuyMedia, Inc., in exchange for 763,942
shares of Series D Convertible Preferred Stock of BuyMedia, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Document
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 13 and
Note 3 - "Net Loss Per Share" to the Consolidated
Financial Statements on Page 14)
27.1 Financial Data Schedule for the nine months ended
September 30, 2000
(b) Reports on Form 8-K
None.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNET CAPITAL GROUP, INC.
Date: November 14, 2000 By: /s/ Edward H. West
--------------------------------------------
Name: Edward H. West
Title: Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
(Duly Authorized Officer)
-39-
