SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Commission File Number 000-26929
INTERNET CAPITAL GROUP, INC.
Delaware | 23-2996071 | |
(State of other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
690 Lee Road, Suite 310, Wayne, PA (Address of principal executive offices) |
19087 (Zip Code) |
(610) 727-6900
(Registrants 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. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o
The number of shares of the Companys Common Stock outstanding as of May 10, 2004 was 38,056,600 shares.
INTERNET CAPITAL GROUP, INC.
FORM 10-Q
March 31, 2004
INDEX
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 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.
This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended. See the subsection of Part I, Item 2 entitled Risk Factors for more information.
Our internet website address is www.internetcapital.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed by us with the Securities and Exchange Commission pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are accessible free of charge through our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission.
2
INTERNET CAPITAL GROUP, INC.
PARTNER COMPANIES AS OF MARCH 31, 2004
Agribuys, Inc. (Agribuys)
Anthem/CIC Ventures Fund LP (Anthem)
Arbinet thexchange Inc. (Arbinet)
Axxis, Inc. (f/k/a FuelSpot.com, Inc.)(Axxis)
Blackboard, Inc. (Blackboard)
Captive Capital Corporation (f/k/a eMarketCapital, Inc.) (Captive Capital)
ClearCommerce Corporation (ClearCommerce)
CommerceQuest, Inc. (CommerceQuest)
ComputerJobs.com, Inc. (ComputerJobs.com)
Co-nect, Inc. (f/k/a Simplexis.com) (Co-nect)
CreditTrade Inc. (CreditTrade)
eCredit.com, Inc. (eCredit)
eMerge Interactive, Inc. (eMerge Interactive) (Nasdaq:EMRG)
Emptoris, Inc. (Emptoris)
Entegrity Solutions Corporation (Entegrity Solutions)
Freeborders, Inc. (Freeborders)
GoIndustry AG (GoIndustry)
ICG Commerce Holdings, Inc. (ICG Commerce)
Investor Force Holdings, Inc. (Investor Force)
iSky, Inc. (iSky)
Jamcracker, Inc. (Jamcracker)
LinkShare Corporation (LinkShare)
Marketron International, Inc. (f/k/a BuyMedia, Inc.) (Marketron)
Mobility Technologies, Inc. (f/k/a traffic.com Inc.) (Mobility Technologies)
StarCite, Inc. (StarCite)
Syncra Systems, Inc. (Syncra Systems)
Tibersoft Corporation (Tibersoft)
Universal Access Global Holdings Inc. (Universal Access) (Nasdaq:UAXS)
Verticalnet, Inc. (Verticalnet) (Nasdaq:VERT)
3
PART I FINANCIAL INFORMATION
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2004 |
2003 |
|||||||
(unaudited) | ||||||||
(in thousands, except per share data) | ||||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 79,780 | $ | 77,581 | ||||
Restricted cash |
1,802 | 1,819 | ||||||
Short term investments |
9 | 9 | ||||||
Accounts receivable, net of allowance ($2,057-2004; $2,620-2003) |
21,075 | 25,715 | ||||||
Prepaid expenses and other current assets |
10,857 | 6,315 | ||||||
Total current assets |
113,523 | 111,439 | ||||||
Assets of discontinued operations |
278 | 278 | ||||||
Fixed assets, net |
2,144 | 2,368 | ||||||
Ownership interests in Partner Companies |
55,721 | 53,415 | ||||||
Available for sale securities |
10,582 | 6,714 | ||||||
Goodwill |
45,196 | 45,196 | ||||||
Intangibles, net |
5,814 | 6,452 | ||||||
Other |
4,549 | 5,301 | ||||||
Total Assets |
$ | 237,807 | $ | 231,163 | ||||
Liabilities and Stockholders Equity (Deficit) |
||||||||
Current Liabilities |
||||||||
Convertible subordinated notes (Note 9) |
$ | 39,111 | $ | 173,919 | ||||
Current maturities of other long-term debt |
6,917 | 6,930 | ||||||
Accounts payable |
16,233 | 19,263 | ||||||
Accrued expenses |
15,560 | 15,141 | ||||||
Accrued compensation and benefits |
4,905 | 7,907 | ||||||
Accrued restructuring |
3,898 | 3,785 | ||||||
Deferred revenue |
9,306 | 8,973 | ||||||
Total current liabilities |
95,930 | 235,918 | ||||||
Liabilities of discontinued operations |
278 | 278 | ||||||
Other long term debt |
30 | 30 | ||||||
Other liabilities |
8,867 | 9,656 | ||||||
Minority interest |
3,993 | 4,575 | ||||||
109,098 | 250,457 | |||||||
Stockholders Equity (Deficit) |
||||||||
Preferred stock $0.01 par value; 10,000 shares authorized, none
issued or outstanding |
| | ||||||
Common stock, $0.001 par value; 2,000,000 shares authorized,
38,057 (2004) and 21,839 (2003) issued and outstanding |
38 | 22 | ||||||
Additional paid in capital |
3,521,093 | 3,251,068 | ||||||
Accumulated deficit |
(3,393,715 | ) | (3,269,920 | ) | ||||
Unamortized deferred compensation |
(2,602 | ) | (712 | ) | ||||
Notes receivable-stockholders |
(460 | ) | (460 | ) | ||||
Accumulated other comprehensive income |
4,355 | 708 | ||||||
Total stockholders equity (deficit) |
128,709 | (19,294 | ) | |||||
Total Liabilities and Stockholders Equity (Deficit) |
$ | 237,807 | $ | 231,163 | ||||
See notes to Consolidated Financial Statements
4
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands, except per share data) | ||||||||
Revenue |
$ | 12,146 | $ | 19,395 | ||||
Operating expenses |
||||||||
Cost of revenue |
7,434 | 11,934 | ||||||
Selling, general and administrative |
8,876 | 15,730 | ||||||
Research and development |
2,495 | 5,461 | ||||||
Amortization of other intangibles |
786 | 1,724 | ||||||
Impairment related and other |
653 | 537 | ||||||
Total operating expenses |
20,244 | 35,386 | ||||||
(8,098 | ) | (15,991 | ) | |||||
Other income (loss), net |
(113,739 | ) | 5,774 | |||||
Interest income |
227 | 442 | ||||||
Interest expense |
(1,630 | ) | (4,553 | ) | ||||
Loss before minority interest and equity loss |
(123,240 | ) | (14,328 | ) | ||||
Minority interest |
630 | 1,434 | ||||||
Equity loss |
(1,185 | ) | (4,925 | ) | ||||
Loss from continuing operations |
(123,795 | ) | (17,819 | ) | ||||
Loss on discontinued operations |
| (283 | ) | |||||
Net loss |
$ | (123,795 | ) | $ | (18,102 | ) | ||
Basic and diluted loss per share: |
||||||||
Loss from continuing operations |
$ | (3.89 | ) | $ | (1.32 | ) | ||
Loss on discontinued operations |
| (0.02 | ) | |||||
$ | (3.89 | ) | $ | (1.34 | ) | |||
Shares used in computation of basic and
diluted loss per share |
31,853 | 13,479 | ||||||
See notes to Consolidated Financial Statements.
5
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Net cash used in operating activities |
$ | (6,965 | ) | $ | (8,710 | ) | ||
Investing Activities |
||||||||
Capital expenditures |
(137 | ) | (67 | ) | ||||
Proceeds from sales of Partner Company ownership
interests |
13,156 | | ||||||
Acquisitions of ownership interests in Partner
Companies, net |
(3,848 | ) | (8,268 | ) | ||||
Proceeds of short-term investments, net |
| 4,990 | ||||||
Cash provided by (used in) investing activities |
9,171 | (3,345 | ) | |||||
Financing Activities |
||||||||
Repurchase of convertible notes |
| (5,529 | ) | |||||
Long term debt and capital lease obligations, net. |
(13 | ) | (45 | ) | ||||
Line of credit borrowings |
| 113 | ||||||
Line of credit repayments |
| (89 | ) | |||||
Cash used in financing activities |
(13 | ) | (5,550 | ) | ||||
Net increase (decrease) in Cash and Cash Equivalents |
2,193 | (17,605 | ) | |||||
Effect of exchange rates on Cash |
6 | (542 | ) | |||||
Cash and Cash Equivalents at the beginning of period |
77,581 | 117,783 | ||||||
Cash and Cash Equivalents at the end of period |
$ | 79,780 | $ | 99,636 | ||||
Supplemental non-cash See Note 9.
See notes to Consolidated Financial Statements.
6
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Description of the Company
Internet Capital Group, Inc. (the Company) is an information technology company actively engaged in delivering software solutions and services that are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. The Company operates through a network of Partner Companies that deliver those solutions to customers. To help drive partner company progress, the Company provides operational assistance, capital support, industry expertise, access to operational best practices, and a strategic network of business relationships. The Company was formed in March 1996 and is headquartered in Wayne, Pennsylvania.
Although the Company refers to 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.
Reverse stock split
In May 2004, the Company recorded a one for twenty reverse stock split. 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 reflect this reverse stock split.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The consolidated financial statements also include the following majority owned subsidiaries for the periods indicated, each of which was consolidated since the date the Company acquired majority control (collectively, the Consolidated Subsidiaries):
THREE MONTHS ENDED MARCH 31, 2004
CommerceQuest
ICG Commerce
THREE MONTHS ENDED MARCH 31, 2003
Captive Capital
CommerceQuest
eCredit
Freeborders
ICG Commerce
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 methods: consolidation, equity and cost. The applicable accounting method is generally determined based on the Companys 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, and for which other shareholders do not possess the right to participate in significant management decisions, are generally accounted for under the consolidation method of accounting. Under this method, a Partner Companys balance sheet and results of operations are reflected within the Companys Consolidated Financial Statements. All significant intercompany accounts and transactions have been eliminated. Participation of other Partner Company stockholders in the net assets and in the earnings or losses of a consolidated Partner Company is reflected in the caption Minority interest in the Companys Consolidated Balance Sheets and Statements of Operations. Minority interest adjusts the Companys consolidated results of operations to reflect only the Companys 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. Also, see Note 3.
7
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Equity Method. Partner Companies that are not consolidated, but over which 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 Companys 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 Companys holdings in common, preferred and other convertible instruments in the Partner Company. Under the equity method of accounting, a Partner Companys accounts are not reflected within the Companys Consolidated Balance Sheets and Statements of Operations; however, the Companys share of the earnings or losses of the Partner Company is reflected in the caption Equity loss in the Consolidated Statements of Operations. The carrying value of equity method Partner Companies is reflected in Ownership interests in Partner Companies in the Companys Consolidated Balance Sheets.
When the Companys investment in an equity method Partner Company is reduced to zero, no further losses are recorded in the Companys consolidated financial statements unless the Company guaranteed obligations of the Partner Company or has committed additional funding. When the Partner Company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
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 Companys share of the earnings or losses of such companies is not included in the Balance Sheet or Consolidated Statements of Operations. However, cost method Partner Company impairment charges are recognized in the Consolidated Statements of Operations. If circumstances suggest that the value of the Partner Company has subsequently recovered, such recovery is not recorded.
When a cost method Partner Company qualifies for use of the equity method, the Companys investment is adjusted retroactively for its share of the past results of its operations. Therefore, prior losses could significantly decrease the Companys basis at that time.
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 Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Recent Accounting Pronouncements
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also includes required disclosures for financial instruments within its scope. For the Company, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise at July 1, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS No. 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of SFAS No. 150.
Also see Note 3.
Concentration of Customer Base and Credit Risk
Approximately 17% of the Companys revenue for the three months ended March 31, 2003, related to one customer of one of the Companys consolidated Partner Companies. Accounts receivable from this customer as of March 31, 2003 were not significant. During 2003, this customer notified such consolidated Partner Company of the exercise of its right to terminate its arrangement to purchase services from such consolidated Partner Company effective January 1, 2004.
8
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Accounts Receivable
The Company provides services in which the Company manages the transaction between its customer and a third party supplier. In these transactions, the Company is responsible for paying the supplier for the full cost of the goods or services and the customer is responsible for paying the Company an amount, which is generally the Companys cost plus a transaction fee, for the goods or services. The Company is typically responsible for paying the supplier independent of when and if the Company receives payment from its customer. The Company receives payment directly from its customer. The Company records the gross amount of the associated receivables and payables on the accompanying consolidated balance sheets. However, the Company records the net amount of the transaction fee as revenue on the accompanying consolidated statements of operations. As of March 31, 2004 and December 31, 2003, accounts receivable included approximately $14.3 million and $17.3 million, respectively, related to such transactions.
Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company measures compensation cost in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no compensation expense is recorded for stock options issued to employees that are granted at fair market value. Stock options issued to non-employees are recorded at fair value at the date of grant. Fair value is determined using the Black-Scholes model and the expense is amortized over the vesting period.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123, which provides optional transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the statement mandates certain disclosures that are incremental to those required by SFAS No. 123. The Company has continued to account for stock-based compensation in accordance with APB No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 148.
In March 2004, the Company issued 5.9 million shares of restricted stock to employees that generally vest over four years with acceleration provisions based on certain operating metrics. The value of the restricted stock at the date of grant of $2.1 million will be recorded as deferred compensation.
The following table illustrates the effect on the Companys net loss and net loss per share as if the fair value based method had been applied to all outstanding and unvested awards:
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands, except per share data) | ||||||||
Net loss, as reported |
$ | (123,795 | ) | $ | (18,102 | ) | ||
Add stock-based employee
compensation expense
included in reported net
loss |
254 | 1,311 | ||||||
Deduct total stock-based
employee compensation
expense determined
under fair-value-based method
for all awards |
(1,989 | ) | (5,095 | ) | ||||
Pro forma net loss |
$ | (125,530 | ) | $ | (21,886 | ) | ||
Net loss per share, as reported |
$ | (3.89 | ) | $ | (1.34 | ) | ||
Pro forma net loss per share |
$ | (3.94 | ) | $ | (1.62 | ) |
The per share weighted-average fair value of options issued by the Company during the three months ended March 31, 2004 and 2003 was $8.60 and $6.90, respectively.
9
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
The following assumptions were used to determine the fair value of stock options granted to employees by the Company for the three months ended March 31, 2004 and 2003:
2004 |
2003 |
|||||||
Volatility |
132.99 | % | 137.09-138.38 | % | ||||
Average expected option life |
3 years | 3 years | ||||||
Risk-free interest rate |
2.26 | % | 2.05-2.26% | |||||
Dividend yield |
0.0 | % | 0.0% |
The Company also includes its share of its Partner Companies SFAS No. 123 pro forma expense in the Companys SFAS No. 123 pro forma expense. The methods used by the Partner Companies included the minimum value method for private Partner Companies and the Black-Scholes method for public Partner Companies.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The impact of these changes is not material and did not affect net loss.
3. Acquisitions and impairments/dispositions of ownership interests in Partner Companies
The following table summarizes the Companys goodwill and other intangibles and ownership interests in Partner Companies.
March 31, |
December 31, |
|||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Goodwill |
$ | 45,196 | $ | 45,196 | ||||
Other intangibles |
5,814 | 6,452 | ||||||
$ | 51,010 | $ | 51,648 | |||||
Ownership
interest in Partner Companies - Equity
Method |
$ | 45,269 | $ | 41,745 | ||||
Ownership
interests in Partner Companies - Cost Method |
10,452 | 11,670 | ||||||
$ | 55,721 | $ | 53,415 | |||||
Equity Method Companies
The following unaudited summarized financial information relates to the thirteen Partner Companies accounted for under the equity method of accounting at March 31, 2004 (voting ownership %):
Private Core CreditTrade (30%), eCredit (40%), Freeborders (48%), GoIndustry (54%), Investor Force (38%), LinkShare (40%), Marketron (40%) and StarCite (17%). Although the Companys ownership percentage in GoIndustry exceeds 50% at March 31, 2004, the Company has not consolidated its financial statements due to the existence of certain minority voting rights in accordance with Emerging Issues Task Force No. 96-16, Investors Accounting for an Investee when the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.
Private Emerging Agribuys (26%), ComputerJobs (46%), Co-nect (36%), iSky (25%) and Syncra Systems (31%);
This information has been compiled from the unaudited financial statements of the respective Partner Companies.
10
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and impairments/dispositions of ownership interests in Partner Companies (Continued)
Balance Sheets
As of March 31, 2004 |
||||||||||||
Core |
Emerging |
Total |
||||||||||
(in thousands) | ||||||||||||
Cash, cash
equivalents and short-term investments |
$ | 44,294 | $ | 7,306 | $ | 51,600 | ||||||
Other current assets |
54,492 | 14,138 | 68,630 | |||||||||
Non-current assets |
81,180 | 19,792 | 100,972 | |||||||||
Total assets |
$ | 179,966 | $ | 41,236 | $ | 221,202 | ||||||
Current maturities of long-term debt |
$ | 6,684 | $ | 1,934 | $ | 8,618 | ||||||
Other current liabilities |
65,764 | 20,968 | 86,732 | |||||||||
Long-term debt |
11,863 | 32,246 | 44,109 | |||||||||
Other non-current liabilities |
7,052 | 1,709 | 8,761 | |||||||||
Stockholders
equity (deficit) |
88,603 | (15,621 | ) | 72,982 | ||||||||
Total
liabilities and stockholders equity (deficit) |
$ | 179,966 | $ | 41,236 | $ | 221,202 | ||||||
Total carrying value |
$ | 44,304 | $ | 965 | $ | 45,269 | ||||||
As of December 31, 2003 |
||||||||||||
Core |
Emerging |
Total |
||||||||||
(in thousands) | ||||||||||||
Cash and cash equivalents |
$ | 50,154 | $ | 7,383 | $ | 57,537 | ||||||
Other current assets |
57,788 | 14,456 | 72,244 | |||||||||
Non-current assets |
82,784 | 20,428 | 103,212 | |||||||||
Total assets |
$ | 190,726 | $ | 42,267 | $ | 232,993 | ||||||
Current maturities of long-term debt |
$ | 9,672 | $ | 1,915 | $ | 11,587 | ||||||
Other current liabilities |
74,162 | 21,239 | 95,401 | |||||||||
Long-term debt |
13,540 | 31,808 | 45,348 | |||||||||
Other non-current liabilities |
6,263 | 1,709 | 7,972 | |||||||||
Stockholders equity (deficit) |
87,089 | (14,404 | ) | 72,685 | ||||||||
Total
liabilities and stockholders equity (deficit) |
$ | 190,726 | $ | 42,267 | $ | 232,993 | ||||||
Carrying value |
$ | 40,305 | $ | 1,004 | $ | 41,309 | ||||||
Carrying
value of eMerge Interactive |
$ | 436 | ||||||||||
Total
carrying value |
$ | 41,745 | ||||||||||
The long-term debt (including current portion thereof) of the Companys equity method Partner Companies primarily consists of secured notes due to other stockholders and other outside lenders of these Partner Companies. The debt is non-recourse to the Company and the Company has not guaranteed any of this long-term debt.
11
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and impairments/dispositions of ownership interests in Partner Companies (Continued)
Results of Operations
Three Months Ended March 31, 2004 |
||||||||||||
Core |
Emerging |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 41,005 | $ | 15,162 | $ | 56,167 | ||||||
Net loss |
$ | (1,800 | ) | $ | (5,044 | ) | $ | (6,844 | ) | |||
Equity Loss |
$ | (366 | ) | $ | (383 | ) | $ | (749 | ) | |||
Public Partner Companies |
$ | (436 | ) | |||||||||
$ | (1,185 | ) | ||||||||||
Three Months Ended March 31, 2003 |
||||||||||||
Core |
Emerging |
Total |
||||||||||
(in thousands) | ||||||||||||
Revenue |
$ | 32,139 | $ | 17,703 | $ | 49,842 | ||||||
Net loss |
$ | (6,756 | ) | $ | (4,557 | ) | $ | (11,313 | ) | |||
Equity loss |
$ | (1,406 | ) | $ | (1,397 | ) | $ | (2,803 | ) | |||
Public Partner Companies |
(1,937 | ) | ||||||||||
Other |
(185 | ) | ||||||||||
$ | (4,925 | ) | ||||||||||
12
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Acquisitions and impairments/dispositions of ownership interests in Partner Companies (Continued)
During the year ended December 31, 2003, two of the Companys public Partner Companies, Verticalnet and Universal Access, previously accounted for under the equity method of accounting were reclassified to the cost method of accounting as the Companys ownership level decreased as did the Companys ability to exercise significant influence on these entities. During the three months ended March 31, 2003, Verticalnet and Universal Access reported aggregate revenue and net loss of $22.6 million and $(6.4) million, respectively.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (Interpretation No. 46). Interpretation No. 46 addresses the consolidation by business enterprises of variable interest entities as defined in Interpretation No. 46. Interpretation No. 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, Interpretation No. 46 is applied to the enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (Interpretation No. 46-R) to address certain Interpretation No. 46 implementation issues. The effective dates and impact of Interpretation No. 46 and Interpretation No. 46-R are as follows:
(i) | Special purpose entities created prior to February 1, 2003: The Company must apply either the provisions of Interpretation No. 46 or early adopt the provisions of Interpretation No. 46-R at the end of the first interim or annual reporting period ending after December 31, 2003. | |||
(ii) | Non-special purpose entities created prior to February 1, 2003: The Company is required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. | |||
(iii) | All entities, regardless of whether a special purpose entity, that were created subsequent to January 31, 2003: The provisions of Interpretation No. 46 were applicable for variable interests in entities obtained after January 31, 2003. The Company is required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
The Company adopted FIN 46R during the three months ended March 31, 2004. There was no impact to the Companys Consolidated Financial Statements as the Companys ownership interests in its Partner Companies were excluded due to scope exceptions provided for in Interpretation No. 46-R.
Impairments Related to Equity Method Companies
The Company recorded no impairment charges during the three months ended March 31, 2004 and 2003 related to equity method Partner Companies.
Impairments related to Cost Method Companies
The Company recorded no impairment charges during the three months ended March 31, 2004 and 2003 related to cost method Partner Companies.
Available-for-sale Securities
Available-for-sale securities at March 31, 2004 includes the Companys holdings in eMerge Interactive, Universal Access, Verticalnet and other minority holdings. Subsequent to March 31, 2004, the Company sold substantially all of its eMerge Interactive holdings for approximately $2.3 million in cash.
4. Goodwill and Other Intangible Assets
As of March 31, 2004 and December 31, 2003, $45.2 million of goodwill was allocated to the Companys Core segment. Amortizable intangible assets as of March 31, 2004 and December 31, 2003 of $5.0 million and $5.7 million, respectively, are included in intangible assets in the Companys Consolidated Balance Sheets. Unamortizable intangible assets of $0.8 million, as of March 31, 2004 and December 31, 2003 are included in intangible assets in the Companys Consolidated Balance Sheets.
13
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Goodwill and Other Intangible Assets (Continued)
Other intangible assets that are being amortized over their useful lives are shown in the table below.
As of March 31, 2004 | ||||||||||||||||
Useful | Gross Carrying | (in thousands) Accumulated |
Net Carrying | |||||||||||||
Amortizable Intangible Assets |
Life |
Amount |
Amortization |
Amount |
||||||||||||
Customer Base |
2-5 years | $ | 6,860 | $ | (6,860 | ) | $ | | ||||||||
Technology |
2-5 years | 22,527 | (17,459 | ) | 5,068 | |||||||||||
$ | 29,387 | $ | (24,319 | ) | $ | 5,068 | ||||||||||
As of December 31, 2003 | ||||||||||||||||
Useful | Gross Carrying | (in thousands) Accumulated |
Net Carrying | |||||||||||||
Amortizable Intangible Assets |
Life |
Amount |
Amortization |
Amount |
||||||||||||
Customer Base |
2-5 years | $ | 6,860 | $ | (6,860 | ) | $ | | ||||||||
Technology |
2-5 years | 22,379 | (16,673 | ) | 5,706 | |||||||||||
$ | 29,239 | $ | (23,533 | ) | $ | 5,706 | ||||||||||
Amortization expense for intangible assets for the three months ended March 31, 2004 and 2003 was $0.8 million and $1.7 million, respectively.
Estimated amortization expense for the remainder of 2004 and succeeding fiscal years is as follows (in thousands):
December 31, 2004 (remainder) |
$ | 1,912 | ||
December 31, 2005 |
1,592 | |||
December 31, 2006 |
845 | |||
December 31, 2007 |
719 | |||
December 31, 2008 and thereafter |
| |||
$ | 5,068 | |||
5. Derivative Financial Instruments
In September 2001, the Company entered into a variable share forward contract to hedge 1.8 million shares of its holdings of i2 Technologies, Inc. (i2 Technologies) common stock. On April 7, 2003, the forward contract was terminated and the Company received cash of $9.6 million.
The fair value of warrants issued to the Company by Partner Companies, which are derivative instruments, are recorded in the Consolidated Balance Sheets at issuance in Ownership interests in Partner Companies and are valued using the Black-Scholes option-pricing model. Changes in the fair value of the warrants are recorded to Other income (loss), net. The estimated fair value of warrants held in Partner Companies was approximately $0.9 million at March 31, 2004 and December 31, 2003.
14
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes
The Companys deferred tax asset before valuation allowance of $643 million at March 31, 2004 consists primarily of $262 million related to the carrying value of its Partner Companies, capital loss carryforwards of $230 million and net operating loss carryforwards of approximately $148 million.
At March 31, 2004, the Company had net operating loss carryforwards of approximately $399 million that may be used to offset future taxable income. Approximately $62 million of these carryforwards are subject to significant limitations on their utilization due to ownership changes experienced by certain consolidated Partner Companies. Additionally, as a result of the convertible debt for equity exchanges (see Note 9) that were completed in 2004, an ownership change, pursuant to Section 382 of the Internal Revenue Code, of the Company has occurred. The annual limitation on the utilization of its net operating loss and capital loss carryforwards will be approximately $13 million. These carryforwards expire between 2008 and 2022.
A valuation allowance has been provided for the Companys net deferred tax asset at March 31, 2004, as the Company believes, after evaluating all positive and negative evidence, historical and prospective, that it is more likely than not that these benefits will not be realized.
7. 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 Companys primary source of comprehensive loss is net unrealized holding gains (losses) related to its available-for-sale securities. The following summarizes the components of comprehensive loss:
Three Months Ended | ||||||||
March 31, |
||||||||
2004 |
2003 |
|||||||
(unaudited) | ||||||||
(in thousands) | ||||||||
Net loss |
$ | (123,795 | ) | $ | (18,102 | ) | ||
Other comprehensive income (loss): |
||||||||
Unrealized holding gains (losses) in available-for-sale securities |
3,647 | (631 | ) | |||||
Reclassification adjustments/realized net gains on available-for-sale securities |
| 332 | ||||||
Comprehensive loss |
$ | (120,148 | ) | $ | (18,401 | ) | ||
8. Net Loss Per Share
The calculations of net loss per share were:
Three Months Ended | ||||||||
March 31, |
||||||||
2004 |
2003 |
|||||||
(unaudited) | ||||||||
(in thousands, except per share data) | ||||||||
Basic and Diluted: |
||||||||
Loss from continuing operations |
$ | (123,795 | ) | $ | (17,819 | ) | ||
Loss on discontinued operations |
| (283 | ) | |||||
Net loss |
$ | (123,795 | ) | $ | (18,102 | ) | ||
Weighted average common shares outstanding |
31,853 | 13,479 | ||||||
Loss from continuing operations |
$ | (3.89 | ) | $ | (1.32 | ) | ||
Loss on discontinued operations |
| (0.02 | ) | |||||
Net loss per share |
$ | (3.89 | ) | $ | (1.34 | ) | ||
15
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Net Loss Per Share (Continued)
If a consolidated or equity method Partner Company has dilutive options or securities outstanding, diluted net loss per share is computed first by deducting from loss from continuing operations the income attributable to the potential exercise of the dilutive options or securities of the Partner Company. For the three months ended March 31, 2004 and 2003, the impact of a Partner Companys dilutive securities has not been included as the impact would be anti-dilutive.
The following options and restricted stock grants were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive: options to purchase 790,663 and 937,094 shares of common stock at average prices of $26.83 and $58.96, respectively, outstanding as of March 31, 2004 and 2003; options to purchase 743,657 shares of common stock at an average price of $43.60 that were previously exercised, but subsequent modifications resulted in variable accounting, outstanding as of March 31, 2004 and 2003; 297,850 and 99,749 shares of unvested restricted stock outstanding as of March 31, 2004 and 2003, respectively; convertible subordinated notes convertible into 15,344 and 106,369 shares of common stock outstanding as of March 31, 2004 and 2003, respectively; and warrants to purchase 12,500 shares of common stock at $6.00 outstanding as of March 31, 2004.
9. Debt
Senior Convertible Notes
In April 2004, the Company issued $60.0 million of senior convertible notes. The notes bear interest at an annual rate of 5%, payable semi-annually, and mature in April 2009. The notes are convertible at the option of the holder, at any time on or before maturity into shares of the Companys common stock at a conversion price of $9.108 per share. Additionally, subsequent to October 8, 2004, provided that at the time of redemption, the Company is in compliance with certain other requirements, the notes may be redeemed by the Company if the Companys closing stock price exceeds $15.94 per share for at least 20 out of 30 consecutive trading days.
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. From 2001 through March 31, 2004, the Company has repurchased and extinguished $527.2 million of the original $566.3 million face value of convertible notes for $89.8 million in cash and 23.2 million shares of the Companys common stock in a series of separate transactions. As of March 31, 2004, the remaining balance of convertible notes is $39.1 million. In May 2004, the Company called the remaining $39.1 million face value of convertible notes for redemption in June 2004. The Company recorded interest expense of $2.0 million and $4.3 million during the three months ended March 31, 2004 and 2003, respectively, related to these convertible notes.
16
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Debt (Continued)
The following table summarizes the Companys cash debt repurchases and debt for equity exchanges completed during the three months ended March 31, 2004 and 2003:
Three Months | Three Months Ended | |||||||
Ended March 31, |
March 31, |
|||||||
2004 |
2003 |
|||||||
(in millions) | ||||||||
Cash repurchases of convertible debt |
||||||||
Face value of convertible
subordinated notes
repurchased |
$ | | $ | 12.0 | ||||
Cash paid |
| (5.5 | ) | |||||
Other expenses |
| (0.4 | ) | |||||
Net gain recorded |
$ | | $ | 6.1 | ||||
Debt for equity exchanges |
||||||||
Face value of convertible
subordinated notes
exchanged |
$ | 134.8 | $ | | ||||
Shares of common stock issued for
debt exchange |
15.9 | | ||||||
Fair value of common stock issued |
$ | 133.3 | $ | | ||||
Fair value of common stock
issued-original terms |
(0.4 | ) | | |||||
Accrued interest |
(0.8 | ) | | |||||
Other expenses |
0.5 | | ||||||
Net expense recorded |
$ | 132.6 | $ | | ||||
For the three months ended March 31, 2004, the Company exchanged approximately $134.8 million face value of its convertible subordinated notes for approximately 15.9 million shares of its common stock. These exchanges resulted in an expense of $132.6 million in the first quarter of 2004 in accordance with SFAS No. 84 Induced Conversions of Convertible Debt and is included in other income (loss) net in the Companys Consolidated Statements of Operations. Additionally, additional paid-in capital increased by the $134.8 million of face value of convertible notes exchanged and the $132.9 million of fair value of the 15.9 million shares issued in excess of the 0.055 million shares issuable pursuant to the original terms.
Loan and Credit Agreements
On September 30, 2002, the Company entered into a loan agreement with Comerica Bank to provide for the issuance of letters of credit (the Loan Agreement). The Loan Agreement provided for issuances of letters of credit up to $20 million subject to a cash-secured borrowing base as defined by the Loan Agreement. The Loan Agreement was extended to October 19, 2004, and the maximum amount of letters of credit authorized to be issued was reduced to $10 million. Issuance fees of 0.50% per annum of the face amount of each letter of credit will be paid to Comerica Bank subsequent to issuance. The Loan Agreement also is subject to a 0.25% per annum unused commitment fee payable to the bank quarterly. As of March 31, 2004, $0.9 million in letters of credit were outstanding under the loan agreement, and amounts secured under the Loan Agreement are included in Restricted Cash on the Companys Consolidated Balance Sheets.
Other Long-Term Debt
The Companys other long-term debt of less than $0.1 million (net of current maturities of $6.9 million) relates to its consolidated Partner Companies, and primarily consists of secured notes due to stockholders and outside lenders of CommerceQuest and capital lease commitments.
17
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Debt (Continued)
Aggregate maturities for other long-term debt at March 31, 2004 are $6.9 million in 2004, and the remaining less than $0.1 million in 2005. Additionally, accrued interest on the notes payable of $1.6 million and $1.5 million, respectively, is due in 2004 and is included in Accrued expenses on the Companys Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003.
Subsequent to March 31, 2004, the Company repurchased with cash the $6.9 million of other long-term debt and related accrued interest.
10. Discontinued Operations
In the fourth quarter of 2003, the sale of the assets of OneCoast Network Holdings, Inc. (OneCoast) occurred. In accordance with SFAS No. 144, this Partner Company has been treated as a discontinued operation. Accordingly, the operating results of this discontinued operation have been presented separately from continuing operations and include the losses recognized on disposition in the line item Loss on discontinued operations in the Companys Consolidated Statements of Operations. The Company received no cash proceeds on the transaction and recorded a loss of approximately $10.8 million. OneCoast had revenues of $5.5 million for the three months ended March 31, 2003. The Companys share of the losses of OneCoast totaled $0.3 million for the three months ended March 31, 2003.
11. Restructuring
During 2004, 2003, 2002 and 2001, the Company and its consolidated Partner Companies implemented restructuring plans designed to reduce cost structures by closing and consolidating offices, disposing of fixed assets and reducing their workforces. In 2004, the Company settled a lease obligation for $0.5 million more than originally estimated. In 2003, 2002 and 2001, the Company and its consolidated partner companies recorded $4.4 million, $10.0 million and $56.2 million, respectively, primarily consisting of additional employee severance and office closure costs related to workforce reductions. The restructuring costs include the estimated costs to close offices including costs to fulfill the Companys obligations under signed lease contracts and the write-off of leasehold improvements. In 2003, we settled a lease obligation for $7.1 million less than expected. Employee severance and related benefits include the estimated costs of cash severance and non-cash charges for the acceleration of stock options and forgiveness of interest on employee stock option loans. Cash severance was paid in a lump sum or over the shorter of a six-month period or until new employment. These charges are included in Impairment related and other in the Consolidated Statements of Operations.
Accrual
at December 31, 2003 |
Restructuring Charges/(Credits) |
Cash Payments |
Non-cash
Items Expensed Immediately/Other |
Accrual at March 31, 2004 |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Restructuring - 2004 |
||||||||||||||||||||
Office closure costs |
$ | | $ | 546 | $ | | $ | | $ | 546 | ||||||||||
Employee severance and related benefits |
| 107 | | | 107 | |||||||||||||||
| 653 | | | 653 | ||||||||||||||||
Restructuring 2003 |
||||||||||||||||||||
Office closure costs |
$ | 1,928 | $ | | $ | | $ | | $ | 1,928 | ||||||||||
Employee severance and related benefits |
326 | | (231 | ) | | 95 | ||||||||||||||
2,254 | | (231 | ) | | 2,023 | |||||||||||||||
Restructuring 2002 and 2001 |
||||||||||||||||||||
Office closure costs |
1,401 | | (179 | ) | (3 | ) | 1,219 | |||||||||||||
Employee severance and related benefits |
130 | | | (127 | ) | 3 | ||||||||||||||
1,531 | | (179 | ) | (130 | ) | 1,222 | ||||||||||||||
$ | 3,785 | $ | 653 | $ | (410 | ) | $ | (130 | ) | $ | 3,898 | |||||||||
18
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Segment Information
The Companys reportable segments using the management approach under SFAS No. 131, Disclosure About Segments of a Business Enterprise and Related Information, consist of two operating segments, the core (Core) operating segment and the emerging (Emerging) operating segment. Each segment includes the results of the Companys Consolidated Partner Companies and records the Companys share of earnings and losses of Partner Companies accounted for under the equity method of accounting and captures our basis in the assets of all of our partner companies.
The Core operating segment includes those partner companies in which the Companys management takes a very active role in providing strategic direction and management assistance. The Emerging operating segment includes investments in companies that are, in general, managed to provide the greatest near term stockholder value.
iSky and Syncra Systems are included in the Emerging category for all periods. Previously, iSky and Syncra Systems were included in the Core category.
Approximately 31% and 29% of the Companys consolidated revenue for the three months ended March 31, 2004 and 2003 respectively, relates to sales generated in Europe.
The following summarizes the selected information related to the Companys segments. All significant intersegment activity has been eliminated. Assets are owned or allocated assets used by each operating segment.
Segment Information
(in thousands)
Reconciling Items |
||||||||||||||||||||||||||||
Discontinued | ||||||||||||||||||||||||||||
Total | Operations and | Consolidated | ||||||||||||||||||||||||||
Core |
Emerging |
Segment |
Dispositions |
Corporate |
Other |
Results |
||||||||||||||||||||||
Three Months Ended March 31, 2004 |
||||||||||||||||||||||||||||
Revenues |
$ | 12,146 | $ | | $ | 12,146 | $ | | $ | | $ | | $ | 12,146 | ||||||||||||||
Net loss |
$ | (5,054 | ) | $ | (383 | ) | $ | (5,437 | ) | $ | | $ | (5,157 | ) | $ | (113,201) | * | $ | (123,795 | ) | ||||||||
Assets |
$ | 150,309 | $ | 10,019 | $ | 160,328 | $ | 278 | $ | 77,201 | $ | | $ | 237,807 | ||||||||||||||
Capital Expenditures |
$ | (135 | ) | $ | | $ | (135 | ) | $ | | $ | (2 | ) | $ | | $ | (137 | ) | ||||||||||
Three Months Ended March 31, 2003 |
||||||||||||||||||||||||||||
Revenues |
$ | 19,193 | $ | 202 | $ | 19,395 | $ | | $ | | $ | | $ | 19,395 | ||||||||||||||
Net loss |
$ | (13,861 | ) | $ | (1,640 | ) | $ | (15,501 | ) | $ | (468 | ) | $ | (8,981 | ) | $ | 6,848 | * | $ | (18,102 | ) | |||||||
Assets |
$ | 184,157 | $ | 18,181 | $ | 202,338 | $ | 4,105 | $ | 97,375 | $ | | $ | 303,818 | ||||||||||||||
Capital Expenditures |
$ | (67 | ) | $ | | $ | (67 | ) | $ | | $ | | $ | | $ | (67 | ) |
*Other reconciling items to net loss are as follows: | ||||||||
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
Impairment (Note 3) |
$ | | $ | | ||||
Minority interest |
630 | 1,434 | ||||||
Other income (loss) |
(113,831 | ) | 5,414 | |||||
$ | (113,201 | ) | $ | 6,848 | ||||
19
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Parent Company Financial Information
Parent company financial information is provided to present the financial position and results of operations of the Company and its wholly-owned subsidiaries 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 Companys share of the consolidated Partner Companies losses is included in Equity loss in the Parent Company Statements of Operations for all periods presented based on the Companys ownership percentage in each period. The carrying value of the consolidated companies as of March 31, 2004 and December 31, 2003 is included in Ownership interests in Partner Companies in the Parent Company Balance Sheets.
Parent Company Balance Sheets
As of March 31, |
As of December 31, |
|||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 54,052 | $ | 49,771 | ||||
Restricted cash |
850 | 850 | ||||||
Other current assets |
7,334 | 2,481 | ||||||
Current assets |
62,236 | 53,102 | ||||||
Ownership interests in Partner Companies |
100,259 | 100,367 | ||||||
Available for sale securities |
10,582 | 6,714 | ||||||
Other |
3,461 | 4,323 | ||||||
Total assets |
$ | 176,538 | $ | 164,506 | ||||
Liabilities and stockholders equity (deficit) |
||||||||
Current maturities of convertible subordinated notes |
$ | 39,111 | $ | 173,919 | ||||
Other current liabilities |
8,718 | 9,881 | ||||||
Total current liabilities |
47,829 | 183,800 | ||||||
Stockholders equity (deficit) |
128,709 | (19,294 | ) | |||||
Total liabilities and stockholders equity (deficit) |
$ | 176,538 | $ | 164,506 | ||||
Parent Company Statements of Operations
Three Months ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Revenue |
$ | | $ | | ||||
Operating expenses |
||||||||
General and administrative |
3,343 | 5,032 | ||||||
Impairment related and other |
546 | | ||||||
Total operating expenses |
3,889 | 5,032 | ||||||
(3,889 | ) | (5,032 | ) | |||||
Other income (loss), net |
(113,831 | ) | 5,414 | |||||
Interest expense, net |
(1,268 | ) | (3,949 | ) | ||||
Loss before income taxes and equity loss |
(118,988 | ) | (3,567 | ) | ||||
Equity loss |
(4,807 | ) | (14,535 | ) | ||||
Net loss |
$ | (123,795 | ) | $ | (18,102 | ) | ||
20
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Parent Company Financial Information (Continued)
Parent Company Statements of Cash Flows
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Net cash used in operating activities |
$ | (3,875 | ) | $ | (1,015 | ) | ||
Investing Activities |
||||||||
Capital expenditures |
(2 | ) | | |||||
Proceeds from sales of ownership interests in Partner
Companies |
13,156 | | ||||||
Acquisitions of ownership interests in Partner Companies, net |
(4,998 | ) | (11,768 | ) | ||||
Proceeds from maturities of short-term investments |
| 4,990 | ||||||
Cash provided by (used in) investing activities |
8,156 | (6,778 | ) | |||||
Financing Activities |
||||||||
Repurchase of convertible subordinated notes |
| (5,529 | ) | |||||
Cash used in financing activities |
| (5,529 | ) | |||||
Net Increase (Decrease) in Cash and Cash Equivalents |
4,281 | (13,322 | ) | |||||
Cash and cash equivalents at beginning of period |
49,771 | 81,875 | ||||||
Cash and Cash Equivalents at end of period |
$ | 54,052 | $ | 68,553 | ||||
Other Income (Loss), net
Other income (loss), net consists of the effect of transactions and other events incidental to the Companys ownership interests in its Partner Companies and its operations in general.
Three Months Ended | ||||||||
March 31, |
||||||||
2004 |
2003 |
|||||||
Gain (Loss) on Debt Extinquishment (Note 9) |
$ | (132,559 | ) | $ | 6,127 | |||
Gain on
sales of Ownership interests in Partner
Companies |
18,956 | | ||||||
Realized losses on available-for-sale securities |
| (332 | ) | |||||
Other |
(228 | ) | (381 | ) | ||||
(113,831 | ) | 5,414 | ||||||
Consolidated
Partner Companies |
92 | 360 | ||||||
$ | (113,739 | ) | $ | 5,774 | ||||
During the three months ended March 31, 2004, the Company sold the majority of its ownership interest in eMerge Interactive. The Company received $12.4 million in cash proceeds. Additionally, during the three months ended March 31, 2004, the Company sold its entire interest in Onvia.com, Inc. (Onvia.com), receiving $0.8 million in cash in March 2004 and $5.8 million in April 2004 when the trade settled for this portion of the disposition. The $5.8 million receivable is included in Other current assets in the Companys Consolidated Balance Sheets at March 31, 2004.
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth elsewhere in this Report and the risks discussed in our other SEC filings. The following discussion should be read in conjunction with our audited Consolidated Financial Statements and related notes thereto included in our Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 14, 2004 and amended on April 14, 2004.
Although we refer in this Report to 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, 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 own significant interests in information technology and e-commerce companies, many of which have generated net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While many of 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 or infrequently occurring transactions and other events relating to our ownership interests in partner companies. These transactions and events are described in more detail in our Notes to Consolidated Financial Statements and include dispositions of, and changes to, our partner company ownership interests, dispositions of our holdings of available-for-sale securities and debt extinguishments.
Introduction
The Consolidated Financial Statements include the consolidated accounts of Internet Capital Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly and majority-owned (Internet Capital Group, Inc. and all its subsidiaries, hereafter we, ICG, the Company or Internet Capital Group) and have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP).
Internet Capital Group is an information technology company actively engaged in delivering software solutions and services that are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. The Company operates through a network of partner companies that deliver those solutions to customers. The various interests that we acquire in our partner companies are accounted for under one of three accounting methods: consolidation, equity method or cost method. The applicable accounting method is generally determined based on our voting interest in a partner company. Generally, if we own more than 50% of the outstanding voting securities of a partner company, and for which other shareholders do not possess the right to participate in significant management decisions, a partner companys accounts are reflected within our consolidated financial statements. If we own between 20% and 50% of the outstanding securities, a partner companys accounts are not reflected within our consolidated financial statements; however, our share of the earnings or losses of the partner company is reflected in the caption Equity loss in our consolidated statements of operations. 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.
Information for all periods presented below reflects the grouping of ICG partner companies into two segments, consisting of the Core segment and the Emerging segment. The Core operating segment includes those partner companies in which the Companys management takes a very active role in providing strategic direction and management assistance. The Emerging operating segment includes investments in companies that are, in general, managed to provide the greatest near-term stockholder value (Emerging). During fiscal 2003, one of our consolidated Core partner companies, OneCoast Network Holdings, Inc. (OneCoast), disposed of substantially all of its assets. The historical results of OneCoast are presented as Discontinued Operations. Additionally, during fiscal 2003 seven of our Emerging partner companies ceased operations. The partner companies included within the segments as of March 31, 2004 are consistently the same 29 partner companies for the 2004 and 2003 period.
Loss from continuing operations for the three months ended March 31, 2004 totaled $123.8 million and included net charges totaling $114.6 million consisting of the following: (i) charges in accordance with Statement of Financial Accounting Standards (SFAS) No. 84, Induced Conversions of Convertible Debt, of $132.6 million relating to our 2004 convertible debt for equity
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exchanges (ii) gains on the disposition of partner companies/other of $18.7 million and (iii) net restructuring charges of $0.7 million.
Loss from continuing operations for the three months ended March 31, 2003 totaled $17.8 million and included net benefits totaling $5.2 million consisting of the following: (i) gains on the retirement of debt of $6.1 million, (ii) losses on the disposition of partner companies/other of $0.4 million and (iii) restructuring charges of $0.5 million.
Liquidity and Capital Resources
The following table summarizes certain balance sheet information for the Parent Company, Internet Capital Group, Inc.:
March 31, 2004 |
December 31, 2003 |
|||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 54,052 | $ | 49,771 | ||||
Available for sale securities |
$ | 10,582 | $ | 6,714 | ||||
Convertible subordinated notes due December 2004 |
$ | (39,111 | ) | $ | (173,919 | ) | ||
Shares of common stock outstanding |
38,057 | 21,839 |
In May 2004, we issued $60 million of senior convertible notes due in April 2009. We will use the net proceeds to redeem the remaining $39.1 million of December 2004 convertible subordinated notes, general operation requirements and fundings to new and existing partner companies.
We believe existing cash, cash equivalents and short-term investments, proceeds from the potential sales of all or a portion of our interests in certain partner companies and net proceeds from the $60 million senior convertible notes are expected to be sufficient to fund our cash requirements through at least the second quarter of 2005, including commitments to existing partner companies, debt obligations and general operations requirements.
As of March 31, 2004, our available-for-sale securities consist of: 1,053,964 shares of eMerge Interactive common stock, 2,917,794 shares of Verticalnet common stock and 1,083,206 shares of Universal Access common stock.
In the first quarter of 2004, we sold 1,559,481 shares of Onvia.com common stock for $6.5 million in cash, of which $5.8 million was received in early April 2004.
At May 10, 2004, we were obligated for no funding and guarantee commitments to existing partner companies. If a certain consolidated partner company achieves a fair market value in excess of $1.0 billion, we will be obligated to pay, in cash or stock at our option, 4% of the partner companys fair market value in excess of $1.0 billion, up to $70 million to a venture capital firm. One of our executive officers was a limited partner of this venture capital firm. This contingent obligation will expire on the earlier to occur of May 31, 2005 or an unaffiliated company sale, if the valuation milestone is not achieved. Currently, the fair market value of this partner company is well below $1.0 billion. We will continue to evaluate acquisition opportunities and may acquire additional ownership interests in new and existing partner companies in the next twelve months; however, such acquisitions will generally 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 stockholders may experience significant dilution.
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The following table summarizes our and our consolidated subsidiaries cash and cash equivalents, restricted cash and short-term investments:
Summary of Liquidity
March 31, 2004 |
December 31, 2003 |
|||||||||||||||||||||||
ICG Parent | Consolidated | ICG Parent | Consolidated | |||||||||||||||||||||
Company Level |
Subsidiaries |
Total |
Company Level |
Subsidiaries |
Total |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents |
$ | 54,052 | $ | 25,728 | $ | 79,780 | $ | 49,771 | $ | 27,810 | $ | 77,581 | ||||||||||||
Restricted Cash |
850 | 952 | 1,802 | 850 | 969 | 1,819 | ||||||||||||||||||
Short-term investments |
| 9 | 9 | | 9 | 9 | ||||||||||||||||||
Total |
$ | 54,902 | $ | 26,689 | $ | 81,591 | $ | 50,621 | $ | 28,788 | $ | 79,409 | ||||||||||||
Consolidated working capital improved $142.1 million from December 31, 2003 to March 31, 2004 primarily due to the repurchase and extinguishment of $134.8 million of convertible notes through the issuance of 15.9 million shares of our common stock.
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
Net cash used in operating activities |
$ | (6,965 | ) | $ | (8,710 | ) | ||
Net cash provided by (used in) investing activities |
$ | 9,171 | $ | (3,345 | ) | |||
Net cash used in financing activities |
$ | (13 | ) | $ | (5,550 | ) |
Net cash used in operating activities was approximately $7.0 million for the three months ended March 31, 2004 compared to $8.7 million during the comparable 2003 period. The decrease is primarily the result of the decreased losses at our consolidated partner companies.
Net cash provided by investing activities during the three months ended March 31, 2004 was $9.2 million versus net cash used in investing activities of $3.3 million during the comparable 2003 period. The increase is primarily due to increased proceeds from partner company dispositions and reduced acquisitions of ownership interests in 2004 versus 2003.
Net cash used in financing activities was less than $0.1 million for the three months ended March 31, 2004 versus $5.6 million during the comparable 2003 period. The decrease in cash used is principally the result of $5.5 million being used to repurchase $12.0 million of principal amount of our convertible notes in 2003.
We and our consolidated subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. We do not expect the ultimate liability with respect to these actions will materially affect our financial position or cash flows.
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Contractual Cash Obligations and Commercial Commitments
The following table summarizes our contractual cash obligations and commercial commitments as of March 31, 2004:
Payments due by period |
||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total |
1 Year |
1-3 Years |
3-5 Years |
5 years |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Convertible subordinated notes (1) |
$ | 39,111 | $ | 39,111 | $ | | $ | | $ | | ||||||||||
Funding commitments/guarantees (2) |
2,605 | 2,605 | | | | |||||||||||||||
Operating leases |
18,905 | 9,237 | 6,025 | 1,442 | 2,201 | |||||||||||||||
Other borrowings (2) |
6,960 | 6,930 | 30 | | | |||||||||||||||
$ | 67,581 | $ | 57,883 | $ | 6,055 | $ | 1,442 | $ | 2,201 | |||||||||||
(1) | Subsequent to March 31, 2004, we issued $60.0 million of new senior convertible notes due April 2009. We will use the net proceeds to redeem the remaining $39.1 million convertible subordinated notes due December 2004, general operations requirements and fundings to new and existing Partner Companies. | |||
(2) | Subsequent to March 31, 2004, we repurchased $6.9 million of Other borrowings, and the $2.6 million in Funding commitments/guarantees has been liquidated. |
Off-Balance Sheet Arrangements
We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Results of Operations
As of March 31, 2004, we owned interests in 29 partner companies that are categorized below based on segment and method of accounting.
CORE PARTNER COMPANIES (%Voting Interest) |
||||
Consolidated |
Equity |
Cost |
||
CommerceQuest (80%)
|
CreditTrade (30%) | Blackboard (15%) | ||
ICG Commerce (75%)
|
eCredit (40%) | eMerge Interactive (2%) | ||
Freeborders (48%) | Universal Access (9%) | |||
GoIndustry (54%) | Verticalnet (12%) | |||
Investor Force (38%) | ||||
LinkShare (40%) | ||||
Marketron (40%) | ||||
StarCite (17%) |
EMERGING PARTNER COMPANIES (%Voting Interest) |
||||
Consolidated |
Equity |
Cost |
||
Agribuys (26%) | Anthem (9%) | |||
ComputerJobs.com (46%) | Arbinet (2%) | |||
Co-nect (36%) | Axxis (9%) | |||
iSky (25%) | Captive Capital (5%) | |||
Syncra Systems (31%) | ClearCommerce (11%) | |||
Emptoris (9%) | ||||
Entegrity Solutions (2%) | ||||
Jamcracker (2%) | ||||
Mobility Technologies (3%) | ||||
Tibersoft (5%) |
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The following summarizes the unaudited selected financial information related to our segments. Each segment includes the results of our consolidated partner companies and records our share of the earnings and losses of partner companies accounted for under the equity method of accounting. The partner companies included within the segments are consistently the same 29 partner companies for the three months ended March 31, 2004 and 2003. The method of accounting for any particular partner company may change based on our ownership interest.
Discontinued operations and dispositions are those partner companies that have been sold or ceased operations and are no longer included in a segment for all periods presented. Corporate expenses represent our general and administrative expenses of supporting the partner companies and operating as a public company. The measure of segment net loss reviewed by us does not include items such as impairment related charges, income taxes and accounting changes, which are reflected in other reconciling items in the information that follows.
Segment Information
(in thousands)
Reconciling Items |
||||||||||||||||||||||||||||
Discontinued | ||||||||||||||||||||||||||||
Total | Operations and | Consolidated | ||||||||||||||||||||||||||
Core |
Emerging |
Segment |
Dispositions |
Corporate |
Other |
Results |
||||||||||||||||||||||
For The Three
Months Ended March 31, 2004 |
||||||||||||||||||||||||||||
Revenues |
$ | 12,146 | $ | | $ | 12,146 | $ | | $ | | $ | | $ | 12,146 | ||||||||||||||
Net Income (loss) |
$ | (5,054 | ) | $ | (383 | ) | $ | (5,437 | ) | $ | | $ | (5,157 | ) | $ | (113,201 | ) | $ | (123,795 | ) | ||||||||
For The Three
Months Ended March 31, 2003 |
||||||||||||||||||||||||||||
Revenues |
$ | 19,193 | $ | 202 | $ | 19,395 | $ | | $ | | $ | | $ | 19,395 | ||||||||||||||
Net income (loss) |
$ | (13,861 | ) | $ | (1,640 | ) | $ | (15,501 | ) | $ | (468 | ) | $ | (8,981 | ) | $ | 6,848 | $ | (18,102 | ) |
For the Three Months Ended March 31, 2004 vs. 2003
Results of Operations Core Companies
The following presentation of our Results of Operations Core Companies includes the results of our consolidated Core partner companies and our share of the results of our equity method Core partner companies.
Three Months Ended March 31, |
||||||||
Selected data: |
2004 |
2003 |
||||||
(in thousands) | ||||||||
Revenue |
$ | 12,146 | $ | 19,193 | ||||
Cost of revenue |
(7,434 | ) | (11,845 | ) | ||||
Selling, general and administrative |
(5,533 | ) | (10,342 | ) | ||||
Research and development |
(2,495 | ) | (5,461 | ) | ||||
Amortization of other intangibles |
(786 | ) | (1,724 | ) | ||||
Impairment related and other |
(107 | ) | (537 | ) | ||||
Operating expenses |
(16,355 | ) | (29,909 | ) | ||||
Interest and other |
(43 | ) | 198 | |||||
Equity loss |
(802 | ) | (3,343 | ) | ||||
Net loss |
$ | (5,054 | ) | $ | (13,861 | ) | ||
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Revenue
Revenue decreased $7.1 million from $19.2 million in 2003 to $12.1 million in 2004. The deconsolidation in the second quarter of 2003 of two Core companies, eCredit and Freeborders reduced revenue $2.6 million versus 2003. During 2003, a customer of one of our consolidated partner companies notified the consolidated partner company of the exercise of its right to terminate its arrangement to purchase services from our consolidated partner company effective January 1, 2004. Revenue from this customer totalled $3.3 million in the 2003 period versus nil in the 2004 period. Revenue from this customer totaled $11.9 million, $10.4 million and $11.2 million in 2003, 2002 and 2001, respectively. The residual decrease is primarily due to additional reduced revenues at ICG Commerce.
Operating Expenses
Operating expenses decreased $13.5 million from $29.9 million in 2003 to $16.4 million in 2004. As a result of a challenging market for enterprise software sales in 2003 and the associated reduction in revenues, CommerceQuest reduced operating expenses $2.1 million in 2004 as compared to 2003. The deconsolidation in 2003 of two Core Companies, eCredit and Freeborders, reduced operating expenses $5.6 million. The residual $5.8 million decrease is primarily the result of ICG Commerce significantly reducing operating expenses.
Equity Loss
The following table reconciles the components of equity loss for segment reporting purposes to equity loss for consolidated financial statement reporting:
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
Share of loss public companies |
$ | (436 | ) | $ | (1,937 | ) | ||
Share of loss private companies |
(366 | ) | (1,406 | ) | ||||
Segment subtotal |
$ | (802 | ) | $ | (3,343 | ) | ||
Impairments see subsection below |
| | ||||||
$ | (802 | ) | $ | (3,343 | ) | |||
Our share of the net losses of eMerge Interactive, Universal Access and Verticalnet decreased from $1.9 million during the 2003 period to $0.4 million during the 2004 period. As our ownership level in Universal Access and Verticalnet fell below 20% during the third quarter of 2003, these companies are no longer accounted for under the equity method of accounting. This decreased equity loss by $1.4 million as compared to 2003. During the three months ended March 31, 2004, we sold a portion of our ownership interest and terminated a voting agreement relating to eMerge Interactive. Accordingly, as of March 31, 2004, these three public Core companies are no longer accounted for under the equity method of accounting.
The total revenue of our eight private core equity method companies improved from $32.1 million in the 2003 period to $41.0 million in the 2004 period. The 28% improvement of 2004 versus 2003 is primarily the result of increased revenue at our companies involved with affiliate marketing, credit markets, online meetings and online auctions.
The total net losses of our eight private core equity method companies in the aggregate improved from $6.8 million in the 2003 period to $1.8 million in the 2004 period. The 74% improvement of 2004 versus 2003 is primarily the result of increased revenues and reduced operating expenses. Accordingly, our share of the net losses of these companies also improved over these periods. As of March 31, 2004, three of these eight equity method companies have carrying values that have been reduced to zero. Accordingly, we did not record our share of these companies losses for the 2004 period. Had we recorded our share of these companies earnings, the equity loss would have increased by approximately $1.0 million in the 2004 period. We may not record our share of these companies losses in 2004 until such time as our share of income equals the unrecorded losses or the partner companies equity transactions result in an adjustment of our investment. Our share of the net losses of those companies whose carrying value is zero at March 31, 2004 totaled $4.4 million in 2003. Additionally, our equity loss was increased during the 2004 period by approximately $0.6 million by changes in the method of accounting for a partner company.
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Results of Operations Emerging Companies
The following presentation of our Results of Operations Emerging Companies includes the results of our consolidated Emerging partner companies and our share of the results of our equity method emerging partner companies.
Three Months Ended March 31, |
||||||||
Selected data: |
2004 |
2003 |
||||||
(in thousands) | ||||||||
Revenue |
$ | | $ | 202 | ||||
Operating expenses |
| (445 | ) | |||||
Interest and other |
| | ||||||
Equity loss |
(383 | ) | (1,397 | ) | ||||
Net loss |
$ | (383 | ) | $ | (1,640 | ) | ||
Our consolidated emerging companies have generated negligible revenues to date. The period over period decreases in operating expenses is due to the deconsolidation of Captive Capital during the second quarter of 2003. Equity loss decreased from the 2003 period to the 2004 period primarily as a result of our carrying value in the partner companies being reduced to zero.
Discontinued Operations and Dispositions
The following is a summary of the components included in Discontinued Operations and Dispositions, a reconciling item for segment reporting purposes:
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
Net loss attributable to Discontinued Operations |
$ | | $ | (283 | ) | |||
Net loss attributable to equity method companies disposed of |
| (185 | ) | |||||
$ | | $ | (468 | ) | ||||
In the fourth quarter of 2003, the sale of the assets of OneCoast occurred. In accordance with SFAS No. 144, this partner company has been treated as a discontinued operation. Accordingly, the operating results of this discontinued operation has been presented separately from continuing operations and include the gains or losses recognized on disposition. We received no cash proceeds on the transaction and recorded a loss of approximately $10.8 million. Our share of the losses of OneCoast totaled $0.3 million for the three months ended March 31, 2003.
The impact to our consolidated results of other consolidated and equity method partner companies we have disposed of our ownership interest in or have ceased operations during 2004 and 2003 is also included in the caption Dispositions for segment reporting purposes.
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Corporate
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
General and administrative |
$ | (3,343 | ) | $ | (5,032 | ) | ||
Impairment related and other |
(546 | ) | | |||||
Interest expense, net |
(1,268 | ) | (3,949 | ) | ||||
Total corporate operating expenses |
$ | (5,157 | ) | $ | (8,981 | ) | ||
General and Administrative
Our general and administrative expenses decreased $1.7 million from 2003 to 2004 primarily due to a reduction in stock-based compensation from $1.1 million in 2003 to $0.3 million in 2004 as a result of more restricted stock vesting in 2003, as well as changes recorded relating to certain modifications of certain stockholder loans. The residual decrease is the result of our continued restructuring of our operations.
Restructuring (Impairment Related and Other)
During the first quarter of 2004, we settled a lease obligation for more than we had estimated, resulting in a charge of $0.5 million.
Interest Income/Expense
The decrease in interest expense, net is primarily attributable to the reduction in convertible notes outstanding at March 31, 2004 versus 2003.
Other
Three Months Ended March 31, |
||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Other income (loss) (Note 13) |
$ | (113,831 | ) | $ | 5,414 | |||
Minority interest |
630 | 1,434 | ||||||
$ | (113,201 | ) | $ | 6,848 | ||||
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our investments in our partner companies, marketable securities, revenues, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are important to the presentation of our financial statements and require the most difficult, subjective and complex judgments.
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Valuation of Goodwill, Intangible Assets and Ownership Interests in Partner Companies
We perform on-going business reviews and perform annual goodwill impairment tests in accordance with SFAS No. 142 and other impairments tests in accordance with APB No. 18 Equity Method Investments and SFAS No. 144 and, based on quantitative and qualitative measures, assess the need to record impairment losses on goodwill, intangible assets and our ownership interests in our partner companies when impairment indicators are present. Where impairment indicators are present, we determine the amount of the impairment charge as the excess of the carrying value over the fair value. We determine fair value based on a combination of the discounted cash flow methodology, which is based upon converting expected future cash flows to present value, and the market approach, which includes analysis of market price multiples of companies engaged in lines of business similar to the company being evaluated. The market price multiples are selected and applied to the company based on relative performance, future prospects and risk profile of the company in comparison to the guideline companies. Significant assumptions relating to future operating results must be made when estimating the future cash flows associated with these companies. Significant assumptions relating to achievement of business plan objectives and milestones must be made when evaluating whether impairment indicators are present. Should unforeseen events occur or should operating trends change significantly, additional impairment losses could occur.
Revenue
We may assume all or a part of a customers procurement function as part of sourcing arrangements. Typically, in these engagements, we are paid a fee based on a percentage of the amount spent by our customers purchasing department in the specified areas we manage, a fixed fee agreed upon in advance, and in many cases we have the opportunity to earn additional fees based on the level of savings achieved for customers. We recognize fee income as earned and any additional fees as we become entitled to them. In these arrangements, we do not assume inventory, warranty or credit risk for the goods or services a customer purchases, but we do negotiate the arrangements between a customer and supplier.
We recognize license revenue when a signed contract or purchase order exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the Residual Method prescribed by Statements of Position No. 98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.
We assess whether the fee is fixed or determinable and collection is probable at the time of the transaction. In determining whether the fee is fixed or determinable, we compare the payment terms of the transaction to our normal payment terms. If a significant portion of a fee is due after our normal payment terms, we account for the fee as not being fixed or determinable and recognize revenue as the fees become due. We assess whether collection is probable based on a number of factors, including the customers past transaction history and credit-worthiness. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.
First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. For such arrangements with multiple obligations, we allocate revenue to each component of the arrangement based on the fair value of the undelivered elements. Fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts. Maintenance revenue is deferred and recognized ratably over the term of the maintenance and support period. Fair value of services, such as consulting or training, is based upon separate sales of these services. Consulting and training services are generally billed based on hourly rates and revenues are generally recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of our products and generally do not include significant customization to or development of the underlying software code.
Deferred Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets is charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.
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Commitments and Contingencies
From time to time, we are a defendant or plaintiff in various legal actions that arise in the normal course of business. We are also a guarantor of various third-party obligations and commitments. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful analysis of each individual matter. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (Interpretation No. 46). Interpretation No. 46 addresses the consolidation by business enterprises of variable interest entities as defined in Interpretation No. 46. Interpretation No. 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, Interpretation No. 46 is applied to the enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (Interpretation No. 46-R) to address certain Interpretation No. 46 implementation issues. The effective dates and impact of Interpretation No. 46 and Interpretation No. 46-R are as follows:
(i) | Special purpose entities created prior to February 1, 2003: We must apply either the provisions of Interpretation No. 46 or early adopt the provisions of Interpretation No. 46-R at the end of the first interim or annual reporting period ending after December 31, 2003. | |||
(ii) | Non-special purpose entities created prior to February 1, 2003: We are required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. | |||
(iii) | All entities, regardless of whether a special purpose entity, that were created subsequent to January 31, 2003: The provisions of Interpretation No. 46 were applicable for variable interests in entities obtained after January 31, 2003. We are required to adopt Interpretation No. 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
We adopted FIN46R during the three months ended March 31, 2004. The adoption resulted in no impact to our consolidated financial statements as our ownership interests in our partner companies were excluded due to scope exceptions provided for in Interpretation No. 46-R.
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 also includes required disclosures for financial instruments within its scope. For us, SFAS No. 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise at July 1, 2003, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, SFAS No. 150 will be effective for us on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. We currently do not have any financial instruments that are within the scope of SFAS No. 150.
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Risk Factors
Forward-looking statements made with respect to our financial condition and results of operations and business in this Report and those made from time to time by us through our senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and projections about future events but 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.
Factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those anticipated in forward-looking statements include, but are not limited to, factors discussed elsewhere in this Report and include among other things:
| development of the e-commerce and information technology markets; | ||
| capital spending by enterprises and customers; | ||
| our partner companies ability to compete successfully against competitors; | ||
| our ability to maximize value in connection with divestitures; | ||
| our ability to retain key personnel; | ||
| our ability to effectively manage existing capital resources; | ||
| our ability and our partner companies ability to access the capital markets; and | ||
| our outstanding indebtedness. |
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. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Report might not occur.
Our business involves a number of risks, some of which are beyond our control. You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this Report before deciding to invest in our shares. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties that we do not currently know or that we currently believe to be immaterial may also adversely affect our business.
Risks Particular to Internet Capital Group
If our common stock ceases to be listed for trading on the Nasdaq SmallCap Market, the price and liquidity of our common stock may be adversely affected.
If our common stock ceases to be listed for trading on the Nasdaq SmallCap Market, sales of our common stock would likely be conducted only in the over-the-counter market. This could have a negative impact on the price and liquidity of our common stock.
Companies listed on the Nasdaq SmallCap Market are required to maintain a minimum bid price of $1.00 per share. When we transferred from the Nasdaq National Market to the Nasdaq SmallCap Market, our securities were trading below $1.00. As a result of our transfer to the Nasdaq SmallCap Market, we were granted an initial grace period lasting until October 22, 2002 to regain compliance with the $1.00 per share minimum bid price requirement. On October 23, 2002, we received a letter from Nasdaq informing us that, although we did not regain compliance during the initial grace period, we qualified for and would be provided with a second grace period, lasting 180 calendar days, to regain compliance. On April 21, 2003, we received a letter from Nasdaq informing us that although we did not regain compliance during the second grace period, we qualified for and would be provided with a third grace period lasting 90 calendar days to regain compliance. On July 23, 2003, we received a delisting determination from the Nasdaq staff stating that we had not regained compliance with the Nasdaq SmallCap Markets $1.00 per share minimum bid price requirement.
We appealed this determination and on October 10, 2003, we were granted an exception to the bid price requirement through December 1, 2003. On December 15, 2003 we were granted an exception to the bid price requirement through January 30, 2004 to allow for developments in the SEC rulemaking process with respect to a proposed rule that would afford SmallCap Market issuers additional grace periods to remedy a minimum bid price deficiency. Under the proposal, an issuer could receive up to a two-year grace
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period provided that it continued to meet certain listing requirements and provided that it committed to seek stockholder approval for a reverse stock split to address the bid price deficiency at or before a meeting scheduled to occur no later than two years from the original notification of bid price deficiency. ICGs two-year deadline expired on April 24, 2004.
In December 2003, the SEC approved the proposed rule change regarding grace periods. Based on the SECs approval of this proposed rule change, Nasdaq notified the Company that in order to remain listed, it must commit to seeking stockholder approval for a reverse stock split sufficient to remedy its bid price deficiency prior to April 24, 2004. On January 9, 2004, the Company notified Nasdaq of its determination that, if its stock price does not regain compliance with the SmallCap Markets minimum bid price requirement, it will seek to obtain stockholder approval by April 24, 2004 for a reverse stock split sufficient to support the Companys compliance with the requirement. Based on this determination, Nasdaq granted ICG an exception to the bid price requirement through April 24, 2004. The Company obtained stockholder approval on April 23, 2004 to grant discretionary authority to our Board to effect a reverse stock split. On April 26, 2004, our Board approved the amendment of our restated certificate of incorporation to effect a reverse stock split of our common stock based upon a ratio of one-for-twenty. The record date for the reverse stock split was May 7, 2004 and the reverse stock split was effective as of the close of trading on May 7, 2004.
Our common stock may be delisted from the Nasdaq SmallCap Market even though the reverse stock split has been authorized and implemented.
There can be no assurance that after implementing the reverse stock split that the Company will be able to achieve and maintain compliance with the Nasdaq SmallCap Markets $1.00 per share minimum bid price requirement. If the Company fails to achieve compliance with such requirement subsequent to the reverse stock split, our common stock may cease to be listed for trading on the Nasdaq SmallCap Market.
There can be no assurance that the total market capitalization of our common stock (the aggregate value of all our common stock at the then current market price) after the reverse stock split will be equal to or greater than the total market capitalization before the reverse stock split or that the per share market price of our common stock following the reverse stock split will either equal or exceed the then current per share market price.
There can be no assurance that the market price per share of our common stock after the reverse stock split will remain unchanged or increase in proportion to the reduction in the number of old shares of our common stock outstanding before the reverse stock split. Accordingly, the total market capitalization of our common stock after the reverse stock split may be lower than the total market capitalization before the reverse stock split and, in the future, the market price of our common stock following the reverse stock split may not exceed or remain higher than the market price prior to the reverse stock split.
After the reverse stock split is effected, the resulting per-share stock price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors.
While we believe that a higher stock price may help generate investor interest, there can be no assurance that the reverse stock split will result in a per share price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds.
A decline in the market price of our common stock after the reverse stock split may result in a greater percentage decline than would occur in the absence of the reverse stock split, and the liquidity of our common stock could be adversely affected following the reverse stock split.
If the market price of our common stock declines, the percentage decline may be greater than would occur in the absence of the reverse stock split, and the liquidity of our common stock could be adversely affected.
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Our outstanding indebtedness could negatively impact our future prospects.
In April 2004, we issued $60.0 million of senior convertible notes due in April 2009. This indebtedness may make it more difficult to obtain additional financing and may inhibit our ability to pursue needed or favorable opportunities.
We have had a history of losses and expect continued losses in the foreseeable future.
We have had significant operating losses and, excluding the effect of any future non-operating gains, we expect to continue incurring operating losses in the future. As a result, we may not have sufficient resources to expand or maintain our operations in the future. We can give no assurances as to when or whether we will achieve profitability, and if we ever have profits, we may not be able to sustain them.
Our stock price has been volatile in the past and may continue to be volatile in the future.
Our stock price has historically been volatile. Stock prices of technology companies have generally been volatile as well. This volatility may continue in the future.
The following factors, among others, may add to our common stock prices volatility:
| the reverse stock split; | ||
| our debt obligations; | ||
| actual or anticipated variations in our quarterly results and those of our partner companies; | ||
| changes in the market valuations of our partner companies and other technology and internet companies; | ||
| conditions or trends in the information technology and e-commerce industries; | ||
| negative public perception of the prospects of information technology companies; | ||
| changes in our financial estimates and those of our partner companies by securities analysts; | ||
| new products or services offered by us, our partner companies and their competitors; | ||
| announcements by our partner companies and their competitors of technological innovations; | ||
| announcements by us or our partner companies or our competitors of significant acquisitions, strategic partnerships or joint ventures; | ||
| additional sales of our securities; | ||
| additions to or departures of our key personnel or key personnel of our partner companies; and | ||
| general economic conditions, such as a recession or interest rate or currency rate fluctuations, and the reluctance of enterprises to increase spending on new technologies. |
Many of these factors are beyond our control. These factors may decrease the market price of our common stock, regardless of our operating performance.
Our business depends upon the performance of our partner companies, which is uncertain.
If our partner companies do not succeed, the value of our assets and the price of our common stock may decline. Economic, governmental, industry and company factors outside our control affect each of our partner companies. The material risks relating to our partner companies include:
| fluctuations in the market price of the common stock of Verticalnet and Universal Access, our publicly traded partner companies, and other future publicly traded partner companies, which are likely to affect the price of our common stock; | ||
| many of our partner companies are in the early stages of their development with limited operating history, little revenue and substantial losses; |
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| lack of the widespread commercial use of the internet, decreased spending on information technology software and services and elongated sales cycles which may prevent our partner companies from succeeding; | ||
| intensifying competition for the products and services our partner companies offer, which could lead to the failure of some of our partner companies; and | ||
| the inability of our partner companies to secure additional financing, which may force some of our partner companies to cease or scale back operations. |
Of our $237.8 million in total assets as of March 31, 2004, $55.7 million, or 23.4%, consisted of ownership interests in our partner companies accounted for under the equity and cost methods of accounting. The carrying value of our partner company ownership interests includes our original acquisition cost, the effect of accounting for certain of our partner companies under the equity method of accounting, the effect of adjustments to our carrying value resulting from certain issuances of equity securities by our partner companies, and the effect of impairment charges recorded for the decrease in value of certain partner companies. The carrying value of our partner companies will be impaired and decrease if one or more of our partner companies do not succeed. The carrying value of our partner companies is not marked to market; therefore, a decline in the market value of one of our publicly-traded partner companies may impact our financial position by not more than the carrying value of the partner company. However, this decline would likely affect the price of our common stock. For example, our stakes in our publicly traded partner companies had a combined market value of $10.6 million in the aggregate as of March 31, 2004. A decline in the market value of our publicly traded partner companies will likely cause a decline in the price of our common stock.
Other material risks relating to our partner companies are more fully described below under Risks Particular to Our Partner Companies.
Because we have limited resources to dedicate to our partner companies, some of the partner companies may not be able to raise sufficient capital to sustain their operations.
If our partner companies are not able to raise capital from other outside sources, then they may need to cease operations. Our allocation of resources to our partner companies is mostly discretionary. Because our resources and our ability to raise capital are limited, we may not commit to provide our partner companies with sufficient capital resources to allow them to reach a cash flow positive position. We allocate our resources to focus on those partner companies that we believe present the greatest potential to increase stockholder value. We cannot ensure that the companies we identified in this process are those that actually have the greatest value proposition. As a result of our limited resources, we will not allocate capital to all of our existing partner companies. Our decision to not provide additional capital support to some of our partner companies could have a material adverse impact on the operations of such partner companies.
If public and private capital markets are not favorable for the information technology and e-commerce sectors, we may not be able to execute on our strategy.
Our success depends on the acceptance by the public and private capital markets of information technology and e-commerce companies in general, including initial public offerings of those companies. The information technology and e-commerce markets have experienced significant volatility recently and the market for initial public offerings of information technology and e-commerce companies has been generally weak since 2000. If these conditions continue, we may not be able to create stockholder value by taking our partner companies public. In addition, reduced market interest in our industry may reduce the market value of our publicly traded partner companies.
Fluctuations in our quarterly results may adversely affect our stock price.
We expect that our quarterly results will fluctuate significantly due to many factors, including:
| the operating results of our partner companies; | ||
| significant fluctuations in the financial results of information technology and e-commerce companies generally; | ||
| changes in equity losses or income; | ||
| the acquisition or divestiture of interests in partner companies; | ||
| the repurchase, exchange or restructuring of any of our outstanding indebtedness; | ||
| changes in our methods of accounting for our partner company interests, which may result from changes in our ownership percentages of our partner companies; |
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| sales of equity securities by our partner companies, which could cause us to recognize gains or losses under applicable accounting rules; | ||
| the pace of development or a decline in growth of the information technology and e-commerce markets; | ||
| competition for the goods and services offered by our partner companies; and | ||
| our ability to effectively manage our growth and the growth of our partner companies. |
If our operating results in one or more quarters do not meet securities analysts or investors expectations, the price of our common stock could decrease.
The loss of any of our or our partner companies executive officers or other key personnel or our or our partner companies inability to attract additional key personnel could disrupt our business and operations.
If one or more of our executive officers or key personnel, or our partner companies executive officers or key personnel were unable or unwilling to continue in their present positions, or if we or our partner companies were unable to hire qualified personnel, our business and operations could be disrupted and our operating results and financial condition could be seriously harmed. The success of some of our partner companies also depends on their having highly trained technical and marketing personnel. A shortage in the number of trained technical and marketing personnel could limit the ability of our partner companies to increase sales of their existing products and services and launch new product offerings.
Our accounting estimates with respect to the ultimate recoverability of our basis in our partner companies could change materially in the near term.
Our accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis, including goodwill, in our partner companies could change in the near term and the effect of such changes on the financial statements could be significant. 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 $1.0 billion. Based on our periodic review of our partner company holdings, we have recorded cumulative impairment charges of $1.3 billion to write off certain partner company holdings. As of March 31, 2004, our recorded amount of carrying basis including goodwill was not impaired, although we cannot assure that our future results will confirm this assessment. We performed our annual impairment test during the fourth quarter of 2003. It is possible that a significant write-down or write-off of partner company carrying basis, including goodwill, may be required in the future, or that a significant loss will be recorded in the future upon the sale of a partner company. A write-down or write-off of this type could cause a decline in the price of our common stock.
We may compete with some of our partner companies, and our partner companies may compete with each other, which could deter companies from partnering with us and may limit future business opportunities.
We may compete with our partner companies to acquire interests in information technology and e-commerce companies and our partner companies may compete with each other for information technology e-commerce opportunities. This competition may deter companies from partnering with us and may limit our business opportunities.
Our partner companies could make business decisions that are not in our best interests or that we do not agree with, which could impair the value of our partner company interests.
Although we generally seek a significant equity interest and participation in the management of our partner companies, we may not be able to control significant business decisions of our partner companies. In addition, although we currently own a controlling interest in several of our partner companies, we may not maintain this controlling interest. Equity interests in partner companies in which we lack control or share control involve additional risks that could cause the performance of our interest and our operating results to suffer, including the management of a partner company having economic or business interests or objectives that are different from ours and partner companies not taking our advice with respect to the financial or operating difficulties that they may encounter.
Our inability to prevent dilution of our ownership interests in our partner companies or our inability to otherwise have a controlling influence over the management and operations of our partner companies could have an adverse impact on our status under the Investment Company Act. Our ability to adequately control our partner companies could also prevent us from assisting them or could prevent us from liquidating our interest in them at a time or at a price that is favorable to us. Additionally, our partner companies may not collaborate with
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each other or act in ways that are consistent with our business strategy. These factors could hamper our ability to maximize returns on our interests and cause us to recognize losses on our interests in partner companies.
Our stakes in some partner companies have been and are likely to be diluted, which could materially reduce the value of our stake in such partner companies.
Since we allocate our financial resources to certain partner companies, our ownership interests in other partner companies have been and are likely to continue to be diluted due to our decision not to participate in financings. This dilution could result in a reduction in the value of our stakes in such partner companies.
Our operations and growth could be impaired by limitations on our and our partner companies ability to raise money.
If the capital markets interest in our industry is depressed, our ability and the ability of our partner companies to grow and access the capital markets will be impaired. This may require us to take other actions, such as borrowing money on terms that may be unfavorable to us, or divesting of interests in our partner companies to raise capital. While we attempt to operate our business in such a manner so as to be independent from the capital markets, there is no assurance that we will be successful in doing so. Our partner companies are also dependent on the capital markets to raise capital for their own purposes.
Even if a number of our partner companies achieve profitability, we may not be able to extract cash from such companies, which could have a negative impact on our operations.
One of our goals is to help our partner companies achieve profitability. Even if a number of our partner companies do meet such goal, we may not be able to access cash generated by such partner companies to fund our own operations, which could have a negative impact on our operations.
When we divest partner company interests, we may be unable to obtain maximum value for such interests.
When we divest all or part of an interest in a partner company, we may not receive maximum value for our position. We may divest our interests in partner companies to generate cash or for strategic reasons. For partner companies with publicly-traded stock, we may be unable to sell our interest at then-quoted market prices. Because we hold significant stakes of restricted securities in thinly-traded public companies, we may have difficulty selling our interest in such companies and, if we are able to sell our shares, such sales may be subject to volume limitations. Furthermore, for those partner companies that do not have publicly-traded stock, the realizable value of our interests may ultimately prove to be lower than the carrying value currently reflected in our consolidated financial statements. We continually evaluate the carrying value of our ownership interests in and advances to each of our partner companies for possible impairment based on achievement of business plan objectives and milestones, the 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. If we are unable to raise capital from other sources, we may be forced to sell our stakes in partner companies at unfavorable prices in order to sustain our operations. Additionally, we may be unable to find buyers for certain of our assets, which could adversely affect our business.
The Companies that we have identified as Core partner companies may not succeed.
We have identified certain partner companies that we believe offer the greatest value proposition as Core partner companies. We cannot ensure that the companies we have identified as Core partner companies are those that actually have the greatest value proposition or are those to which we will continue to allocate capital. Although we have identified certain of our partner companies as Core partner companies, this categorization does not necessarily imply that every one of our Core partner companies is a success at this time or will become successful in the future. There is no guarantee that a Core partner company will remain categorized as Core or that it will be able to successfully continue operations.
We may not be able to increase our ownership stakes in select partner companies.
One of our goals is to increase our ownership in a small group of companies that we believe have major growth opportunities. We may not be able to achieve this goal because of limited resources and/or the unwillingness of other stockholders of such companies to enter into a transaction that would result in an increase in our ownership stake.
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We may have to buy, sell or retain assets when we would otherwise choose not to in order to avoid registration under the Investment Company Act of 1940, which would impact our investment strategy.
We believe that we are actively engaged in the businesses of information technology and e-commerce through our network of majority-owned subsidiaries and companies that we are considered to control. Under the Investment Company Act, a company is considered to control another company if it owns more than 25% of that companys voting securities and is the largest stockholder of such company. A company may be required to register as an investment company if more than 45% of its total assets consist of, and more than 45% of its income/loss and revenue attributable to it over the last four quarters is derived from, ownership interests in companies that it does not control. Because many of our partner companies are not majority-owned subsidiaries, and because we own 25% or less of the voting securities of a number of our partner companies, changes in the value of our interests in our partner companies and the income/loss and revenue attributable to our partner companies could subject us to regulation under the Investment Company Act unless we take precautionary steps. For example, in order to avoid having excessive income from non-controlled interests, we may not sell minority interests we would otherwise want to sell or we may have to generate non-investment income by selling interests in partner companies that we are considered to control. We may also need to ensure that we retain more than 25% ownership interests in our partner companies after any equity offerings. In addition, we may have to acquire additional income or loss generating majority-owned or controlled interests that we might not otherwise have acquired or may not be able to acquire non-controlling interests in companies that we would otherwise want to acquire. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively managing, operating and promoting collaboration among our network of partner companies. On August 23, 1999, the SEC granted our request for an exemption under Section 3(b)(2) of the Investment Company Act declaring us to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. This exemptive order reduces the risk that we may have to take action to avoid registration as an investment company, but it does not eliminate the risk.
We have implemented certain anti-takeover provisions that could make it more difficult for a third party to acquire us.
Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Our certificate of incorporation provides that our board of directors may issue preferred stock without stockholder approval and also provides for a staggered board of directors. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders. Additionally, we have a Rights Agreement which has the effect of discouraging any person or group from beneficially owning more that 15% of our outstanding common stock unless our board has amended the plan or redeemed the rights. The combination of these provisions may inhibit non-negotiated merger or other business combination.
Risks Particular to Our Partner Companies
Certain of our partner companies have a limited operating history and may never be profitable.
Certain of our partner companies are early-stage companies with limited operating histories, have significant historical losses and may never be profitable. Many of these companies have incurred substantial costs to develop and market their products and expand operations, have incurred net losses and cannot fund their cash needs from operations. Operating expenses of these companies could increase in the foreseeable future as they continue to develop products, increase sales and marketing efforts and expand operations.
Fluctuation in the price of the common stock of our publicly-traded partner companies may affect the price of our common stock.
Verticalnet and Universal Access are our publicly-traded partner companies. Fluctuations in the price of Verticalnets and Universal Access and other future publicly-traded partner companies common stock are likely to affect the price of our common stock. The price of our publicly-traded partner companies common stock has been highly volatile. As of March 31, 2004, the market value of the Companys interest in publicly-traded partner companies was $10.6 million. Our assets as reflected in our March 31, 2004 balance sheet were $237.8 million, of which $8.6 million related to Verticalnet and Universal Access as the Companys ownership interests are marked to market in our balance sheet.
Verticalnets results of operations, and accordingly the price of its common stock, may be adversely affected by the risk factors disclosed in its SEC filings, including the following factors:
| inability to retain key management and experienced software personnel; | |||
| inability to generate significant revenues from enterprise software licensing and professional services; |
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| inability to generate an operating profit; | ||
| inability to establish brand awareness; | ||
| inability to acquire additional funding; | ||
| inability to compete in the market for the products and services it offers; | ||
| inability to protect intellectual property rights; | ||
| lengthy sales and implementation cycles for products; | ||
| dilution of existing shareholders; and | ||
| uncertainty regarding pending litigation. |
Universal Access results of operations, and accordingly the price of its common stock, may be adversely affected by the risk factors disclosed in its SEC filings, including the following factors:
| restrictions on future operating activities and ability to pursue business opportunities in connection with the incurrence of indebtedness; | ||
| failure of its services to be sufficiently rapid, reliable and cost-effective; | ||
| unwillingness of clients to outsource the obtaining of circuits; | ||
| failure to successfully operate a network operations center; | ||
| inability to implement and maintain its Universal Information Exchange (UIX) databases; | ||
| failure of the market for Universal Transport Exchange (UTX) services to grow; | ||
| inability of clients to pay their obligations; | ||
| inability to obtain additional financing; | ||
| inability to reduce costs and manage future expansion effectively; | ||
| inability to retain key personnel and hire additional personnel; | ||
| dependence on several large clients; | ||
| inability to develop new service offerings and expand marketing channels; | ||
| control by a significant stockholder may discourage third party offers to acquire the company; | ||
| recent reverse stock split may cause a decline in stock price and total market capitalization; | ||
| inability to provide uninterrupted circuit access; | ||
| difficult industry conditions; | ||
| inability to compete due to price compression; | ||
| compliance with regulatory requirements; and | ||
| lack of patented technology. |
The success of our partner companies depends on the development of the e-commerce market, which is uncertain.
Some of our partner companies rely on e-commerce markets for the success of their businesses. If widespread commercial use of the internet does not develop, or if the internet does not develop as an effective medium for providing products and services, our partner companies may not succeed.
A number of factors could prevent widespread market acceptance of e-commerce, including the following:
| the unwillingness of businesses to shift from traditional processes to e-commerce processes; | ||
| the network necessary for enabling substantial growth in usage of e-commerce may not be adequately developed; | ||
| increased government regulation or taxation, which may adversely affect the viability of e-commerce; | ||
| insufficient availability of telecommunication services or changes in telecommunication services which could result in slower response times for the users of e-commerce; and | ||
| concern and adverse publicity about the security of e-commerce transactions. |
Our partner companies may fail if their competitors provide superior technology offerings or continue to have greater resources than our partner companies have.
If our partner companies are unable to compete successfully against their competitors, our partner companies may fail. Competition for information technology and e-commerce products and services is intense. As the markets for information technology and e-commerce grow, we expect that competition will intensify. Barriers to entry are minimal and competitors can offer products and services at a relatively low cost. Our partner companies compete for a share of a customers:
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| purchasing budget for information technology and services, materials and supplies with other online providers and traditional distribution channels; and | ||
| dollars spent on consulting services with many established information systems and management consulting firms. |
In addition, some of our partner companies compete to attract and retain a critical mass of buyers and sellers. Many companies offer competitive solutions that compete with one or more of our partner companies. We expect that additional companies will offer competing solutions on a stand-alone or combined basis in the future. Furthermore, our partner companies competitors may develop products or services that are superior to, or have greater market acceptance than, the solutions offered by our partner companies.
Many of our partner companies competitors have greater brand recognition and greater financial, marketing and other resources than our partner companies. This may place our partner companies at a disadvantage in responding to their competitors pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives.
Our partner companies may fail to retain significant customers.
During 2003, a partner companys customer notified such partner company that it was exercising its right to terminate its arrangement to purchase services from such partner company effective January 1, 2004. This customer may compete with this partner company in the future. Approximately 17% of our consolidated company revenue for the year ended December 31, 2003, related to such customer. If our partner companies are not able to retain significant customers, such partner companies and our results of operations and financial position could be adversely effected.
The inability of our partner companies customers to pay their obligations to them in a timely manner, if at all, could have an adverse effect on our partner companies.
Some of the customers of our partner companies may have inadequate financial resources to meet all their obligations. If one or more significant customers are unable to pay amounts owed to a partner company, such partner companys results of operations and financial condition could be adversely affected.
Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.
The complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of our partner companies and the demands of quick delivery of products and services to market, create the risk that our partner companies will be unable to protect their proprietary rights. Further, the nature of internet business demands that considerable detail about their innovative processes and techniques be exposed to competitors, because it must be presented on the websites in order to attract clients. Some of our partner companies also license content from third parties, and it is possible that they could become subject to infringement actions based upon the content licensed from those third parties. Our partner companies generally obtain representations as to the origin and ownership of such licensed content. However, these representations may not adequately protect them. Any claims against our partner companies proprietary rights, with or without merit, could subject our partner companies to costly litigation and the diversion of their technical and management personnel. If our partner companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase and their profits, if any, will decrease.
Government regulation of the internet and e-commerce may harm our partner companies businesses.
Government regulation of the internet and e-commerce is evolving and unfavorable changes could harm our partner companies business. Our partner companies are subject to general business regulations and laws specifically governing the internet and e-commerce. Such existing and future laws and regulations may impede the growth of the internet or other online services. These regulations and laws may cover taxation, user privacy, pricing content, copyrights, distribution, electronic contracts, consumer protection, the provision of online payment services, broadband residential internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and e-commerce. Unfavorable resolution of these issues may harm our partner companies business.
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Our partner companies that publish or distribute content over the internet may be subject to legal liability.
Some of our partner companies may be subject to legal claims relating to the content on their websites, or the downloading and distribution of this content. Claims could involve matters such as defamation, invasion of privacy and copyright infringement. Providers of internet products and services have been sued in the past, sometimes successfully, based on the content of material. In addition, some of the content provided by our partner companies on their websites is drawn from data compiled by other parties, including governmental and commercial sources. The data may have errors. If any of our partner companies website content is improperly used or if any of our partner companies supply incorrect information, it could result in unexpected liability. Any of our partner companies that incur this type of unexpected liability may not have insurance to cover the claim or its insurance may not provide sufficient coverage. If our partner companies incur substantial cost because of this type of unexpected liability, the expenses incurred by our partner companies will increase and their profits, if any, will decrease.
Our partner companies computer and communications systems may fail, which may discourage parties from using our partner companiessystems.
Some of our partner companies businesses depend on the efficient and uninterrupted operation of their computer and communications hardware systems. Any system interruptions that cause our partner companies websites to be unavailable to web browsers may reduce the attractiveness of our partner companies websites to third parties. If third parties are unwilling to use our partner companies websites, our business, financial condition and operating results could be adversely affected. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events.
Our partner companies businesses may be disrupted if they are unable to upgrade their systems to meet increased demand.
Capacity limits on some of our partner companies technology, transaction processing systems and network hardware and software may be difficult to project and they may not be able to expand and upgrade their systems to meet increased use. As traffic on our partner companieswebsites continues to increase, they must expand and upgrade their technology, transaction processing systems and network hardware and software. Our partner companies may be unable to accurately project the rate of increase in use of their websites. In addition, our partner companies may not be able to expand and upgrade their systems and network hardware and software capabilities to accommodate increased use of their websites. If our partner companies are unable to appropriately upgrade their systems and network hardware and software, the operations and processes of our partner companies may be disrupted.
Our partner companies may be unable to acquire or maintain easily identifiable website addresses or prevent third parties from acquiring website addresses similar to theirs.
Some of our partner companies hold various website addresses relating to their brands. These partner companies may not be able to prevent third parties from acquiring website addresses that are similar to their addresses, which could adversely affect the use by businesses of our partner companies websites. In these instances, our partner companies may not grow as we expect. The acquisition and maintenance of website addresses generally is regulated by governmental agencies and their designees. The regulation of website addresses in the United States and in foreign countries is subject to change. As a result, our partner companies may not be able to acquire or maintain relevant website addresses in all countries where they conduct business. Furthermore, the relationship between regulations governing such addresses and laws protecting trademarks is unclear.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risks on the marketable portion of our equity securities. Our public holdings at March 31, 2004 include equity positions in companies in the technology industry sector, including: eMerge Interactive; Universal Access and Verticalnet, 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 March 31, 2004, would result in an approximate $2.1 million decrease in the fair value of our public holdings.
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 a forward contract on 1.8 million shares of our holdings in i2 Technologies. The forward contract limited our exposure to and benefits from price fluctuations in the underlying equity securities. As of December 31, 2002, 1.8 million shares of i2 Technologies remained under this arrangement. In addition, 0.5 million shares of i2 Technologies were held in escrow, which were released to us in 2002, and were not hedged that had a market value of $0.5 million at December 31, 2002. The
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combined value of the forward contract, the underlying hedged securities and the unhedged securities at December 31, 2002 was $10.1 million. The forward contract maturity was September 2003; however, on April 1, 2003, the forward contract was terminated and the Company received $9.6 million in cash. In 2003, the Company also sold the 0.5 million shares released from escrow in 2002 for $0.4 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 March 31, 2004, the remaining principal balance of the convertible subordinated notes was $39.1 million and the fair value was approximately $39.1 million. Fair value of the Companys convertible subordinated notes is determined by obtaining thinly traded market quotes from public sources. 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.
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.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15e and 15d-15e under the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures provide reasonable assurance that information required to be included in the Companys periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
In addition, we reviewed our internal controls and, as of the end of the period covered in this report, there have been no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date of our most recent evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May and June 2001, certain of the Companys present directors, along with the Company, certain of its former directors, certain of its present and former officers and its underwriters, were named as defendants in nine class action complaints filed in the United States District Court for the Southern District of New York. The plaintiffs and the alleged classes they seek to represent include present and former stockholders of the Company. The complaints generally allege violations of Sections 11 and 12 of the Securities Act of 1933 and Rule 10b-5 promulgated under the Securities Exchange Act of 1934, based on, among other things, the dissemination of statements allegedly containing material misstatements and/or omissions concerning the commissions received by the underwriters of the initial public offering and follow-on public offering of the Company as well as failure to disclose the existence of purported agreements by the underwriters with some of the purchasers in these offerings to buy additional shares of the Companys stock subsequently in the open market at pre-determined prices above the initial offering prices. The plaintiffs seek for themselves and the alleged class members an award of damages and litigation costs and expenses. The claims in these cases have been consolidated for pre-trial purposes (together with other issuers and underwriters) before one judge in the Southern District of New York federal court. In April 2002, a consolidated, amended complaint was filed against these defendants which generally alleges the same violations and also refers to alleged misstatements or omissions that relate to the recommendations regarding the Companys stock by analysts employed by the underwriters. In June and July 2002, defendants, including the Company defendants, filed motions to dismiss plaintiffs complaints on numerous grounds. The Companys motion was denied in its entirety in an opinion dated February 19, 2003. In July 2003, a committee of the Companys Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide for, among other things, a release of the Company and of the individual defendants (who had been previously dismissed without prejudice) for the wrongful conduct alleged in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Companys insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of the Companys insurers to the settlement, and the completion of acceptable final settlement
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documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the United States District Court overseeing the litigation.
On December 20, 2002, the Company was named as a defendant in an action filed in the United States District Court for the District of Maine. The plaintiffs include former stockholders of Animated Images, Inc. (Animated Images), one of the Companys former partner companies. In addition to the Company, the defendants include Freeborders, a current partner company, and four individual defendants, including former officers of the Company and former Animated Images and Freeborders directors. The complaint generally alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Section 5(a) of the Securities Act of 1933, fraud, breach of contract, breach of fiduciary duty and civil conspiracy, among other claims, in connection with the merger of Animated Images into Freeborders. In support of these claims, the plaintiffs allege, among other things, that the defendants misrepresented the value of the stock of Freeborders, resulting in plaintiffs having received less consideration in the merger than that to which they believe they were entitled. The litigation currently is in its preliminary stage. The Court granted defendants motion to stay the litigation pending arbitration in California of plaintiffs claims against Freeborders. In an effort to avoid such arbitration, plaintiffs have moved to dismiss Freeborders from the litigation, and they seek to proceed with arbitration of their claims against the Company and certain other defendants. The Company has opposed plaintiffs motion, and the Court has not yet ruled on it.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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) | Exhibits |
Number |
Document |
|
10.1
|
Lease Termination Agreement between One Boston Place LLC and Internet Capital Group Operations, Inc. dated April 14, 2004. | |
11.1
|
Statement Regarding Computation of Per Share Earnings (included herein at Note 8 Net Loss Per Share to the Consolidated Financial Statements on Page 15) | |
31.1
|
Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) | Reports on Form 8-K |
On February 19, 2004, the Company furnished a Current Report on Form 8-K dated February 19, 2004, to report under Item 9, the Companys press release and financial information for the fourth quarter and year-end 2003 results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERNET CAPITAL GROUP, INC. | ||||
Date: May 10, 2004 |
||||
By: | /s/Anthony P. Dolanski | |||
Name: Anthony P. Dolanski | ||||
Title: Chief Financial Officer | ||||
(Principal Financial and Principal Accounting Officer) | ||||
(Duly Authorized Officer) |
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EXHIBIT INDEX
Number |
Document |
|
10.1
|
Lease Termination Agreement between One Boston Place LLC and Internet Capital Group Operations, Inc. dated April 14, 2004 | |
11.1
|
Statement Regarding Computation of Per Share Earnings (included herein at Note 8 Net Loss Per Share to the Consolidated Financial Statements on page 15) | |
31.1
|
Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 |