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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from _____________________ to ____________________
Commission File 000-26929
________________
INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2996071
(State of other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
Building 800, 435 Devon Park Drive, Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
(610) 989-0111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of Each Exchange on which Registered
Common Stock, $0.001 par value Nasdaq Stock Market
_________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X]Yes [_]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The approximate aggregate market value of Common Stock held by non-affiliates of
the Company was $21.5 billion as of March 1, 2000. (For purposes of determining
this amount only, the Company has defined affiliates as including (a) the
executive officers named in Part I of this 10-K Report, (b) all directors of the
Company and (c) each stockholder that has informed the Company by March 1, 2000
that it is the beneficial owner of 10% or more of the outstanding common stock
of the Company.
The number of shares of the Company's Common Stock outstanding as of March 1,
2000 was 264,283,685 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy Statement") to
be filed with the Securities and Exchange Commission relative to the Company's
Annual Meeting of Stockholders for the fiscal year ended December 31, 1999 are
incorporated by reference into Part III of this Report.
Internet Capital Group, Inc.
Form 10-K
December 31, 1999
TABLE OF CONTENTS
Item Page No.
- ---- --------
PART I
1. Business......................................................................................................... 2
2. Properties....................................................................................................... 16
3. Legal Proceedings................................................................................................ 16
4. Submission of Matters to a Vote of Security Holders.............................................................. 16
4A. Executive Officers of the Registrant............................................................................. 17
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............................................ 18
6. Selected Consolidated Financial Data............................................................................. 20
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 20
7A. Quantitative and Qualitative Disclosures About Market Risk ...................................................... 35
8. Financial Statements and Supplementary Data...................................................................... 35
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............................ 67
PART III
10. Directors and Executive Officers of the Registrant .............................................................. 67
11. Executive Compensation .......................................................................................... 67
12. Security Ownership of Certain Beneficial Owners and Management .................................................. 67
13. Certain Relationships and Related Transactions .................................................................. 67
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 67
SIGNATURES............................................................................................................ 73
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act. We have based these forward-looking statements
on our current expectations and projections about future events. These forward-
looking statements are subject to known and unknown risks, uncertainties and
assumptions about us and our partner companies, that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those discussed elsewhere in this Report and
the risks discussed in our other Securities and Exchange Commission ("SEC")
filings including our Registration on Form S-1 declared effective on August 4,
1999 by the SEC (File No. 333-78193), our Registration on Form S-1 declared
effective on December 15, 1999 by the SEC (File No. 333-91447), and our Forms
10-Q filed on September 20, 1999 and November 15, 1999. The following
discussion should be read in conjunction with our audited Consolidated Financial
Statements and related Notes thereto included elsewhere in this report.
Although we refer in this Report to the companies in which we have acquired
an equity ownership interest as our "partner companies" and that we have a
"partnership" with these companies, we do not act as an agent or legal
representative for any of our partner companies, and we do not have the power or
authority to legally bind any of our partner companies, and we do not have the
types of liabilities in relation to our partner companies that a general partner
of a partnership would have.
PART I
ITEM 1. BUSINESS
Overview
Internet Capital Group is an Internet company actively engaged in business-
to-business, or B2B, e-commerce through a network of partner companies. Our goal
is to become the premier B2B e-commerce company by establishing an e-commerce
presence in major segments of the global economy. We believe that our sole focus
on the B2B e-commerce industry allows us to capitalize rapidly on new
opportunities and to attract and develop leading B2B e-commerce companies. As of
December 31, 1999, we owned interests in 49 B2B e-commerce companies that we
refer to as our partner companies.
Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
With the goal of holding our partner company interests for the long-term, we use
these collective resources to actively develop the business strategies,
operations and management teams of our partner companies. Our resources include
the experience, industry relationships and specific expertise of our management
team, our partner companies' management and our Advisory Board. Currently, our
Advisory Board consists of individuals with executive-level experience in
general management, sales and marketing and information technology at leading
companies such as Coca-Cola Company, Exodus Communications, IBM Corporation,
MasterCard, Merrill Lynch and Microsoft. We believe that building successful B2B
e-commerce companies enhances the ability of our collaborative network to
facilitate innovation and growth among our partner companies.
The substantial growth in B2B e-commerce creates tremendous market
opportunities for new emerging companies. Forrester Research estimates that the
United States B2B e-commerce market, defined as the intercompany trade of hard
goods over the Internet, will grow from $43 billion in 1998 to more than $1.3
trillion by 2003. International Data Corporation, or IDC, projects that the
Western European B2B e-commerce market will grow from $3.8 billion in 1998 to
over $350 billion by 2003. We focus on two types of B2B e-commerce companies,
which we call market makers and enabling service providers.
. Market makers bring buyers and sellers together by creating
Internet-based markets for the exchange of goods, services and
information. Market makers enable more effective and lower cost
commerce for traditional businesses by providing access through
the Internet to a broader range of buyers and sellers. Market
makers typically operate in a specific industry or provide
specific goods and services across multiple industries. Market
makers tailor their business models to match a target market's
distinct characteristics. At December 31, 1999 our partner
company network included significant interests in the following
30 market makers: Animated Images, Arbinet Communications,
asseTrade, AUTOVIA, Bidcom, Collabria, Commerx, ComputerJobs.com,
CourtLink, CyberCrop.com., Deja.com, e-Chemicals, eMarketWorld,
eMerge Interactive,
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EmployeeLife.com, ICG Commerce, Internet Commerce Systems,
iParts, JusticeLink, Metalsite, NetVendor, ONVIA.com,
PaperExchange.com, Plan Sponsor Exchange, Residential Delivery
Services, Retail Exchange, StarCite, Universal Access, USgift.com
and VerticalNet.
. Enabling service providers sell software and services to
businesses engaged in e-commerce. Many businesses need assistance
in designing business practices to take advantage of the Internet
and in building and managing the technological infrastructure
needed to support B2B e-commerce. At December 31, 1999, our
partner company network included significant interests in the
following 19 enabling service providers: Benchmarking Partners,
Blackboard, Breakaway Solutions, ClearCommerce, CommerceQuest,
Context Integration, Entegrity Solutions, iSky, Jamcracker,
LinkShare, PrivaSeek, SageMaker, Servicesoft Technologies, Syncra
Software, TRADEX Technologies, traffic.com, United Messaging, US
Interactive, and Vivant!
We have grown rapidly since our inception in 1996. In 1998 and 1999, we
added 12 and 29 B2B e-commerce companies, respectively, to our network. All of
our acquisitions as of December 31, 1999 have been B2B e-commerce companies
headquartered in the United States. We expect to continue to evaluate additional
acquisition opportunities in the United States. In addition, at the end of 1999
we opened an office in London, England which focuses on European B2B e-commerce
opportunities.
Internet Capital Group, Inc. is a successor to a business originally
founded in March 1996 as a Delaware limited liability company under the name
Internet Capital Group, L.L.C. As a limited liability company, Internet Capital
Group, L.L.C. was treated for income tax purposes as a partnership with taxes on
the income generated by Internet Capital Group, L.L.C. paid by its members.
Internet Capital Group, L.L.C. merged into Internet Capital Group, Inc. on
February 2, 1999 with Internet Capital Group, Inc. surviving (the
"Reorganization"). In connection with the Reorganization and as required by its
limited liability company agreement to satisfy the members' tax liabilities,
Internet Capital Group, L.L.C. declared a $10.7 million distribution to its
members. Internet Capital Group, Inc. has assumed all liabilities of Internet
Capital Group, L.L.C. including the distribution to members of Internet Capital
Group, L.L.C. Also as part of the Reorganization, Internet Capital Group, Inc.
issued 164,011,098 shares of common stock to the members of Internet Capital
Group, L.L.C. The separate existence of Internet Capital Group, L.L.C. ceased
in connection with the Reorganization.
Industry Overview
Growth of the Internet
People and businesses are increasingly relying on the Internet to access
and share information as well as to purchase and sell products and services.
IDC estimates that at the end of 1998 more than 142 million people were using
the Internet to communicate, participate in discussion forums and obtain
information about goods and services. IDC projects that this user base will grow
to 502 million people by the end of 2003. A rapidly growing number of businesses
use the Internet to market and sell their products and streamline business
operations. According to Forrester Research, 50% of all United States businesses
will be on-line by 2002.
Growth of B2B E-Commerce
The Internet's substantial growth creates tremendous market opportunities
for companies that connect buyers and sellers, and companies that create
applications and systems for traditional businesses wishing to engage in e-
commerce. Historically, B2B e-commerce has occurred through electronic data
interchange over proprietary networks, which are costly and available only to a
limited number of participants. The Internet provides an open platform with
common communication protocols to build efficient, cost-effective networks that
facilitate e-commerce. As Internet-based network reliability, speed and security
have improved in recent years and as more businesses have connected to the
Internet, traditional businesses are beginning to use the Internet to conduct e-
commerce and exchange information with customers, suppliers and distributors.
While the business-to-consumer e-commerce market currently is significant in
size, estimated by IDC to have encompassed $15 billion in goods and services in
1998, the B2B e-commerce market is larger and is predicted to grow dramatically.
Forrester Research projects that the United States B2B e-commerce market, which
Forrester Research defines as the intercompany trade of hard goods over the
Internet, will grow from $43 billion in 1998 to over $1.3 trillion by 2003. IDC
projects that the Western European B2B e-commerce market will grow from $3.8
billion in 1998 to over $350 billion by 2003.
3
We believe that the B2B e-commerce market is beginning a period of rapid
development and growth for the following reasons:
. Expanded Access to New and Existing Customers and Suppliers.
Traditional businesses have relied on their sales forces and
purchasing departments to develop and maintain customer and
supplier relationships. This model is constrained by the time and
cost required to exchange current information regarding
requirements, prices and product availability, and the difficulty
of cost-effectively locating new customers and suppliers and
managing existing relationships. Traditional businesses can
leverage the Internet to obtain and communicate real-time,
accurate information regarding requirements, prices and products
to a global audience, including suppliers, customers and business
partners. This makes it easier for businesses to attract new
customers and suppliers, improve service and increase revenue.
. Increased Efficiency and Reduced Cost. Traditional businesses can
utilize the Internet to automate their internal operations,
including manufacturing, finance, sales and purchasing functions.
The Internet can also be used to increase information flow and
access throughout an organization. This increases operational
efficiency by reducing the time, costs and resources required to
transact business, lowering inventory levels and procurement
costs, and improving responsiveness to customers and suppliers.
Market Opportunities for Emerging B2B E-Commerce Companies
We believe that there are significant opportunities for companies that can
assist traditional businesses in using the Internet to create more efficient
markets and enable e-commerce. We call these companies B2B e-commerce companies.
We focus on two types of B2B e-commerce companies: market makers and enabling
service providers.
. Market Makers. Market makers bring buyers and sellers together by
creating Internet-based markets for the exchange of goods,
services and information. Market makers enable more effective and
lower cost commerce for traditional businesses by providing
access through the Internet to a broader range of buyers and
sellers. Market makers typically operate in a specific industry
or provide specific goods and services across multiple
industries. Market makers tailor their business models to match a
target market's distinct characteristics. We refer to market
makers operating in a particular industry as vertical market
makers, and to market makers operating across multiple industries
as horizontal market makers. Vertical and horizontal market
makers may:
. act as principals in transactions;
. automate business processes so as to make them more
efficient;
. operate exchanges where buyers and sellers dynamically
negotiate prices; or
. facilitate interaction and transactions among businesses and
professionals with common interests by providing an
electronic community.
Market makers may generate revenue by:
. selling products and services;
. charging fees based on the value of the transactions they
facilitate;
. charging fees for access to their Internet-based services;
or
. selling advertising on their Web sites.
. Enabling Service Providers. Enabling service providers sell
software and services to businesses engaged in e-commerce. Many
businesses need assistance in designing business practices to
take advantage of the Internet, and in building and managing the
technological infrastructure needed to support B2B e-commerce.
Enabling service providers help businesses in the following ways:
4
. Strategic Consulting and Systems Integration. Strategic
consultants assist traditional businesses in developing
their e-commerce strategies. Systems integrators develop and
implement a technological infrastructure that enables e-
commerce. Systems integrators also integrate e-commerce
applications with existing enterprise applications.
Strategic consultants and systems integrators typically
charge their clients on a project-by-project basis.
. Software Providers. Software providers design and sell
software applications, tools and related services that
support e-commerce and integrate business functions.
Software providers may sell or license their products.
. Outsourced Service Providers. Outsourced service providers
offer software applications, infrastructure and related
services designed to help traditional businesses reduce
cost, improve operational efficiency and decrease time to
market. Outsourced service providers may charge fees on a
per-use or periodic basis.
Challenges Facing Emerging B2B E-Commerce Companies
We believe that emerging B2B e-commerce companies face certain challenges,
including:
. Developing a Successful Business Model. B2B e-commerce companies
must develop business models that capitalize on the Internet's
capabilities to provide solutions to traditional companies in
target industries. B2B e-commerce companies require industry
expertise because each industry and market has distinct
characteristics including existing distribution channels, levels
of concentration and fragmentation among buyers and sellers,
procurement policies, product information and customer support
requirements. B2B e-commerce companies also require Internet
expertise in order to apply their capabilities to their target
industries.
. Building Corporate Infrastructure. Many B2B e-commerce companies
have been recently formed and require sales and marketing,
executive recruiting and human resources, information technology,
and finance and business development assistance. These companies
also require capital as significant resources may be required to
build technological capabilities and internal operations.
. Finding the Best People. Entrants into the B2B e-commerce market
require management with expertise in the applicable market, an
understanding of the Internet's capabilities, the ability to
manage rapid growth and the flexibility to adapt to the changing
Internet marketplace. We believe that very few people have these
skills, and those that do are highly sought after. To be
successful, companies must attract and retain highly qualified
personnel.
We believe that the most successful B2B e-commerce companies will rapidly
identify market demands and move quickly to satisfy those demands. B2B e-
commerce companies that accomplish this goal may establish new standards, gain
market share, secure critical partnerships and create a brand name, making
competition more difficult for new entrants. In addition, B2B e-commerce
companies must keep abreast of Internet and industry-specific developments and
adapt to a rapidly changing environment.
Our Solution and Strategy
Our goal is to become the premier B2B e-commerce company by establishing an
e-commerce presence in major segments of the global economy. We believe that our
sole focus on the B2B e-commerce industry allows us to capitalize rapidly on new
opportunities and to attract and develop leading B2B e-commerce companies. As
of December 31, 1999, we owned interests in 49 B2B e-commerce companies that we
refer to as our partner companies.
Our operating strategy is to integrate our partner companies into a
collaborative network that leverages our collective knowledge and resources.
With the goal of holding our partner company interests for the long-term, we use
these collective resources to actively develop the business strategies,
operations and management teams of our partner companies. Our resources include
the experience, industry relationships and specific expertise of our management
team, partner companies, strategic investors and Advisory Board members.
5
Our strategy is to:
. create or identify companies with the potential to become
industry leaders;
. acquire significant interests in partner companies and
incorporate them into our collaborative network;
. provide strategic guidance and operational support to our partner
companies; and
. promote collaboration among our partner companies.
In implementing our strategy, we leverage the collective knowledge and
experience of our partner companies, strategic investors and Advisory Board
members. Our Advisory Board consists of more than 15 experienced executives from
various backgrounds who provide our network with strategic guidance, sales,
marketing and information technology expertise and industry contacts. Ideally,
we would like to own 40% or more of each of our partner companies, with
management and public shareholders owning the remaining interests, but we
believe that we can have significant influence with lower ownership levels.
Our strategy includes acquiring interests in partner companies based in the
United States and abroad. We opened an office in London in late 1999 that
focuses on European B2B opportunities. We have staffed our London office with
two executives from one of Europe's leading private equity firms. These two
executives worked together on Internet acquisitions in Europe and cultivated a
broad network of technology and vertical market contacts. We anticipate opening
an office in continental Europe during 2000. We plan to staff our European
offices with personnel that will provide strategic guidance and operational
support to our partner companies operating in Europe.
We plan to acquire interests in European B2B e-commerce companies. If we
wish to enter a European market in which we cannot locate an attractive partner
company candidate, we may create a new company or assist one of our partner
companies located in the United States in expanding overseas. In addition, our
worldwide personnel will focus on providing connections and resources to all our
partner companies, creating an international expansion platform for each member
of the network.
Create or Identify Companies With the Potential to Become Market Leaders
Our expertise in the B2B e-commerce market allows us to build or identify
companies that are positioned to succeed. We apply a disciplined analysis that
capitalizes on this competitive advantage. When we evaluate whether to enter a
market by building a company or acquiring an interest in an existing company, we
weigh the following industry and partner company factors:.
. Industry Criteria
. Inefficiency. We consider whether the industry suffers from
inefficiencies that may be alleviated through e-commerce. We
also consider the relative amount of inefficiency, as more
inefficient industries present greater profit potential.
. Competition. We evaluate the amount of competition that a
potential partner company faces from e-commerce and
traditional businesses.
. Significance of Vertical Market. Our strategy includes
acquiring interests in market makers doing business in the
principal vertical markets of the global economy. When
evaluating market makers, we consider whether the market
maker has the potential to be a leader in its vertical
market.
. Industry Potential. When evaluating a market maker, we
consider the number and dollar value of transactions in its
corresponding industry. We evaluate the incremental
efficiency to be gained from conducting or supporting
transactions on-line and estimate the potential to migrate
transactions on-line. By considering these factors, we can
focus on vertical industries for which the leading market
maker can eventually generate significant transaction
activity for the market maker.
6
. Centralized Information Sources. When evaluating market
makers, we consider whether the industry has product
catalogs, trade journals and other centralized sources of
information regarding products, prices, customers and other
factors. The availability of this information makes it
easier for a market maker to facilitate interaction and
transactions. We generally avoid industries where this
information is not available.
. Enabling Service Provider Profit Potential. When evaluating
enabling service providers, we examine the size of the
market opportunity, the profit potential in serving the
target market and whether the enabling service provider can
provide assistance to our market maker partner companies.
. Partner Company Criteria
. Industry Leader. We partner with a company only if we
believe that it has the products and skills to become a
leader in its industry.
. Significant Ownership. We consider whether we will be able
to obtain a significant position in the company and exert
influence over the company.
. Network Synergy. We consider the degree to which a potential
partner company may contribute to our network, and benefit
from our network and operational resources.
. Management Quality. We assess the overall quality and
industry expertise of a potential partner company's
management.
Acquire Interests in Partner Companies
After we identify an attractive potential partner company, we negotiate the
acquisition of a significant interest in the company. As a condition to an
acquisition, we require representation on the company's board of directors to
ensure our ability to provide active guidance to the partner company. We
structure acquisitions to permit the partner company's management and key
personnel to retain an equity stake in the company. As a result of our
experience, we believe that we have the ability to complete acquisitions quickly
and efficiently. After acquiring interests in partner companies, we frequently
participate in their follow-on financings and seek to increase our ownership
positions.
During our negotiations with potential partner companies we emphasize the
value of our collaborative network, which we believe gives us a competitive
advantage over other acquirors in successfully consummating transactions. Our
partner companies, strategic investors and Advisory Board members assist in
these discussions and assist in other stages of the acquisition process,
including the initial evaluation of potential partner companies and due
diligence.
Provide Strategic Guidance and Operational Support to Our Partner Companies
After we make an acquisition or form a partner company, we take an active
role in its affairs by providing both strategic guidance and operational
support:
. Strategic Guidance. We provide strategic guidance to our partner
companies regarding market positioning, business model
development and market trends. In addition, we advise our partner
companies' management and directors on day-to-day management and
operational issues. Our exclusive focus on the B2B e-commerce
market and the knowledge base of our partner companies, strategic
investors, management and Advisory Board give us valuable
experience that we share with our partner company network. For
example, Advisory Board and management team members who provide
strategic guidance to our partner companies include Todd Hewlin,
a former Partner with McKinsey & Company; Jeff Ballowe, a former
President of Ziff-Davis Inc. and the current Chairman of
Deja.com, Inc.; Alex W. Hart, a former Chief Executive Officer of
MasterCard International; Ron Hovsepian, Vice President of
Business Development at IBM Corporation; and Yossi Sheffi, Ph.D.,
a co-founder of Syncra Software, Inc. and e-Chemicals, Inc. and
currently a Professor at the Massachusetts Institute of
Technology.
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. Operational Support. B2B e-commerce companies often have
difficulty obtaining senior executive level guidance in certain
disciplines that successful companies need. We assist our partner
companies by providing access to skilled managers who guide our
partner companies in the following functional areas:
. Sales and Marketing. Several members of our Advisory Board
and management team provide guidance to our partner
companies' sales, marketing, product positioning and
advertising efforts. These individuals include Michael H.
Forster, a former Senior Vice President of Worldwide Field
Operations at Sybase, Inc. and currently one of our Senior
Partners; Christopher H. Greendale, a former Executive Vice
President at Cambridge Technology Partners and currently one
of our Managing Directors; Rowland Hanson, a former Vice
President of Corporate Communications at Microsoft
Corporation and currently founder of C. Rowland Hanson &
Associates; Charles W. Stryker, Ph.D., President, Marketing
Information Solutions, at IntelliQuest, Inc.; and Sergio
Zyman, a former Vice President and Chief Marketing Officer
of the Coca-Cola Company.
. Executive Recruiting and Human Resources. Members of our
management team assist our partner companies in recruiting
key executive talent. These individuals include Rick Devine,
one of our Managing Directors and a former partner at
Heidrick & Struggles, Inc., an executive recruiting firm. In
providing this assistance, we leverage the contacts
developed by our network of partner companies, management
and Advisory Board. We believe that this is one of the most
important functions that we perform on behalf of our partner
companies. B2B e-commerce companies must locate executives
with both industry and Internet expertise. The market for
these professionals is highly competitive since few persons
possess the necessary mix of skills and experience.
. Information Technology. Our Chief Technology Officer,
Richard G. Bunker, is dedicated to helping our partner
companies with their information systems strategies and
solving problems relating to their current information
technology challenges. Members of our Board of Directors and
Advisory Board who provide guidance in this area include
K.B. Chandrasekhar, Chairman of the Board of Directors of
Exodus Communications, and Peter A. Solvik, the Chief
Information Officer of Cisco Systems, Inc.
. Finance. One of our Managing Directors, John N. Nickolas, an
experienced finance executive, is dedicated to providing
financial guidance to our partner companies in areas such as
corporate finance, financial reporting, accounting and
treasury operations. In providing these services, Mr.
Nickolas leverages the skills and experience of our internal
finance and accounting group, our partner company network
and outside consultants.
. Business Development. B2B e-commerce companies may be
involved in evaluating, structuring and negotiating joint
ventures, strategic alliances, joint marketing agreements,
acquisitions or other transactions. We provide assistance to
our partner companies in all these areas. Our management
team, Advisory Board, strategic investors and partner
companies all assist in this function.
Promote Collaboration Among Our Partner Companies
One of the principal goals of our network is to promote innovation and
collaboration among our partner companies, which has resulted in shared
knowledge and business contacts among our partner companies and the formation of
numerous strategic alliances. We promote collaboration formally by hosting
regularly scheduled seminars relating to partner company operational and
business issues. At these seminars, the executives of partner companies share
their experiences with each other, our management team and the Advisory Board.
For example, at a seminar in 1999, thirteen chief executive officers of our
market maker and enabling service provider partner companies gathered to discuss
e-commerce strategies and business models. In addition, in the last six months
of 1999 we hosted four conferences for our partner companies on various
operational issues ranging from financing strategies to the use of technology.
On an informal basis, we promote collaboration by making introductions and
introducing partner companies to each other.
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Recent examples of collaboration among our partner companies include:
. PaperExchange.com and VerticalNet have developed a strategic
alliance that provides PaperExchange with co-branded access to
leading industry content, including news, feature articles and
interviews from VerticalNet's PulpandPaper On-line property.
VerticalNet's members will get access to PaperExchange's leading
pulp and paper exchange, which is an Internet-based marketplace
for buying and selling pulp and paper products. In addition, the
companies are joining forces to create a comprehensive equipment
listing and career site. By linking their sites together,
PaperExchange.com and VerticalNet are seeking to establish a
leading destination for pulp and paper professionals.
. Commerx, a provider of e-commerce solutions for the industrial
processing market, has formed a strategic alliance with
CommerceQuest, to provide integration solutions to connect
efficiently the systems of processors and manufacturers within
the industries served by Commerx. Commerx will use
CommerceQuest's enableNet solution for deployment of
PlasticsNet.com, the plastics industry's leading electronic
marketplace. CommerceQuest's enableNet provides reliable, real-
time delivery of data with enterprise-strength security and
accurate data transformation across many formats and
applications. This relationship allows PlasticsNet.com users to
conduct e-commerce over their clients' network of choice or
private lines. This state-of-the-art e-commerce infrastructure
will allow for cost efficient implementation and integration with
faster and more seamless transactions.
The collaboration of our partner companies is the result of our role as the
hub of our network. Through the network we identify prospective alliances, make
introductions, assist in strategic planning and monitor the ongoing
relationships among our partner companies. We encourage and facilitate the
information flow among our partner companies. We also control the information
flow by determining the composition of the network. If we believe that a partner
company is not contributing to our network or has lost its strategic importance,
we may sell our interest in that partner company.
Overview of Current Partner Companies
We focus our efforts on building and operating companies in two areas of
the B2B e-commerce market--market makers and enabling service providers.
Market Maker Categories
Market makers may operate in particular industries, such as chemicals, food
or auto parts, or may sell goods and services across multiple industries. Market
makers must tailor their business models to match their markets. We refer to
market makers operating in a particular industry as vertical market makers, and
to market makers operating across multiple industries as horizontal market
makers. Examples of vertical and horizontal market makers are as follows:
. Vertical. An example of one of our vertical market maker
companies is e-Chemicals. e-Chemicals believes that traditional
distribution channels for chemicals burden customers with
excessive transaction costs, high administrative costs and
inefficient logistics. To solve these problems, e-Chemicals has
developed an Internet-based marketplace through which it will
sell a wide range of industrial chemicals to business customers.
e-Chemicals provides products based on streamlined Web-based
ordering processes, outsourced logistics systems and on-line
support.
. Horizontal. One example of our horizontal market maker partner
companies is VerticalNet. As of December 31, 1999, VerticalNet
owned and operated over 50 industry-specific Web sites designed
to act as on-line B2B communities. These trade communities act as
comprehensive sources of information, interaction and e-commerce.
9
Market Maker Profiles
Table of Market Makers. The partner companies listed below are integral
to our goal of owning numerous interests in vertical and horizontal market
makers that are strategically complementary to each other. We believe that
establishing an e-commerce presence in major industrial segments of the economy
will enable us to become the premier B2B e-commerce company. The table shows
certain information regarding our market maker partner companies by category as
of December 31, 1999. Our ownership positions have been calculated based on the
issued and outstanding common stock of each partner company, assuming the
issuance of common stock on the conversion or exercise of preferred stock and
convertible notes, but excluding the effect of unexercised options and warrants.
Our Partner
Ownership Company
Category and Name Industry Description of Business Percentage Since
- -------------------------------- --------------------------------------------------------------------------------------------
Vertical:
Animated Images, Inc. Apparel Provides Internet-based design, communication, 50% 1999
www.appliedintranet.com and procurement services for the apparel and
sewn goods industries.
Arbinet Communications, Inc. Telecommunications Provides an Internet-based trading floor and 8% 1999
www.arbinet.com clearinghouse for telecommunications carriers
to purchase bandwidth.
AUTOVIA Corporation Auto Parts Developing a system to provide Internet-based 16% 1998
www.autovia.net auto parts procurement for professional
automotive and truck repair shops.
Bidcom, Inc. Construction Provides Internet-based project planning and 35% 1999
www.bidcom.com management services for the construction
industry.
Collabria, Inc. Printing Provides Internet-based procurement and 11% 1999
www.collabria.com production services for the commercial
printing industry.
Commerx, Inc. Plastics Provides Internet-based procurement and 40% 1998
www.commerx.com sales of raw materials, tools and maintenance
and repair products for the plastics industry.
ComputerJobs.com, Inc. Technology Provides Internet-based job screening and 33% 1998
www.computerjobs.com Employment resume posting for information technology
professionals, corporations and staffing firms.
CourtLink Legal Provides on-line access to court documents. 19% 1999
www.courtlink.com
CyberCrop.com, Inc. Agriculture Developing a system to provide an 80% 1999
www.cybercrop.com Internet-based service for agricultural
producers to purchase services and inputs, as
well as market their grain crops that include
corn, wheat and soybeans.
Deja.com, Inc. Media Provides a Web-based community for potential 31% 1997
www.deja.com purchasers to access user comments on a
variety of products and services.
e-Chemicals, Inc. Chemicals Provides Internet-based sales and 37% 1998
www.e-chemicals.com distribution of industrial chemicals.
eMerge Interactive, Inc. Livestock Provides Internet-based content, community 28% 1999
www.emergeinteractive.com and transaction services in an on-line
marketplace for the cattle industry.
EmployeeLife.com Healthcare Provides Internet-based solutions for 52% 1999
www.employeelife.com employee health benefits management across
the health care industry.
Internet Commerce Systems, Food Provides Internet-based product introduction 43% 1999
Inc. and promotion services to wholesale and
www.icsfoodone.com retail food distributors.
10
iParts Electronic Provides Internet-based sales and 66% 1999
www.ipartsupply.com Components distribution of electronic components.
JusticeLink, Inc. Legal Provides electronic filing, service and 37% 1999
www.justicelink.com retrieval of legal documents and information
among courts, attorneys, their clients and
other interested parties.
MetalSite, L.P. Metals Provides an Internet-based marketplace to 44% 1999
www.metalsite.com source, buy and sell metal products and
connect with metal professionals around the
world.
PaperExchange.com LLC Paper Provides Internet-based sales and 24% 1999
www.paperexchange.com distribution of all grades of pulp and paper.
Plan Sponsor Exchange, Inc. Asset Management Provides a Web-based community for asset 49% 1999
www.plansponsorexchange.com managers to reach fund sponsors.
Retail Exchange.com, Inc. Consumer Goods Provides an online B2B marketplace for the 30% 1999
www.retailexchange.com exchange of excess consumer products.
StarCite! Solutions, Inc. Travel Provides Internet-based services for planning 43% 1999
www.starcite.com and managing corporate meetings for event
planners.
Universal Access, Inc. Tele- Provides Internet-based ordering for 24% 1999
www.universalaccessinc.com communications provisioning and access and transportation
exchange services for network service
providers focused on business customers.
USgift.com Gift, Garden and Provides Internet-based sales and 38% 1999
www.USgift.com Home Decor distribution of gift, garden and home decor
accessories.
Horizontal:
asseTrade.Com, Inc. Used Capital Provides Internet-based asset and inventory 17% 1999
www.assetrade.com Equipment recovery, disposal and management solutions.
eMarketWorld, Inc. Special Event Provides industry-specific Web-based 42% 1999
www.emarketworld.com Services conferences and expositions that help
businesses understand the Internet.
ICG Commerce, Inc. Sourcing Provides strategic sourcing consulting and 60% 1999
www.icgcommerce.com on-line Internet purchasing.
NetVendor Inc. Asset Disposition Provides B2B, industry-specific Internet 27% 1999
www.netvendor.com commerce solutions for mid-size manufacturers
and distributors of automotive, industrial
and electronic products.
ONVIA.com, Inc. Small Business Provides small businesses with a wide breadth 23% 1999
www.onvia.com Services of tailored products and services over the
Internet.
Residential Delivery Logistics Provides home delivery services to e-commerce 38% 1999
Services, Inc. companies, retailers, and catalog companies
www.rdshome.com through a branded network of local agents.
VerticalNet, Inc. Industrial Services Provides industry-specific Web-based trade 34% 1996
www.verticalnet.com communities for businesses and professionals.
11
Enabling Service Provider Categories
Enabling service providers assist traditional businesses in the following
ways:
. Strategic Consulting and Systems Integration. Strategic
consultants assist traditional businesses in developing their e-
commerce strategies. Systems integrators develop and implement
technological infrastructure that enables e-commerce. Systems
integrators also integrate e-commerce applications with existing
enterprise applications. Strategic consultants and systems
integrators typically bill their clients on a project-by-project
basis.
. Software Providers. Software providers design and sell software
applications that support e-commerce and integrate business
functions. Software providers may sell or license their products.
. Outsourced Service Providers. Outsourced service providers offer
software applications, infrastructure and related services
designed to help traditional businesses reduce cost, improve
operational efficiency and decrease time to market. Outsourced
service providers may charge fees on a per-use or periodic basis.
Our current enabling service provider partner companies furnish a variety
of technology-based solutions to their customers. In the future, we may acquire
interests in enabling service providers that focus on two specific types of
solutions: physical fulfillment and financial fulfillment. Physical fulfillment
involves the movement of goods on behalf of market makers or traditional
businesses. Financial fulfillment includes a wide variety of financial services
such as the management of accounts receivable risk and commercial loans.
Enabling Service Provider Profiles
Table of Enabling Service Providers. The partner companies listed below are
important to our strategy because the growth of our partner companies increases
the value of our collaborative network. We believe that enabling service
providers will facilitate innovation and growth of our market maker companies by
providing them with critical services. The following table shows certain
information regarding our enabling service provider partner companies by
category as of December 31, 1999. Our ownership positions have been calculated
based on the issued and outstanding common stock of each partner company,
assuming the issuance of common stock on the conversion or exercise of preferred
stock and convertible notes, but excluding the effect of unexercised options and
warrants.
Our Partner
Ownership Company
Category and Name Description of Business Percentage Since
- -------------------------------------- ------------------------------------------------------------ ------------- --------
Strategic Consulting and
Systems Integration:
Benchmarking Partners, Inc. Provides e-commerce best practices research and 13% 1996
www.benchmarking.com consulting services to maximize return on investment from
demand/supply chain and e-business initiatives.
Context Integration, Inc. Provides systems integration services focused on customer 14% 1997
www.context.com support, data access and e-commerce.
US Interactive, Inc. Provides a range of consulting and technical services relating 3% 1996
www.usinteractive.com to Internet marketing solutions.
12
Software Providers:
Blackboard Inc. Provides universities and corporations with applications that 29% 1998
www.blackboard.com enable them to host classes and training on the Internet.
ClearCommerce Corp. Provides comprehensive e-commerce solutions including 15% 1997
www.clearcommerce.com transaction and payment processing, credit card authorization,
fraud tracking and reporting functions.
Entegrity Solutions Corporation Provides encryption software to secure transactions and 11% 1996
www.entegrity.com communications between business applications.
Servicesoft Technologies, Inc. Provides tools and services used by its customers to create 5% 1998
www.servicesoft.com Internet customer service applications consisting of
self-service, e-mail response and live interaction products.
Syncra Software, Inc. Provides software that improves supply chain efficiency through 35% 1998
www.syncra.com collaboration of trading partners over the Internet.
TRADEX Technologies, Inc. Provides e-commerce application software that enables 10% 1999
www.tradex.com enterprises to create on-line marketplaces and exchanges.
Outsourced Service Providers:
Breakaway Solutions, Inc. Provides application service hosting, e-commerce, consulting and 40% 1999
www.breakaway.com systems integration services to growing companies.
CommerceQuest, Inc. Provides a messaging service for data sharing across separate 28% 1998
www.commercequest.com enterprises. Also provides software, systems integration
services and managed network services for application
integration within enterprises or with external trading partners
and customers.
iSky Provides services to improve customer communications 31% 1996
www.isky.com and relationships.
Jamcracker Inc. Provides integrated application service provider services to 24% 1999
www.jamcracker.com middle market companies.
LinkShare Corporation Establishes affiliate relationships for on-line merchants 34% 1998
www.linkshare.com with other Web sites to facilitate e-commerce.
PrivaSeek, Inc. Provides consumers with control of their Web-based 8% 1998
www.privaseek.com personal profiles, allowing merchants to offer
consumers incentives for selective disclosure.
SageMaker, Inc. Provides services that combine an enterprise's external 21% 1998
www.sagemaker.com and internal information assets into a single, Web-
based knowledge management platform.
traffic.com, Inc. Provides real time traffic monitoring for logistics and 20% 1999
www.traffic.com transportation optimization.
United Messaging, Inc. Provides high performance electronic messaging services 37% 1999
www.unitedmessaging.com for organizations with mission critical e-mail networks.
Vivant! Corporation Provides process automation and decision support services 31% 1998
www.vivantcorp.com that enable companies to strategically manage contractors,
consultants and temporary employees.
13
Government Regulations and Legal Uncertainties
As of March 1, 2000, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, on-line
gambling, distribution and the quality of goods and services. The enactment of
any additional laws or regulations may impede the growth of the Internet and B2B
e-commerce, which could decrease the revenue of our partner companies and place
additional financial burdens on them.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding on-line copyright infringement and the protection of
information collected on-line from children. Although these laws may not have a
direct adverse effect on our business or those of our partner companies, they
add to the legal and regulatory burden faced by B2B e-commerce companies. Other
specific areas of legislative activity are:
. Taxes. Congress recently enacted a three-year moratorium, ending
on October 21, 2001, on the application of "discriminatory" or
"special" taxes by the states on Internet access or on products
and services delivered over the Internet. Congress further
declared that there will be no federal taxes on e-commerce until
the end of the moratorium. However, this moratorium does not
prevent states from taxing activities or goods and services that
the states would otherwise have the power to tax. Furthermore,
the moratorium does not apply to certain state taxes that were in
place before the moratorium was enacted.
. On-line Privacy. Both Congress and the Federal Trade Commission
are considering regulating the extent to which companies should
be able to use and disclose information they obtain on-line from
consumers. If any regulations are enacted, B2B e-commerce
companies may find certain marketing activities restricted. The
Federal Trade Commission has issued regulations enforcing the
Children's On-line Privacy Protection Act, which take effect on
April 21, 2000. These regulations make it illegal to collect
information on-line from children under the age of 13 without
first obtaining parental consent. These regulations also require
Web site operators to allow parents to inspect and remove their
children's information from any database. Compliance with these
regulations could pose a significant administrative burden for
Web site operators whose products and services are targeted to
children or may be attractive to children. Also, the European
Union has directed its member nations to enact much more
stringent privacy protection laws than are generally found in the
United States, and has threatened to prohibit the export of
certain personal data to United States companies if similar
measures are not adopted. Such a prohibition could limit the
growth of foreign markets for United States B2B e-commerce
companies. The Department of Commerce is negotiating with the
European Union to provide exemptions from the European Union
regulations, but the outcome of these negotiations is uncertain.
. Regulation of Communications Facilities. To some extent, the
rapid growth of the Internet in the United States has been due to
the relative lack of government intervention in the marketplace
for Internet access. Lack of intervention may not continue in the
future. For example, several telecommunications carriers are
seeking to have telecommunications over the Internet regulated by
the Federal Communications Commission in the same manner as other
telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to
regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these
providers. Some Internet service providers are seeking to have
broadband Internet access over cable systems regulated in much
the same manner as telephone services, which could slow the
deployment of broadband Internet access services. Because of
these proceedings or others, new laws or regulations could be
enacted which could burden the companies that provide the
infrastructure on which the Internet is based, thereby slowing
the rapid expansion of the medium and its availability to new
users.
14
. Other Regulations. The growth of the Internet and e-commerce may lead
to the enactment of more stringent consumer protection laws. The
Federal Trade Commission may use its existing jurisdiction to police
e-commerce activities, and it is possible that the Federal Trade
Commission will seek authority from Congress to regulate certain on-
line activities.
Generally applicable laws may affect us and our partner companies. The
exact applicability of many of these laws to B2B e-commerce, however, is
uncertain.
Proprietary Rights
Our partner companies have copyrights with respect to software
applications, Web sites and other materials. These materials may constitute an
important part of our partner companies' assets and competitive strengths.
Federal law generally protects such copyrights for 90 years from the creation of
the underlying material.
Competition
Competition From our Shareholders and Within our Network
We may compete with our shareholders and partner companies for Internet-
related opportunities. Comcast Corporation and Safeguard Scientifics own 8.1 %
and 13.7 % of our outstanding common stock, respectively, based on the number of
shares held by each of them on March 1, 2000. These shareholders may compete
with us to acquire interests in B2B e-commerce companies. Comcast Corporation
and Safeguard Scientifics currently each has a designee as a member of our board
of directors and IBM Corporation and AT&T Corp. each has a right to designate a
board observer, which may give these companies access to our business plan and
knowledge about potential acquisitions. In addition, we may compete with our
partner companies to acquire interests in B2B e-commerce companies, and our
partner companies may compete with each other for acquisitions or other B2B e-
commerce opportunities. In particular, VerticalNet seeks to expand, in part
through acquisition, its number of B2B communities. VerticalNet, therefore, may
seek to acquire companies that we would find attractive. While we may partner
with VerticalNet on future acquisitions, as of December 31, 1999, we have no
current contractual obligations to do so. We do not have any contracts or other
understandings with our shareholders or partner companies that would govern the
resolution of these potential conflicts. Such competition, and the complications
posed by the designated directors, may deter companies from partnering with us
and may limit our business opportunities.
Competition Facing our Partner Companies
Competition for Internet products and services is intense. As the market
for B2B e-commerce grows, 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 customer's:
. purchasing budget for services, materials and supplies with other on-
line providers and traditional distribution channels;
. dollars spent on consulting services with many established information
systems and management consulting firms; and
. advertising budget with on-line services and traditional off-line
media, such as print and trade associations.
In addition, some of our partner companies compete to attract and retain a
critical mass of buyers and sellers. Several 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
Internet products or services that are superior to, or have greater market
acceptance than, the solutions offered by our partner companies. If our partner
companies are unable to compete successfully against their competitors, our
partner companies may fail.
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
15
in responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
Competition for Partner Companies
We face competition from other capital providers including publicly-traded
Internet companies, venture capital companies and large corporations. Many of
these competitors have greater financial resources and brand name recognition
than we do. These competitors may limit our opportunity to acquire interests in
new partner companies. If we cannot acquire interests in attractive companies,
our strategy to build a collaborative network of partner companies may not
succeed.
Employees
As of December 31, 1999, excluding our partner companies, we had 70
employees, 69 of whom work with us on a full-time basis. We consider our
relationships with our employees to be good. None of our employees are covered
by a collective bargaining agreement.
Financial Information About Segments
Segment Information is set forth in Note 10 of the Notes of Consolidated
Financial Statements included in Item 8 below and incorporated herein by
reference.
Financial Information About Geographic Areas
We do not believe that foreign or geographic area revenues are material or
significant to an understanding of our business and operations during the three-
year period ending December 31, 1999. Where appropriate, information concerning
our initiatives in Europe is discussed elsewhere in this Item 1.
ITEM 2. PROPERTIES
The location and general description of our properties by reportable
segments as of March 1, 2000 are as follows:
General ICG Operations
We lease approximately 33,000 square feet of office, administrative,
operations and data center space, principally in Wayne, Pennsylvania, San
Francisco, California, Boston, Massachusetts, Seattle, Washington and London,
England, under leases expiring from 2001 to 2017. Our corporate headquarters are
located at 435 Devon Park Drive, Building 800 in an office facility located in
Wayne, Pennsylvania, where we lease approximately 3,650 square feet. We plan to
move into a larger corporate headquarters in Wayne, Pennsylvania during the
first half of 2000.
Partner Company Operations
We lease approximately 21,000 square feet of office, administrative, sales
and marketing, operations and data center space, principally in Pennsylvania,
California, Illinois, Maine, Colorado and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during 1999.
16
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, their ages and their positions are as follows:
Name Age Position
---- --- --------
Walter W. Buckley, III (1) 39 President, Chief Executive Officer
and Director
Douglas A. Alexander (2) 38 Managing Director, East Coast
Operations
Kenneth A. Fox (3) 29 Managing Director, West Coast
Operations and Director
David D. Gathman (4) 52 Chief Financial Officer and
Treasurer
Henry N. Nassau (5) 45 Managing Director, General Counsel
and Secretary
(1) Walter W. Buckley, III, is a co-founder and has served as our President
and Chief Executive Officer and as one of our directors since March 1996.
Prior to co-founding us, Mr. Buckley worked for Safeguard Scientifics, Inc. as
Vice President of Acquisitions from 1991 to February 1996. Mr. Buckley
directed many of Safeguard Scientifics' investments and was responsible for
developing and executing Safeguard Scientifics' multimedia and Internet
investment strategies. Mr. Buckley serves as a director of Breakaway
Solutions, Inc., e-Chemicals, Inc., iSky, Inc., PrivaSeek, Inc., Syncra
Software, Inc., VerticalNet, Inc. and Who?Vision Systems, Inc.
(2) Douglas A. Alexander has served as one of our Managing Directors since
September 1997. Prior to joining us, Mr. Alexander co-founded Reality Online,
Inc. in 1986 and sold it to Reuters Group in 1994. Mr. Alexander continued to
serve as President and Chief Executive Officer of Reality Online after its
acquisition by Reuters Group until September 1997 and was a key contributor to
Reuters' Internet initiatives. Mr. Alexander is Chairman of the Board of
VerticalNet, Inc. and serves as a director of Arbinet Communications, Inc.,
Blackboard Inc., ComputerJobs.com, Inc., Deja.com, Inc., eMerge Interactive,
Inc., LinkShare Corporation, SageMaker, Inc., StarCite, Inc. and traffic.com,
Inc.
(3) Kenneth A. Fox is a co-founder and has served as one of our Managing
Directors since our inception in March 1996. Mr. Fox has also served as one of
our directors since February 1999. Prior to co-founding us, Mr. Fox served as
Director of West Coast Operations for Safeguard Scientifics, Inc. and
Technology Leaders II, L.P., a venture capital partnership, from 1994 to 1996.
In this capacity, Mr. Fox led the development of and managed the West coast
operations for these companies. Mr. Fox serves as a director of AUTOVIA
Corporation, Bidcom, Inc., Commerx, Inc., Deja.com, Inc., Entegrity Solutions
Corporation, ONVIA.com, Inc. and Vivant! Corporation.
(4) David D. Gathman has served as our Chief Financial Officer and Treasurer
since January 1999. Prior to joining us, Mr. Gathman was Chief Financial
Officer and Executive Vice President, Finance and Administration of Integrated
Systems Consulting Group, Inc. from January 1997 through its merger with First
Consulting Group, Inc. in December 1998. He also served as Chief Operating
Officer, Vice President, Secretary and Assistant Treasurer of Integrated
Systems Consulting Group, Inc. from April 1994 to December 1998 and as a
director of the company. Mr. Gathman brings to us over 30 years of finance-
related experience, the last 16 of which were focused in the information
technology industry.
(5) Henry N. Nassau has served as one of our Managing Directors and as our
General Counsel and Secretary since May 1999. Mr. Nassau was a partner in the
law firm of Dechert Price & Rhoads from September 1987 to May 1999 and was
Chair of the Business Department from January 1998 to May 1999. At Dechert
Price & Rhoads, Mr. Nassau engaged in the practice of corporate law,
concentrating on mergers and acquisitions. Mr.
17
Nassau serves as a director of The Albert Abela Corporation, Bliley Electric
Company, JusticeLink, Inc. and Data West Corporation which does business as
CourtLink.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is traded on the Nasdaq National Market under the
symbol "ICGE." Our initial public offering of stock occurred on August 5, 1999
at $6.00 per share. The price range per share reflected in the table below is
the highest and lowest sale price for our stock as reported by the Nasdaq
National Market during each quarter our common stock has been publicly traded.
The information provided below has been restated to reflect a two-for-one stock
split, in the form of a 100% stock dividend, to each shareholder of record as of
December 6, 1999.
Three Months Ended
Sep. 30, 1999 Dec. 31, 1999
Price range per share:
Low $ 7.00 $ 43.00
High $53.75 $193.63
As of March 1, 2000, the last reported sale price for our common stock on
the Nasdaq National Market was $110.50 per share.
(b) Holders. As of March 1, 2000, there were approximately 1,392 holders
of record of our common stock.
(c) Dividends. We have never declared or paid cash dividends on our
capital stock, and we do not intend to pay cash dividends in the foreseeable
future. We plan to retain any earnings for use in the operation of our business
and to fund future growth.
(d) Sale of Unregistered Securities.
(1) In January 1999, Internet Capital Group, L.L.C. issued an
aggregate of 158,750 units of Membership Interests to a director of Internet
Capital Group and other purchasers in a private placement subscription offering
for an aggregate purchase price of $317,500.
(2) On February 2, 1999, each unit of the foregoing Membership
Interests was converted into one share of our Common Stock as a result of the
merger of Internet Capital Group, L.L.C. into Internet Capital Group.
(3) In February 1999, we issued an aggregate of 14,706,250 shares of
Common Stock to employees, directors, consultants and other purchasers in a
private placement subscription offering for an aggregate purchase price of
$29,412,500.
(4) In March 1999, we issued an aggregate of 1,125,000 shares of
Common Stock to consultants and other purchasers in a private placement
subscription offering for an aggregate purchase price of $2,250,000.
(5) On August 4, 1999, we issued 254,635 shares of Common Stock to
PaperExchange.com LLC in a private placement, in conjunction with our previous
agreement to acquire PaperExchange.com LLC, for a purchase price of $2,750,058.
(6) On August 5, 1999, we issued 3,750,000 shares of Common Stock to
International Business Machines Corporation in a private placement occurring a
the same time as our initial public offering for a
18
purchase price of $45,000,000. Merrill Lynch & Co. acted as the placement agent
in connection with this transaction, and we paid $2,250,000 in placement agency
fees to Merrill Lynch & Co.
(7) On November 22, 1999, we issued 262,319 shares of Common Stock to
PaperExchange.com LLC in a private placement, in conjunction with our previous
agreement to acquire PaperExchange.com LLC, for a purchase price of $2,833,045.
(8) In December 1999, each of the above-described shares of Common
Stock of Internet Capital Group was converted into two shares of common stock
due to a stock split by way of a 100% stock dividend.
(9) On December 13, 1999, we issued 609,533 shares of Common Stock of
AT&T Corp. in a private placement for a purchase price of $50,000,000.
(10) On December 15, 1999, we issued 462,962 shares of Common Stock to
Ford Motor Company in a private placement occurring at the same as our follow-on
public offering of Common Stock for a purchase price of $50,000,000.
(11) On December 15, 1999, we issued 185,185 shares of Common Stock to
Internet Assets, Inc. in a private placement occurring at the same time as our
follow-on public offering of Common Stock for a purchase price of $20,000,000.
Warrants to Purchase Common Stock
On May 10, 1999, in conjunction with our issuance of convertible
subordinated notes, we granted to the holders of our convertible notes warrants
exercisable at the initial public offering price of $6 per share to purchase
approximately 3,000,000 shares of our Common Stock.
On April 30, 1999, in conjunction with our Secured Revolving Credit
Facility dated April 30, 1999, we granted to the lenders warrants exercisable at
$5 per share to purchase an aggregate of 400,000 shares of our Common Stock.
Notes Convertible to Common Stock
On May 10, 1999, we issued convertible subordinated notes in an aggregate
principal amount of $90 million. Upon consummation of our initial public
offering on August 5, 1999, the convertible notes automatically converted into
approximately 15,000,000 shares of our common stock at the initial public
offering price of $6 per share.
On December 15, 1999, we issued $20,000,000 principal amount of our 5-1/2%
Convertible Subordinated Notes due 2004 to Internet Assets, Inc. in a private
placement. The notes are convertible, at the option of the holder, at any time
on or before December 21, 2004 into shares of our Common Stock. The conversion
price is $127.44 per share, which is equal to a conversion rate of 7.8468 shares
per $1,000 principal amount of notes, subject to adjustment.
Options to Purchase Common Stock
We have granted from time to time stock options to our employees,
directors, advisory board members and certain employees of our partner
companies. For the 12 months ended December 31, 1999, option to purchase
28,995,500 shares of Common Stock were granted at a weighted average exercise
price of $6.82 per share.
The sale and issuance of securities in the transactions described above
were exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering, where the purchasers were sophisticated investors who represented
their intention to acquire securities for investment only and not with a view to
distribution and received or had access to adequate information about the
Company, or in reliance on Rule 701 promulgated under the Securities Act.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected historical financial
information of Internet Capital Group that has been derived from our audited
financial statements from March 4, 1996, the date of our inception, through
December 31, 1996 and for each of the three years ended December 31, 1997, 1998
and 1999, respectively. The financial information may not be indicative of our
future performance. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and Notes
thereto included in this Report.
March 4, 1996
(Inception) to
(in thousands except per share amounts) December 31, Year Ended December 31,
-----------------------
1996 1997 1998 1999
---- ----------------------------------------
Consolidated Statements of Operations Data:
Revenue....................................................... $ 285 $ 792 $ 3,135 $ 16,536
------- ------- -------- ----------
Operating Expenses
Cost of revenue............................................. 427 1,767 4,643 8,156
Selling, general and administrative........................ 1,921 5,743 15,514 48,924
------- ------- -------- ----------
Total operating expenses................................... 2,348 7,510 20,157 57,080
------- ------- -------- ----------
(2,063) (6,718) (17,022) (40,544)
Other income, net.......................................... -- -- 30,483 67,384
Interest income (expense), net............................. 88 138 925 5,734
------- ------- -------- ----------
Income (Loss) Before Income Taxes, Minority
Interest and Equity Income (Loss).......................... (1,975) (6,580) 14,386 32,574
Income taxes.................................................. -- -- -- 23,722
Minority interest............................................. 427 (106) 5,382 6,026
Equity income (loss).......................................... (514) 106 (5,869) (92,099)
------- ------- -------- ----------
Net Income (Loss)............................................. $(2,062) $(6,580) $ 13,899 $ (29,777)
======= ======= ======== ==========
Net income (loss) per share - diluted......................... $(0.05) $(0.10) $0.12 $(0.15)
Weighted average shares outstanding - diluted................. 40,792 68,198 112,299 201,851
Pro forma net income (loss) (unaudited)....................... $ 8,756 $ (37,449)
Pro forma net income (loss) per share-diluted (unaudited)..... $0.08 $(0.19)
Consolidated Balance Sheet Data:
Cash and cash equivalents..................................... $ 3,215 $ 5,967 $ 26,841 $1,343,459
Working capital............................................... 4,883 2,391 20,453 1,305,380
Total assets.................................................. 13,629 31,481 96,785 2,050,384
Long-term debt................................................ 167 400 352 3,185
Convertible subordinated notes................................ -- -- -- 566,250
Total shareholders' equity.................................... 12,859 26,635 80,724 1,420,221
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. 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 elsewhere in this Report.
20
General
Internet Capital Group is an Internet company actively engaged in B2B e-
commerce through a network of partner companies. As of December 31, 1999, we
owned interests in 49 B2B e-commerce companies that we refer to as our partner
companies. We focus on two types of B2B e-commerce companies, which we call
market makers and enabling service providers.
Because we acquire significant interests in B2B e-commerce companies, many
of which generate net losses, we have experienced, and expect to continue to
experience, significant volatility in our quarterly results. We do not know if
we will report net income in any period, and we expect that we will report net
losses in many quarters for the foreseeable future. While our partner companies
have consistently reported losses, we have recorded net income in certain
periods and experienced significant volatility from period to period due to one-
time transactions and other events incidental to our ownership interests in and
advances to partner companies. These transactions and events are described in
more detail under "Net Results of Operations-- General ICG Operations--Other
Income" and include dispositions of, and changes to, our partner company
ownership interests, dispositions of our holdings of available-for-sale
securities, and impairment charges. On a continuous basis, but no less
frequently than at the end of each reporting period, we evaluate the carrying
value of our ownership interests in and advances to each of our partner
companies for possible impairment based on achievement of business plan
objectives and milestones, the fair value of each ownership interest and advance
in the partner company relative to carrying value, the financial condition and
prospects of the partner company, and other relevant factors. The business plan
objectives and milestones we consider include, among others, those related to
financial performance such as achievement of planned financial results or
completion of capital raising activities, and those that are not primarily
financial in nature such as the launching of a Web site or the hiring of key
employees. The fair value of our ownership interests in and advances to
privately held partner companies is generally determined based on the value at
which independent third parties have invested or have committed to invest in our
partner companies.
The presentation and content of our consolidated financial statements is
largely a function of the presentation and content of the financial statements
of our partner companies. To the extent our partner companies change the
presentation or content of their financial statements, as may be required upon
review by the Securities and Exchange Commission or changes in accounting
literature, the presentation and content of our financial statements may also
change.
On August 23, 1999 the Securities and Exchange Commission 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. Because of our operating
focus, the significant ownership interests we hold in our partner companies and
the greater operating flexibility we obtain from the exemptive order, we do not
believe that the Investment Company Act will adversely affect our operations or
shareholder value.
Effect of Various Accounting Methods on our Results of Operations
The various interests that we acquire in our partner companies are
accounted for under three broad methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on our
voting interest in a partner company.
Consolidation. Partner companies in which we directly or indirectly own
more than 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, a partner
company's results of operations are reflected within our Consolidated Statements
of Operations. Participation of other partner company shareholders in the
earnings or losses of a consolidated partner company is reflected in the caption
"Minority interest" in our Consolidated Statements of Operations. Minority
interest adjusts our consolidated net results of operations to reflect only our
share of the earnings or losses of the consolidated partner company. VerticalNet
was our only consolidated partner company through December 31, 1998. However,
due to VerticalNet's initial public offering in February 1999, our voting
ownership interest in VerticalNet decreased below 50% and we have accounted for
VerticalNet under the equity method of accounting since February 1999. We
acquired controlling majority voting interests in Breakaway Solutions during the
three months ended March 31, 1999, EmployeeLife.com and iParts during the three
months ended June 30, 1999, CyberCrop.com (previously AgProducer Network) during
the three months ended September 30, 1999 and Animated Images and ICG
21
Commerce during the three months ended December 31, 1999, each of which was
consolidated from the date of its acquisition. Due to Breakaway Solutions'
initial public offering in October 1999, our voting ownership interest in
Breakaway Solutions decreased below 50% and we have accounted for Breakaway
Solutions under the equity method of accounting since October 1999. As of
December 31, 1999, Animated Images, CyberCrop.com, EmployeeLife.com, ICG
Commerce, and iParts were our only consolidated partner companies.
The effect of a partner company's net results of operations on our net
results of operations is generally the same under either the consolidation
method of accounting or the equity method of accounting, because under each of
these methods only our share of the earnings or losses of a partner company is
reflected in our net results of operations in the Consolidated Statements of
Operations.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, representation on the partner company's board
of directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the partner company, including voting rights associated
with our holdings in common, preferred and other convertible instruments in the
partner company. Under the equity method of accounting, a partner company's
results of operations are not reflected within our Consolidated Statements of
Operations; however, our share of the earnings or losses of the partner company
is reflected in the caption "Equity income (loss)" in the Consolidated
Statements of Operations. As of December 31, 1998, we accounted for eight of our
partner companies under the equity method of accounting. As of December 31,
1999, we accounted for 31 of our partner companies using this method.
Our partner companies accounted for under the equity method of accounting
at December 31, 1998 and 1999 included:
Voting Ownership
----------------------------
Partner
Company December 31, December 31,
Since 1998 1999
----------------------------------------
EQUITY METHOD:
AsseTRADE.com, Inc................................. 1999 N/A 17%
Bidcom, Inc........................................ 1999 N/A 35%
Blackboard Inc..................................... 1998 35% 29%
Breakaway Solutions, Inc........................... 1999 N/A 40%
CommerceQuest, Inc................................. 1998 N/A 28%
CommerX, Inc....................................... 1998 34% 40%
ComputerJobs.com, Inc.............................. 1998 33% 33%
CourtLink, Inc..................................... 1999 N/A 19%
eMarketWorld, Inc.................................. 1999 N/A 42%
eMerge Interactive, Inc............................ 1999 N/A 45%
Internet Commerce Systems, Inc..................... 1999 N/A 43%
iSky, Inc.......................................... 1996 31% 31%
Jamcracker, Inc.................................... 1999 N/A 24%
JusticeLink, Inc................................... 1999 N/A 37%
LinkShare Corporation.............................. 1998 34% 34%
MetalSite, LLC..................................... 1999 N/A 44%
NetVendor, Inc..................................... 1999 N/A 27%
ONVIA.com, Inc..................................... 1999 N/A 23%
PaperExchange.com LLC.............................. 1999 N/A 24%
Plan Sponsor Exchange, Inc......................... 1999 N/A 49%
Residential Delivery Services, Inc................. 1999 N/A 38%
RetailExchange, Inc................................ 1999 N/A 30%
SageMaker, Inc..................................... 1998 22% 21%
StarCite, Inc...................................... 1999 N/A 43%
Syncra Software, Inc............................... 1998 53% 35%
traffic.com, Inc................................... 1999 N/A 20%
United Messaging, Inc.............................. 1999 N/A 37%
Universal Access, Inc.............................. 1999 N/A 24%
Usgift.com, Inc.................................... 1999 N/A 38%
VerticalNet, Inc................................... 1996 N/A 34%
Vivant! Corporation................................ 1998 23% 31%
22
As of December 31, 1999, we owned voting convertible preferred stock in all
companies listed except Breakaway Solutions and VerticalNet. In addition, we
also owned common stock in CommerceQuest, iSky, SageMaker, and Universal
Access. Our voting ownership in Breakaway Solutions and VerticalNet consisted
only of common stock at December 31, 1999. VerticalNet was consolidated at
December 31, 1998. CommerceQuest and Universal Access were accounted for under
the cost method of accounting at December 31, 1998. We have representation on
the board of directors of all of the above partner companies. During the year
ended December 31, 1999, Sky Alland Marketing changed its name to iSky.
Most of our equity method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most
equity method partner companies incurred substantial losses in 1998 and 1999 and
are expected to continue to incur substantial losses in 2000. One equity method
partner company at December 31, 1998 generated a net profit of less than $1
million in 1998; however, this partner company did not generate a profit in
1999. Additionally, we recognize goodwill amortization expense related to the
"excess basis" of our equity method partner companies.
Cost Method. Partner companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, our share of the earnings or
losses of these companies is not included in our Consolidated Statements of
Operations.
Our partner companies accounted for under the cost method of accounting at
December 31, 1998 and 1999 included:
Partner Voting Ownership
Company December 31, December 31,
Since 1998 1999
COST METHOD:
Arbinet Communications, Inc.............................. 1999 N/A 8%
AUTOVIA Corporation...................................... 1998 15% 16%
Benchmarking Partners, Inc............................... 1996 13% 12%
ClearCommerce Corporation................................ 1997 17% 15%
Collabria, Inc........................................... 1999 N/A 11%
CommerceQuest, Inc....................................... 1998 0% N/A
Context Integration, Inc................................. 1997 18% 14%
Deja.com, Inc............................................ 1997 0% 2%
e-Chemicals, Inc......................................... 1998 0% 0%
Entegrity Solutions Corporation.......................... 1996 12% 11%
PrivaSeek, Inc........................................... 1998 16% 8%
ServiceSoft Technologies, Inc............................ 1998 12% 5%
TRADEX Technologies, Inc................................. 1999 N/A 10%
US Interactive, Inc...................................... 1996 4% 3%
In most cases, we have representation on the board of directors of the
above companies, including those in which we hold non-voting securities. As of
December 31, 1999, we owned voting convertible preferred stock in all companies
listed except Deja.com, in which we owned non-voting convertible preferred
stock, and e-Chemicals, in which we owned non-voting convertible debentures. In
addition, we also owned common stock in Deja.com. We record our ownership in
debt securities at cost as we have the ability and intent to hold these
securities until maturity. In addition to our investments in voting and non-
voting equity and debt securities, we also periodically make advances to our
partner companies in the form of promissory notes. There were advances to cost
method partner companies totaling $2.1 million at December 31, 1999. During the
year ended December 31, 1999, RapidAutoNet Corporation changed its name to
AUTOVIA Corporation.
Most of our cost method partner companies are in a very early stage of
development and have not generated significant revenues. In addition, most cost
method partner companies incurred substantial losses in 1998 and 1999 and are
expected to continue to incur substantial losses in 2000. Two cost method
partner companies were profitable in 1998, one of which was not profitable in
1999. None of our cost method partner companies have paid
23
dividends during our period of ownership and they generally do not intend to pay
dividends in the foreseeable future. US Interactive is accounted for under SFAS
115.
Effect of Various Accounting Methods on the Presentation of our Consolidated
Financial Statements
The presentation of our consolidated financial statements may differ from
period to period primarily due to whether or not we apply the consolidation
method of accounting or the equity method of accounting. For example, since our
inception through December 31, 1998 we consolidated VerticalNet's financial
statements with our own. However, due to VerticalNet's initial public offering
in February 1999, our voting ownership interest in VerticalNet decreased to
below 50%. Therefore, we have applied the equity method of accounting since
February 1999. We also consolidated Breakaway Solutions' financial statements
from the date of acquisition (January 6, 1999) through September 30, 1999.
However, due to Breakaway Solutions' initial public offering in October 1999,
our voting ownership interest in Breakaway Solutions decreased to below 50%.
Therefore, we have applied the equity method of accounting since October 1999.
We acquired controlling majority voting interests in Breakaway Solutions
during the three months ended March 31, 1999, EmployeeLife.com and iParts during
the three months ended June 30, 1999, CyberCrop.com during the three months
ended September 30, 1999, and Animated Images and ICG Commerce during the three
months ended December 31, 1999, each of which was consolidated from the date of
its acquisition. The presentation of our consolidated financial statements looks
substantially different for the year ended December 31, 1999 compared to 1998 as
a result of consolidating Animated Images, Breakaway Solutions, CyberCrop.com,
EmployeeLife.com, ICG Commerce, and iParts and no longer consolidating
VerticalNet in our consolidated financial statements.
To understand our net results of operations and financial position without
the effect of consolidating our majority owned subsidiaries, Note 11 to our
Consolidated Financial Statements summarizes our Parent Company Statements of
Operations and Balance Sheets which treat VerticalNet, Animated Images,
Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts
as if they were accounted for under the equity method of accounting for all
periods presented. Our share of the losses of VerticalNet, Animated Images,
Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts
is included in "Equity income (loss)" in the Parent Company Statements of
Operations. The losses recorded in excess of the carrying value of VerticalNet
at December 31, 1997 and 1998 are included in "Non-current liabilities" and the
carrying value of VerticalNet, Animated Images, Breakaway Solutions,
CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts as of December 31,
1999 are included in "Ownership interests in and advances to Partner Companies"
in the Parent Company Balance Sheets.
Net Results of Operations
Our reportable segments determined in accordance with Statement of
Financial Accounting Standards No. 131 are Partner Company Operations and
General ICG Operations. Partner Company Operations includes the effect of
consolidating VerticalNet for the period from our inception on March 4, 1996
through December 31, 1998 and Animated Images, Breakaway Solutions,
CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts from their dates of
acquisition in 1999, and recording our share of earnings or losses of partner
companies accounted for under the equity method of accounting. General ICG
Operations represents the expenses of providing strategic and operational
support to our partner companies, as well as the related administrative costs
related to these expenses. General ICG Operations also includes the effect of
transactions and other events incidental to our ownership interests in our
partner companies and our operations in general.
24
(in thousands)
Year Ended December 31,
--------------------------------------
1997 1998 1999
---- ---- ----
Summary of Consolidated Net Income (Loss)
Partner Company Operations................................. $ (4,779) $ (14,081) $ (103,418)
General ICG Operations..................................... (1,801) 27,980 73,641
-------- --------- ----------
Net income (loss) -- Consolidated Total.................... $ (6,580) $ 13,899 $ (29,777)
======== ========= ==========
Partner Company Operations
Revenue.................................................... $ 792 $ 3,135 $ 16,536
Operating expenses
Cost of revenue......................................... 1,767 4,643 8,156
Selling, general and administrative..................... 3,689 12,001 25,535
-------- --------- ----------
Total operating expenses................................ 5,456 16,644 33,691
-------- --------- ----------
(4,664) (13,509) (17,155)
Other income (expense), net................................ -- -- (258)
Interest income............................................ 11 212 243
Interest expense........................................... (126) (297) (175)
-------- --------- ----------
Income (loss) from Partner Company Operations
before income taxes, minority interest and
equity income (loss).................................... (4,779) (13,594) (17,345)
Income taxes............................................... -- -- --
Minority interest.......................................... (106) 5,382 6,026
Equity income (loss)....................................... 106 (5,869) (92,099)
-------- --------- ----------
Loss from Partner Company Operations....................... $ (4,779) $ (14,081) $ (103,418)
======== ========= ==========
General ICG Operations
General and administrative................................. $ 2,054 $ 3,513 $ 23,389
-------- --------- ----------
(2,054) (3,513) (23,389)
Other income (expense), net................................ -- 30,483 67,642
Interest income............................................ 253 1,094 9,388
Interest expense........................................... -- (84) (3,722)
-------- --------- ----------
Income (loss) from General ICG Operations before
income taxes............................................ (1,801) 27,980 49,919
Income taxes............................................... -- -- 23,722
-------- --------- ----------
Income (loss) from General ICG Operations.................. $ (1,801) $ 27,980 $ 73,641
======== ========= ==========
Consolidated Total
Revenue.................................................... $ 792 $ 3,135 $ 16,536
Operating expenses
Cost of revenue......................................... 1,767 4,643 8,156
Selling, general and administrative..................... 5,743 15,514 48,924
-------- --------- ----------
Total operating expenses................................ 7,510 20,157 57,080
-------- --------- ----------
(6,718) (17,022) (40,544)
Other income (expense), net................................ -- 30,483 67,384
Interest income............................................ 264 1,306 9,631
Interest expense........................................... (126) (381) (3,897)
-------- --------- ----------
Income (loss) before income taxes, minority
interest and equity income (loss)...................... (6,580) 14,386 32,574
Income taxes............................................... -- -- 23,722
Minority interest.......................................... (106) 5,382 6,026
Equity income (loss)....................................... 106 (5,869) (92,099)
-------- --------- ----------
Net income (loss) -- Consolidated Total.................... $ (6,580) $ 13,899 $ (29,777)
======== ========= ==========
Pretax income (loss)....................................... $ 13,899 $ (53,499)
Pro forma income taxes..................................... (5,143) 16,050
--------- ----------
Pro forma net income (loss)................................ $ 8,756 $ (37,449)
========= ==========
25
Net Results of Operations-Partner Company Operations
Breakaway Solutions was consolidated from its acquisition in January 1999
through September 30, 1999 and accounted for $14.7 million and $24.2 million of
our Partner Company Operations' revenue and operating expenses, respectively,
for the year ended December 31, 1999. Breakaway Solutions was accounted for
under the equity method of accounting for the three months ended December 31,
1999.
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts
were consolidated from their dates of acquisition in 1999 and accounted for $1.8
million and $9.5 million of our Partner Company Operations' revenue and
operating expenses, respectively, for the year ended December 31, 1999.
For the years ended December 31, 1997 and 1998 VerticalNet was our only
consolidated partner company and accounted for all of the revenue and operating
expenses of our Partner Company Operations' segment. VerticalNet was accounted
for under the equity method of accounting in 1999.
Breakaway Solutions-Analysis of the Nine Months Ended September 30, 1999
Breakaway Solutions is a full service provider of e-business solutions that
allow growing enterprises to capitalize on the power of the Internet to reach
and support customers and markets. Breakaway Solutions' services consist of
Breakaway Solutions strategy consulting, Breakaway Solutions Internet solutions,
Breakaway Solutions eCRM solutions and Breakaway Solutions application hosting.
From Breakaway Solutions' inception in 1992 through 1998, the company's
operating activities primarily consisted of providing strategy consulting and
systems integration services. Prior to its acquisition of Applica in 1999,
Breakaway Solutions derived no revenues from application hosting. The company
believes, however, that application hosting will account for a significantly
greater portion of revenues in the future. Breakaway Solutions generated $6.1
million, $10 million, and $25.4 million of revenue in 1997, l998 and 1999,
respectively, resulting in net income in 1997 of $1.1 million and net losses in
1998 and 1999 of $.6 million and $10.4 million, respectively.
The following is a discussion of Breakaway Solutions' net results of
operations for the portion of the year ended December 31, 1999 that it was
consolidated, which was from the date of acquisition in January 1999 through
September 30, 1999 . Breakaway Solutions' comparative results of operations for
the comparable 1998 period are not meaningful.
Revenue. Breakaway Solutions' revenue of $14.7 million for the nine months
ended September 30, 1999 was derived primarily from Internet professional
services and eCRM solutions. Through organic growth and acquisitions, Breakaway
Solutions expanded in 1999 into custom Web development and application hosting.
Cost of Revenue. Cost of revenue of $7 million for the nine months ended
September 30, 1999 consists primarily of Breakaway Solutions' personnel-related
costs of providing its services. As Breakaway Solutions expands into custom Web
development and application hosting, it is incurring the direct costs of these
operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $14.7 million for the nine months ended September 30,
1999 consist of trade show expenses, personnel costs, facility costs,
professional fees and general costs to support operations. Breakaway Solutions
expects selling, general and administrative expenses to increase significantly
in future periods due to the expected growth in its infrastructure, hiring of
additional dedicated sales and marketing employees and the expected significant
amortization of intangible assets from its acquisitions. Also included in
selling, general and administrative expenses for the nine months ended September
30, 1999 was $2.5 million of goodwill amortization related to the acquisition of
our ownership interest in Breakaway Solutions.
Other Consolidated Companies - Analysis of the Year Ended December 31, 1999
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts were
consolidated from their dates of acquisition in 1999 and accounted for $1.8
million and $8.6 million of our Partner Company Operations' revenue and
operating expenses, respectively, for the year ended December 31, 1999.
CyberCrop.com, EmployeeLife.com and iParts are development stage companies, have
generated negligible revenue since their inception, and incurred aggregate
operating expenses of $4.3 million during the year ended December 31, 1999.
Animated Images and ICG Commerce generated aggregate revenues of approximately
$1.8 million during the
26
period from acquisition in 1999 through December 31, 1999 and incurred aggregate
operating expenses of $4.3 million during the same period, primarily general and
administrative expenses as they deploy their business models. Also included in
selling, general and administrative expenses for the year ended December 31,
1999 was $0.8 million of goodwill amortization related to our acquisitions of
these partner companies.
VerticalNet-Analysis of the Two Year Period Ended December 31, 1998
VerticalNet owns and operates industry-specific websites designed as online
business-to-business communities, known as vertical trade communities. These
vertical trade communities act as comprehensive sources of information,
interaction and electronic commerce.
During the periods ended December 31, 1996, 1997 and 1998 we acquired
equity ownership interests in VerticalNet for $1 million, $2 million and $4
million, respectively. In 1998, we made advances to VerticalNet in the form of
convertible notes of $5 million, of which $.8 million was repaid by VerticalNet,
$2.1 million was purchased from us by one of our shareholders, and $2.1 million
was converted into common stock during the three months ended March 31, 1999.
For the periods ended December 31, 1997 and 1998, VerticalNet was our only
consolidated partner company. The following is a discussion of VerticalNet's net
results of operations for the two year period ended December 31, 1998:
Revenue. Revenue was $.8 million for the year ended December 31, 1997 and
$3.1 million for the year ended December 31, 1998. The increase in revenue was
due primarily to an increase in the number of advertisers as a result of
VerticalNet's marketing efforts and the increase in the number of industry-
specific trade communities from 16 as of December 31, 1997 to 33 as of December
31, 1998. Advertising revenue and Web site development fees represented all of
VerticalNet's revenue in 1997. In 1998, most of VerticalNet's revenue was
generated from selling advertisements to industry suppliers in its trade
communities. All advertising revenue is recognized ratably in the period in
which the advertisement is displayed, provided that the collection is reasonably
assured. VerticalNet also generates revenue from career services, education, and
e-commerce, specifically the sale of books and third party software for which
they receive a transaction fee, and from barter transactions.
Cost of Revenue. Cost of revenue was $1.8 million in 1997 and $4.6 million
in 1998. Cost of revenue consists of editorial, operational and product
development expenses. The increase in cost of revenue was due to increased
staffing and the costs of enhancing the features, content and services of
VerticalNet's industry-specific trade communities, as well as increasing the
overall number of trade communities.
Selling, General and Administrative Expenses. Selling expenses were $2.3
million for the year ended December 31, 1997 and $7.9 million for the year ended
December 31, 1998. The increase in selling expenses was primarily due to the
increased number of sales and marketing personnel, increased sales commissions
and increased expenses related to promoting VerticalNet's industry-specific
trade communities. General and administrative expenses were $1.4 million for
the year ended December 31, 1997 and $4.1 million for the year ended December
31, 1998. The increase in general and administrative expenses was due primarily
to increased staffing levels, higher facility costs, professional fees to
support the growth of VerticalNet's infrastructure and goodwill amortization
related to VerticalNet's 1998 acquisitions.
Equity Income (Loss)
A significant portion of our net results of operations is derived from
companies in which we hold a significant minority ownership interest. These
companies are accounted for under the equity method of accounting. Equity income
(loss) fluctuates with the number of companies accounted for under the equity
method, our voting ownership percentage in these companies, the amortization of
goodwill related to newly acquired ownership interests in equity method
companies, and the net results of operations of these companies. During the
years ended December 31, 1998 and 1999 we utilized cash, stock, or notes payable
totalling $23.7 million and $495.6 million, respectively, to acquire partner
company interests accounted for under the equity method of accounting which
resulted in goodwill of $15.1 million and $293.7 million, respectively, which is
being amortized over 3 years. Without giving effect to additional acquisitions
in equity method companies subsequent to December 31, 1999, we expect goodwill
amortization related to equity method companies to approximate $102 million in
2000. The extent to which actual goodwill amortization in 2000 related to
equity method companies exceeds this estimate will depend
27
primarily upon the amount of capital we deploy in 2000 for the acquisition of
additional ownership interests in equity method companies.
During the year ended December 31, 1999 we accounted for 31 companies under
the equity method of accounting, including VerticalNet, compared to eight
companies during 1998. All 31 of the companies incurred losses in the year ended
December 31, 1999. Our equity loss of $92.1 million for the year ended December
31, 1999 consisted of $72.3 million related to our share of the equity method
companies' losses and $19.8 million of amortization of the goodwill of these
companies. Of the $72.3 million equity loss related to our share of the losses
of companies accounted for under the equity method for the year ended December
31, 1999, $19.2 million and $9.3 million, respectively, were attributable to
VerticalNet and Onvia.com, while the other 29 companies accounted for the
remaining equity losses ranging from less than $0.1 million to $6.2 million.
For the year ended December 31, 1999, VerticalNet had revenue of $20.8
million and a net loss of $53.5 million compared to revenue of $3.1 million and
a net loss of $13.6 million for the comparable period in 1998. VerticalNet's
revenue increased period to period primarily due to a significant increase in
the number of storefronts as it grew the number of its vertical trade
communities from 29 as of December 31, 1998 to 55 as of December 31, 1999. In
addition, barter transactions, in which VerticalNet received advertising or
other services in exchange for advertising on its Web sites, accounted for 23%
of revenues for the year ended December 31, 1999 compared to 19% in 1998.
VerticalNet's losses increased period to period due to its costs of maintaining,
operating, promoting and increasing the number of its vertical trade communities
increasing more than revenue, increased amortization of goodwill associated with
acquisitions and a $13.6 million charge for in-process research and development
expensed in August 1999 relating to VerticalNet's acquisition of Isadra.
For the year ended December 31, 1999, Onvia.com had revenue of $27.2
million and a net loss of $43.4 million compared to revenue of $1.0 million and
a net loss of $.7 million for the comparable period in 1998. Onvia.com is a
business-to-busienss emarketplace for snall business buyers and sellers. The
company generated substantially all of its revenue in 1999 from product sales.
Animated Images, CyberCrop.com, EmployeeLife.com, ICG Commerce and iParts were
consolidated from their dates of acquisition in 1999 and accounted for $1.8
million and $8.6 million of our Partner Company Operations' revenue and
operating expenses, respectively, for the year ended December 31, 1999.
Onvia.com's revenue increased period to period due to increased product
sales to new and existing customers. Onvia.com's losses increased period to
period as a result of its increased operating expenses related to marketing and
advertising programs designed to build its brand and drive customer acquisition,
increases in administrative personnel and non-cash equity compensation charges
of $10.5 million.
VerticalNet expects to incur significant net losses for the foreseeable
future because of its aggressive expansion plans. Onvia.com expects increasing
losses for at least the next twelve months as a result of increased sales and
marketing expenses, expanded service and product offerings, and its investment
in technology and development. Due to the early stage of development of the
other companies in which we acquire interests, existing and new partner
companies accounted for under the equity method are expected to incur
substantial losses. Our share of these losses is expected to be substantial in
2000.
While VerticalNet, Onvia.com and most of the companies accounted for under
the equity method of accounting have generated losses in each of 1998 and 1999,
and therefore in most cases did not incur income tax liabilities, these
companies may generate taxable income in the future. Our share of these
companies' net income, if generated, would be reduced to the extent of our share
of these companies' tax expense.
The significant change in equity income (loss) from 1997 to 1998 reflects a
decrease in the net results of operations at iSky and the effect of equity
method partner companies in which we acquired an interest during 1998. One of
these companies, Syncra Software, represented approximately $4.3 million of our
$5.9 million equity loss in 1998. As of December 31, 1998, we accounted for
eight of our partner companies under the equity method of accounting. Most of
these companies were in a very early stage of development and incurred
substantial losses in 1998, and our share of these losses was substantial.
28
Net Results of Operations-General ICG Operations
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, outside services such as legal, accounting and consulting, and
travel-related costs. These costs also include the amortization of deferred
compensation expense in the periods ended December 31, 1997, 1998 and 1999 of
$.2 million, $.3 million and $.2 million, respectively, related to restricted
stock issuances. We commenced operations in March 1996 with offices in Wayne,
Pennsylvania and San Francisco, California. As the number of our employees grew
to support our operations and those of our partner companies, our general and
administrative costs increased. In late 1998, we opened an office in Boston,
Massachusetts, and in 1999 we established operations in Seattle, Washington and
London, England and we significantly increased the number of our employees. As a
result of these initiatives, our general and administrative costs increased 566%
for the year ended December 31, 1999 compared to 1998. We plan to continue to
hire new employees, open new offices, and build our overall infrastructure,
therefore we expect these costs to continue to be substantially higher compared
to historical periods.
During the years ended December 31, 1998 and 1999, we recorded aggregate
unearned compensation expense of $.7 million and $16.4 million respectively, in
connection with the grant of stock options to non-employees and the grant of
employee stock options with exercise prices less than the deemed fair value on
the respective dates of grant. General and administrative costs for the year
ended December 31, 1999 include $5.7 million of amortization expense related to
stock option grants. Without giving effect to any unearned compensation expense
related to equity granted subsequent to December 31, 1999, we expect to
recognize amortization of deferred compensation expense of $5.6 million in 2000,
$3.4 million in 2001, $1.9 million in 2002, $.9 million in 2003 and $.2 million
in 2004.
Other Income
Other income consists of the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general. Other income may include, among other items, gains or
losses on the sales of all or a portion of minority interests, gains or losses
on the issuances of stock by our partner companies to reflect the change in our
share of the net equity of these companies, and impairment charges related to
our ownership interests in and advances to partner companies.
General ICG Operations' other income consisted of the following:
(in thousands) Year Ended December 31,
1998 1999
---- ----
Issuance of stock by VerticalNet..................... $ -- $50,717
Issuance of stock by Breakaway Solutions............. -- 17,304
Sale of SMART Technologies to i2 Technologies........ -- 2,942
Sale of Matchlogic to Excite......................... 12,822 --
Sales of Excite holdings............................. 16,814 2,051
Sale of Excite to @Home Corporation.................. -- 2,719
Sale of WiseWire to Lycos............................ 3,324 --
Sales of Lycos holdings.............................. 1,472 --
Partner company impairment charges................... (3,949) (8,097)
Other................................................ -- 6
-------- -------
$ 30,483 $67,642
======== =======
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for acquisitions in 1999, our share
of VerticalNet's net equity increased by $50.7 million. This increase adjusted
our carrying value in VerticalNet and resulted in a non-operating gain of $50.7
million, before deferred
29
taxes of $17.7 million, in the year ended December 31, 1999. As a result of
Breakaway Solutions completing its initial public offering in October 1999, our
share of Breakaway Solutions' net equity increased by $17.3 million. This
increase adjusted our carrying value in Breakaway Solutions and resulted in a
non-operating gain of $17.3 million, before deferred taxes of $6.1 million, in
the year ended December 31, 1999. These gains were recorded in accordance with
SEC Staff Accounting Bulletin No. 84 and our accounting policy with respect to
such transactions. We believe there is a high likelihood that transactions
similar to these, in which a partner company we account for under the
consolidation or equity method of accounting issues shares of its common stock,
will occur in the future and we expect to record gains or losses related to such
transactions provided they meet the requirements of SEC Staff Accounting
Bulletin No. 84 and our accounting policy. In some cases, as described in SEC
Staff Accounting Bulletin No. 84, the occurrence of similar transactions may not
result in a non-operating gain or loss but would result in a direct increase or
decrease to our shareholders' equity.
In August 1999, we divested our ownership interest in SMART Technologies,
Inc. due to the agreement of merger of SMART Technologies, Inc. and i2
Technologies, Inc. Upon completion of this merger during the three months ended
September 30, 1999, our ownership interest in and advances to SMART
Technologies, Inc. were converted into cash, common stock and warrants to
purchase common stock of i2 Technologies, Inc. Our non-operating gain before
taxes from this transaction was $2.9 million.
In February 1998, we exchanged all of our holdings of Matchlogic, Inc. for
763,820 shares of Excite, Inc. The $14.3 million market value of the Excite
shares received on the date of exchange was used to determine the gain of $12.8
million. Throughout the remainder of 1998, we sold 716,082 shares of Excite
which resulted in $30.2 million of proceeds and $16.8 million of gains. During
the three month period ended March 31, 1999, we sold 23,738 shares of Excite
which resulted in $2.5 million of proceeds and $2.1 million of gains.
In May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, we received
shares of @Home Corporation in exchange for our shares in Excite, resulting in a
non-operating gain before taxes of $2.7 million.
In April 1998, we exchanged all of our holdings of WiseWire for 191,922
shares of Lycos, Inc. The $5.3 million market value of the Lycos shares received
on the date of exchange was used to determine the gain of $3.3 million.
Throughout the remainder of 1998, we sold 169,548 shares of Lycos which resulted
in $6.2 million of proceeds and $1.5 million of gains.
Our remaining holdings of @Home Corporation, Lycos, and i2 Technologies at
December 31, 1999 are accounted for as available-for-sale securities and are
marked to market, with the difference between carrying value and market value,
net of deferred taxes, recorded in "Accumulated other comprehensive income" in
the shareholders' equity section of our Consolidated Balance Sheets in
accordance with Statement of Financial Accounting Standards No. 115.
In December 1998, we recorded an impairment charge of $1.9 million for the
decrease in value of one of our partner companies accounted for under the cost
method of accounting as a result of selling the partner company interest below
our carrying value. We had acquired our ownership interest in the partner
company during 1996 and 1997. In December 1998, the partner company agreed to be
acquired by an independent third party. The transaction was completed in January
1999. The impairment charge we recorded was determined by calculating the
difference between the proceeds we received from the sale and our carrying
value.
For the years ended December 31, 1998 and 1999, we recorded impairment
charges of $2 million and $8.1 million, respectively, for the other than
temporary decline in the fair value of a cost method partner company. From the
date we initially acquired an ownership interest in this partner company through
December 31, 1999, our funding to this partner company represented all of the
outside capital the company had available to fund its net losses and capital
asset requirements. During the year ended December 31, 1999 we fully guaranteed
the partner company's new bank loan and agreed to provide additional funding. We
acquired additional non-voting convertible debentures of this partner company
for $8 million in 1999. The impairment charges we recorded were determined by
the decrease in net book value of the partner company caused by its net losses,
which were funded entirely based on our
30
funding and bank guarantee. Given its continuing losses, we will continue to
determine and record impairment charges in a similar manner for this partner
company until the status of its financial position improves.
Interest Income
Our cash, cash equivalents and short-term investments are invested
primarily in money market accounts and highly liquid, high quality debt
instruments. During 1998, we received $38.2 million of proceeds from the sale of
our common stock and $36.4 million of proceeds from the sales of a portion of
our holdings in Excite and Lycos. During the year ended December 31, 1999, we
received (net of related costs) $32 million of proceeds from the sale of shares
of our common stock prior to our public offering, $90 million in convertible
notes, approximately $209.1 million in our initial public offering,
approximately $831 million in our follow-on stock offering and approximately
$549.9 million from the sale of convertible subordinated notes. The increase in
interest income in 1998 and 1999 was primarily due to the significant increase
in our cash and cash equivalents throughout 1998 and 1999 as a result of these
transactions.
Interest Expense
During May 1999, we issued $90 million in convertible notes bearing
interest at 4.99%. Interest accrued through August 5, 1999, the date of our
initial public offering, was waived in accordance with the terms of the notes
and reclassed to Additional Paid-in-Capital as a result of the conversion of the
convertible notes in connection with our initial public offering. During
December 1999 we issued approximately $566.3 million in convertible subordinated
notes due 2004 bearing interest at 5.5%. The increase in interest expense in
the year ended December 31, 1999 was a result of these transactions.
Income Taxes
From our inception on March 4, 1996 to February 2, 1999, we were organized
as a limited liability company and were treated as a partnership for income tax
purposes. As a result of our Reorganization as a corporation, we are subject to
corporate federal and state income taxes. For informational purposes, the
Consolidated Statement of Operations for the years ended December 31, 1998 and
1999 reflect pro forma income on an after-tax basis assuming we had been taxed
as a corporation since January 1, 1998. We did not have any net operating loss
carry forwards at December 31, 1998.
At the time of our Reorganization, we recorded a deferred tax benefit and
related deferred tax asset of $7.7 million, which primarily represented the
excess of tax basis over book basis of our partner companies. For the period
from the date of the Reorganization through December 31, 1999, we recorded an
additional tax benefit of $16.0 million related to our consolidated results of
operations for that period, net of deferred tax expense of $23.8 million
relating to our gain on VerticalNet's and Breakaway Solutions' common stock
issuances.
We have not recorded a valuation allowance related to our gross deferred
tax assets because we believe it is more likely than not that we will realize
the benefits of these assets. The assets relate primarily to the excess of tax
basis over book basis of our partner companies. These differences in basis
represent capital losses for tax purposes which, if recognized, can only be
deducted to the extent of capital gains. Additionally, these losses may be
carried back three years and carried forward five years from the year in which
they occur. While selling any portion of our ownership interests in partner
companies is something we will not do in the ordinary course of business, we
would consider pursuing such a sale at the minimum amount necessary to prevent
any capital losses from expiring unutilized. If we do not believe such a
strategy, or an alternative strategy, will be available in the time periods
allowed for carrying back and carrying forward losses, we will establish a
valuation allowance at that time. Most of our partner companies are in an early
stage of development, currently generate significant losses and are expected to
generate significant losses in the future. The marketability of the securities
we own of our partner companies is generally limited as they primarily represent
ownership interests in companies whose stock is not publicly traded. As of
December 31, 1999, our only publicly traded partner companies are VerticalNet,
Breakaway Solutions and US Interactive. As a result, there is significant risk
that we may not be able to realize the benefits of expiring carryforwards.
31
Liquidity and Capital Resources
We have funded our operations with a combination of equity proceeds,
proceeds from the issuance of convertible notes, proceeds from the sales of a
portion of our Excite and Lycos holdings, and borrowings under bank credit
facilities.
We received equity commitments of $40 million in 1996, of which $13.7
million and $20.1 million was received in 1996 and 1997, respectively, and $6.2
million of which was funded with an in-kind contribution of holdings of a
partner company in 1996. We received additional commitments of $70 million in
1998, of which $38 million was received in 1998 and $32 million was received
during the year ended December 31, 1999, respectively.
In August 1999, we completed our initial public offering of 30,620,000
shares of our common stock at $6.00 per share. Concurrently, we completed a
private placement of 7,500,000 shares at the $6.00 initial public offering
price. Net proceeds to us from these transactions aggregated approximately
$209.1 million (net of underwriters' commission and offering expenses of
approximately $19.6 million).
In December 1999, we issued 609,533 shares of common stock in a private
placement for $50 million.
In December 1999, we completed a follow-on public offering of 6,900,000
shares of our common stock at $108.00 per share. Concurrently, we completed
private placements for an aggregate of 648,147 shares at the $108.00 offering
price. Net proceeds to us from these transactions aggregated approximately
$781.4 million (net of underwriters' commission and offering expenses of
approximately $33.8 million).
In December 1999, we issued $566.3 million in convertible subordinated
notes due 2004 bearing interest at 5.5%, including a private placement of $20
million. Net proceeds to us from this issuance aggregated approximately $549.9
million (net of underwriters' discount and offering expenses of approximately
$16.4 million).
In May 1999, we issued $90 million of convertible subordinated notes which
converted to 14,999,732 shares of our common stock upon the completion of our
initial public offering in August 1999. Upon the conversion of these notes, we
issued 3,000,000 warrants to purchase our common stock at $6.00 per share
through May 2002. In accordance with the terms of the notes, all accrued
interest was waived upon conversion.
Sales of Excite and Lycos stock generated proceeds of $36.4 million in 1998
and sales of Excite stock generated proceeds of $2.5 million in 1999.
In April 1999, we entered into a $50 million revolving bank credit
facility. In connection with the facility, we issued warrants to purchase
400,000 shares of common stock for an exercise price of $5.00 per share
exercisable for seven years. We valued these warrants at $1 million and
accounted for them as debt issuance costs. The facility matures in April 2000,
is subject to a .25% unused commitment fee, bears interest, at our option, at
prime and/or LIBOR plus 2.5%, and is secured by substantially all of our assets
(including all of our holdings in VerticalNet). Borrowing availability under the
facility is based on the fair market value of our holdings of publicly-traded
partner companies (VerticalNet, Breakaway Solutions, eMerge Interactive and US
Interactive as of February 29, 2000) and the value, as defined in the facility,
of our private partner companies. If the market price of our publicly traded
partner companies declines, availability under the credit facility could be
reduced significantly and could have an adverse effect on our ability to borrow
under the facility and could require an immediate repayment of a portion of our
outstanding borrowings, if any. Based on the provisions of the borrowing base,
borrowing availability at December 31, 1999 and February 29, 2000 was $50
million. We are currently in the process of increasing the amount of our bank
credit facility.
Existing cash, cash equivalents and short-term investments, availability
under our revolving bank credit facility, proceeds from the potential sales of
all or a portion of our minority interests and other internal sources of cash
flow are expected to be sufficient to fund our cash requirements through the
next 12 months, including commitments to new and existing partner companies and
general operations requirements. As of February 29, 2000 , we were contingently
obligated for approximately $5.5 million of guarantee commitments and $93.7
million of funding commitments to new and existing partner companies. We will
continue to evaluate acquisition opportunities and expect to acquire additional
ownership interests in new and existing partner companies in the next 12 months
which may make it necessary for us to raise additional funds. If additional
funds are raised through the issuance of equity securities, our existing
shareholders may experience significant dilution. Our revolving bank credit
facility matures in April 2000, at which time we may not be able to renew the
facility or obtain additional
32
bank financing, or may only be able to do so on terms not favorable or
acceptable to us. We are currently in negotiations to obtain a new credit
facility.
From its inception through its initial public offering, VerticalNet funded
its operations through a combination of equity, investor and bank borrowings,
and leases. These sources included amounts both advanced and guaranteed by us.
VerticalNet raised $58.3 million in its initial public offering in February 1999
and $115 million in a convertible subordinated note offering in October 1999. We
have no obligation to provide additional funding to VerticalNet, and we have no
obligations with respect to its outstanding debt arrangements.
Prior to 1999, Breakaway Solutions funded its operations through a
combination of cash flow from operations, bank borrowings and leases. In January
1999, we acquired a majority voting interest in Breakaway Solutions for $8.3
million, of which Breakaway Solutions used $4.5 million to repurchase a portion
of its outstanding common stock. In July 1999, Breakaway Solutions completed a
private placement of equity securities of about $19.1 million, of which we
contributed $5 million. In October 1999, Breakaway Solutions completed its
initial public offering raising approximately $42 million. We recorded a non-
operating gain during the three months ended December 31, 1999 due to the
increase in our share of Breakaway Solutions' net equity as a result of their
issuance of shares. Our ownership interest in Breakaway Solutions after their
initial public offering is about 40% and will be accounted for under the equity
method. We have no obligation to provide additional funding to Breakaway
Solutions, and we have no obligations with respect to its outstanding debt
arrangements.
Consolidated working capital increased to $1.3 billion at December 31, 1999
from $20.5 million at December 31, 1998 primarily as a result of the equity and
convertible subordinated notes proceeds we raised in 1999 more than offsetting
the cost of ownership interests we acquired and other net cash outflows during
the year ended December 31, 1999.
Cash used in operating activities increased in 1997 and 1998 compared to
each of the prior years primarily due to VerticalNet's increased losses in each
of those years. Cash used in operating activities in the year ended December 31,
1999 increased compared to 1998 due to the increased cost of General ICG
Operations general and administrative expenses.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to new and existing partner companies,
offset in 1998 and the year ended December 31, 1999 by the proceeds of $36.4
million and $2.5 million, respectively, from the sales of a portion of our
available-for-sale securities, Excite and Lycos.
We utilized $57.6 million, including $9 million contributed to VerticalNet,
to acquire interests in new and existing partner companies in 1998. In 1998, we
acquired interests in the following partner companies: AUTOVIA, Blackboard,
CommerceQuest, Commerx, ComputerJobs.com, Context Integration, Deja.com, e-
Chemicals, Entegrity Solutions, LinkShare, PrivaSeek, SageMaker, Servicesoft
Technologies, Syncra Software, US Interactive, VerticalNet and Vivant!.
We utilized $380.5 million, including $13.2 million contributed directly to
Breakaway Solutions and an additional $4 million used to purchase an additional
ownership interest in Breakaway Solutions directly from shareholders of
Breakaway Solutions, and including $30.1 million in the aggregate to acquire our
majority ownership interests in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce, and iParts, to acquire interests in or make
advances to new and existing partner companies during the year ended December
31, 1999. These companies included: Arbinet Communications, asseTrade.com,
AUTOVIA, Benchmarking Partners, Bidcom, Blackboard, ClearCommerce, Collabria,
CommerceQuest, Commerx, CourtLink, Deja.com, e-Chemicals, eMarketWorld, eMerge
Interactive, Entegrity Solutions, Internet Commerce Systems, Jamcracker,
LinkShare, NetVendor, ONVIA.com, PaperExchange.com, PlanSponsor Exchange,
PrivaSeek, Residential Delivery Services, RetailExchange, SageMaker, Servicesoft
Technologies, StarCite, SMART Technologies, Syncra Software, TRADEX
Technologies, traffic.com, United Messaging, Universal Access, USgift.com,
VerticalNet and Vivant!.
During the year ended December 31, 1999, we acquired an interest in a new
partner company from shareholders of the partner company who have an option,
exercisable at any time through August 2000, of electing to receive cash of
$11.3 million or 2,083,333 shares of our common stock. As of December 31, 1999,
$5.6 million of the obligation has been converted into 1,033,908 shares of our
common stock.
33
During the year ended December 31, 1999, we acquired an interest in
MetalSite for a combination of cash of $30 million and 852,631 shares of our
common stock valued at $150.2 million.
During the period from January 1, 2000 through February 29, 2000 we
utilized $220.6 million to acquire interests in or make advances to new and
existing partner companies. These companies included: asseTRADE.com, Arbinet
Communications, AUTOVIA, Benchmarking Partners, Buymedia, Centrimed,
ClearCommerce, Collabria, CourtLink, e-Chemicals, Entegrity Solutions, EU Medix,
EU Supply, FarmingOn-line, FreeBorders, Industrial America LLC, iSky,
LinkShare, Logistics.com, Inc., MetalSite, ServiceSoft Technologies, TALPX,
TeamOn, Universal Access, and Vivant!
During January 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 150,000 shares of
our common stock valued at $26.6 million.
In February 2000, we entered into an agreement to acquire a significant
interest in eCredit.com, a leading provider of Internet based credit, financing
and related services. We will issue common stock worth approximately $450
million to eCredit.com shareholders, which is subject to customary closing
conditions and regulatory approval. We expect the transaction to close in the
quarter ending June 30, 2000.
In February 2000, we entered into an agreement to form a joint venture with
DuPont named CapSpan. CapSpan will provide management, growth capital,
financial, technical and infrastructure capabilities designed to accelerate the
development of B2B e-commerce.
In March 2000, we entered into an agreement to acquire a majority interest
in RightWorks, a leading provider of e-procurement software that powers B2B
exchanges. We will issue approximately $635 million of our common stock (valued
at $111.48 per share) to tendering RightWorks' preferred shareholders (subject
to adjustment based on the number of RightWorks' shares tendered) and also will
purchase newly issued RightWorks' shares for $22 million in cash. The
transaction is subject to customary closing conditions and regulatory approval.
We expect the transaction to close in the quarter ending June 30, 2000.
In March 2000, we entered into an agreement with Hutchinson Whampoa Ltd., a
Hong Kong based multi-national conglomerate, to acquire a majority interest in
Harbour Ring International Holdings, which will be renamed ICG AsiaWorks
Limited, with Hutchison Whampoa Ltd. We will expend approximately $117 million
upon the closing of this transaction which is expected to take place in the
quarter ending June 30, 2000, subject to customary closing conditions and
regulatory approval.
During the year ended December 31, 1999, Ariba, Inc. announced its
intention to acquire all of the outstanding stock of one of our partner
companies, TRADEX Technologies, in exchange for approximately $2.0 billion in
Ariba stock. Ariba closed its acquisition of TRADEX Technologies on March 9,
2000. Based on Ariba's closing price of $320.88 on March 9, 2000, we will
record a non-operating gain of approximately $290 million during the quarter
ended March 31, 2000. Our holdings of Ariba after the transaction will be
accounted for as available-for-sale securities and will be marked to market,
with the difference between carrying value and market value, net of deferred
taxes, recorded in "Accumulated other comprehensive income" in the shareholders'
equity section of our Consolidated Balance Sheets in accordance with Statement
of Financial Accounting Standards No. 115.
During the year ended December 31, 1999, VerticalNet acquired all of the
outstanding stock of NECX Exchange LLC in exchange for $70 million in
convertible notes, $10 million in cash and the assumption of debt and certain
other liabilities. Upon conversion of the $70 million in convertible notes
(expected in the first quarter of 2000), our voting ownership in VerticalNet
will decrease from 35% to approximately 34%. In addition, we expect to record a
non-operating gain due to the increase in our share of VerticalNet's net equity
as a result of their issuance of shares.
In January 2000, Breakaway Solutions announced it had signed a definitive
agreement to acquire EggRock Partners for 3,636,000 shares of its common stock
valued at $250 million at the date of signing the definitive agreement.
Consummation of the transaction is subject to customary closing conditions and
is expected to close in the quarter ending June 30, 2000. Upon closing, our
voting ownership in Breakaway Solutions will decrease from 40% to approximately
33%. In addition, we expect to record a non-operating gain due to the increase
in our share of Breakaway Solutions' net equity as a result of their issuance of
shares.
In March 2000, VerticalNet announced it had signed a definitive agreement
to acquire Tradeum, Inc. approximately for 2,000,000 shares of VerticalNet
common stock valued at approximately $500 million at the date of signing of the
definitive agreement. Consummation of the transaction is subject to customary
closing conditions and is expected to close in the second quarter of 2000. Upon
closing, our voting ownership of VerticalNet will
34
decrease from 33% to approximately 31%. In addition, we expect to record a non-
operating gain due to the increase in our share of VerticalNet's net equity as a
result of their issuance of shares.
Our operations are not capital intensive, and capital expenditures in any
year normally will not be significant in relation to our overall financial
position. We committed funds in 1999 and expect to commit funds in 2000 to the
buildout of our larger new corporate headquarters in Wayne, Pennsylvania, our
international expansion, and the development of our information technology
infrastructure. There were no material capital asset purchase commitments as of
December 31, 1999.
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements
to have a significant impact on our net results of operations, financial
position or cash flows.
ITEM 7A. 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 December 31, 1999 include equity
positions in companies in the Internet industry sector, including Excite@Home;
Breakaway Solutions, Inc.; i2 Technologies, Inc.; Lycos, Inc.; US Interactive,
Inc.; and VerticalNet, Inc., many of which have experienced significant
historical volatility in their stock prices. We typically do not attempt to
reduce or eliminate our market exposure on these securities. A 20% adverse
change in equity prices, based on a sensitivity analysis of our public holdings
as of December 31, 1999, would result in an approximate $522.4 million decrease
in the fair value of our public holdings . A significant portion of the value of
the potential decrease in equity securities, or $411.1 million, consisted of our
holdings in VerticalNet.
The carrying values of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
fair value of convertible subordinated notes is approximately $835.2 million
versus a carrying value of $556.3 million. The carrying value of other long-term
debt approximates its fair value, as estimated by using discounted future cash
flows based on our current incremental borrowing rates for similar types of
borrowing arrangements.
Availability under our credit facility is determined by the market value of
the publicly traded and privately held securities pledged as collateral. As of
December 31, 1999, we had sufficient collateral to enable us to fully utilize
this facility. Additionally, we are exposed to interest rate risk primarily
through our bank credit facility. At December 31, 1999, there were no borrowings
outstanding.
We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. As we expand globally, the risk of
foreign currency exchange rate fluctuation may dramatically increase. Therefore,
in the future, we may consider utilizing derivative instruments to mitigate such
risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements, and the related Notes thereto,
of Internet Capital Group, Inc. and the Report of Independent Auditors are filed
as a part of this Form 10-K.
Page
Number
------
Independent Auditors' Report................................................. 36
Consolidated Balance Sheets as of December 31, 1998 and 1999................. 37
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999............................................. 38
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1998 and 1999....................................... 39
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 1997, 1998 and 1999. ............................... 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................................. 41
Notes to Consolidated Financial Statements .................................. 42
35
Report of Independent Auditors
The Board of Directors and Shareholders
Internet Capital Group, Inc.:
We have audited the accompanying consolidated balance sheets of Internet Capital
Group, Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, shareholders' equity, comprehensive
income (loss) and cash flows for each of the years in the three-year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of certain nonsubsidiary investee companies
(ComputerJobs.com, Inc. and Syncra Software, Inc.) as of and for the year ended
December 31, 1998, which Internet Capital Group, Inc. originally acquired an
interest in during 1998. The Company's ownership interests in and advances to
these nonsubsidiary investee companies at December 31, 1998 were $8,392,155, and
its equity in net income (loss) of these nonsubsidiary investee companies was
$3,876,148 for the year ended December 31, 1998. We also did not audit the
financial statements of a nonsubsidiary investee company (Onvia.com, Inc.) as of
and for the year ended December 31, 1999. The Company's ownership interest and
advances to this nonsubsidiary investee company at December 31, 1999 were
$8,753,597 and its equity in net loss of the nonsubsidiary investee was
$9,327,340. The financial statements of these nonsubsidiary investee companies
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for these nonsubsidiary
investee companies as of and for the years ended December 31, 1998 and 1999, is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Internet Capital Group, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Philadelphia, Pennsylvania
March 8, 2000
36
INTERNET CAPITAL GROUP, INC.
Consolidated Balance Sheets
(in thousands except per share data) As of December 31,
-----------------------------------------
1998 1999
-------------------- -------------------
Assets
Current Assets
Cash and cash equivalents........................................................... $26,841 $1,343,459
Short-term investments.............................................................. -- 3,359
Accounts receivable, less allowances for doubtful accounts
($61-1998; $67-1999)............................................................. 1,842 1,207
Prepaid expenses and other current assets........................................... 1,119 6,347
------- ----------
Total current assets................................................................ 29,802 1,354,372
Fixed assets, net................................................................... 1,151 4,015
Ownership interests in and advances to Partner Companies............................ 59,492 547,339
Available-for-sale securities....................................................... 3,251 46,767
Intangible assets, net.............................................................. 2,476 23,649
Deferred taxes...................................................................... -- 34,388
Other............................................................................... 613 39,854
------- ----------
Total Assets......................................................................... $96,785 $2,050,384
======= ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt................................................ $ 288 $ 3,000
Line of credit...................................................................... 2,000 --
Accounts payable.................................................................... 1,348 6,750
Accrued expenses.................................................................... 1,823 4,205
Notes payable to Partner Companies.................................................. 1,713 34,134
Deferred revenue.................................................................... 2,177 --
Other............................................................................... -- 903
------- ----------
Total current liabilities........................................................... 9,349 48,992
Long-term debt...................................................................... 352 3,185
Other liability (Note 8)........................................................... -- 4,255
Minority interest................................................................... 6,360 7,481
Convertible subordinated notes (Note 7)............................................ -- 566,250
Commitments and contingencies (Note 19)............................................
Shareholders' Equity
Preferred stock, $.01 par value; 10,000 shares
authorized; none issued......................................................... -- --
Common stock, $.001 par value; 300,000 shares
authorized; 132,087 (1998) and
263,579 (1999) issued and outstanding............................................. 132 264
Additional paid-in capital.......................................................... 74,932 1,513,615
Retained earnings (accumulated deficit)............................................. 5,257 (26,539)
Unamortized deferred compensation................................................... (1,330) (11,846)
Notes receivable-shareholders....................................................... -- (79,790)
Accumulated other comprehensive income.............................................. 1,733 24,517
------- ----------
Total shareholders' equity.......................................................... 80,724 1,420,221
------- ----------
Total Liabilities and Shareholders' Equity........................................... $96,785 $2,050,384
======= ==========
See notes to consolidated financial statements.
37
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Operations
(in thousands except per share data) Year ended December 31,
1997 1998 1999
---------------- --------------------- ---------------------
Revenue............................................... $ 792 $ 3,135 $ 16,536
Operating Expenses
Cost of revenue..................................... 1,767 4,643 8,156
Selling, general and administrative................. 5,743 15,514 48,924
------- -------- --------
Total operating expenses............................ 7,510 20,157 57,080
------- -------- --------
(6,718) (17,022) (40,544)
------- -------- --------
Other income, net (Note 18)........................... -- 30,483 67,384
Interest income....................................... 264 1,306 9,631
Interest expense...................................... (126) (381) (3,897)
------- -------- --------
Income (Loss) Before Income
Taxes, Minority Interest and
Equity Income (Loss)................................. (6,580) 14,386 32,574
Income taxes.......................................... -- -- 23,722
Minority interest..................................... (106) 5,382 6,026
Equity income (loss).................................. 106 (5,869) (92,099)
------- -------- --------
Net Income (Loss)..................................... $(6,580) $ 13,899 $(29,777)
======= ======== ========
Net Income (Loss) Per Share
Basic.......................................... $ (0.10) $ 0.12 $ (0.15)
======= ======== ========
Diluted........................................ $ (0.10) $ 0.12 $ (0.15)
======= ======== ========
Weighted Average
Shares Outstanding
Basic.......................................... 68,198 112,205 201,851
======= ======== ========
Diluted........................................ 68,198 112,299 201,851
======= ======== ========
Pro Forma Information
(Unaudited) (Note 2):
Pro forma net income (loss)
Pretax income (loss)........................... $ 13,899 $(53,499)
Pro forma income taxes......................... (5,143) 16,050
-------- --------
Pro forma net income (loss)......................... $ 8,756 $(37,449)
======== ========
Pro forma net income (loss) per share
Basic.......................................... $ 0.08 $ (0.19)
======== ========
Diluted........................................ $ 0.08 $ (0.19)
======== ========
Pro forma weighted average shares outstanding
Basic.......................................... 112,205 201,851
======== ========
Diluted........................................ 112,299 201,851
======== ========
See notes to consolidated financial statements.
38
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Shareholders' Equity
(in thousands) Retained
Additional Earnings Unamortized Notes
Common Stock Paid-In (Accumulated Deferred Receivable--
Shares Amount Capital Deficit) Compensation Shareholders
-------------------- ------- -------- ------------ -------------
Balance as of December 31, 1996...................... 51,779 $ 52 $ 15,762 $ (2,062) $ (893) $ --
Issuance of common stock............................. 40,275 40 20,097 -- -- --
Issuance of restricted stock......................... 3,546 4 414 -- (418) --
Forfeitures of restricted stock...................... (2,033) (2) (176) -- 178 --
Amortization of deferred compensation................ -- -- -- -- 218 --
Net loss............................................. -- -- -- (6,580) -- --
------- ------- ---------- -------- ----------- ------------
Balance as of December 31, 1997...................... 93,567 94 36,097 (8,642) (915) --
Issuance of common stock, net........................ 38,520 38 38,167 -- -- --
Issuance of stock options to non-employees........... -- -- 668 -- (668) --
Net unrealized appreciation in available-............ -- -- -- -- -- --
for-sale securities..............................
Amortization of deferred compensation................ -- -- -- -- 253 --
Net income........................................... -- -- -- 13,899 -- --
------- ------- ---------- -------- ----------- ------------
Balance as of December 31, 1998...................... 132,087 132 74,932 5,257 (1,330) --
Issuance of common stock, net........................ 78,258 78 1,072,494 -- -- --
Issuance of common stock and income tax
benefit upon exercise of options................. 35,992 36 90,512 -- -- (81,148)
Shareholder loans principal payments................. -- -- -- -- -- 1,358
Issuance of common stock for acquisitions............ 1,887 2 172,001 -- -- --
Issuance of common stock and waiving of
accrued interest upon conversion of
convertible notes................................ 15,000 15 91,070 -- -- --
Issuance of common stock upon exercise of
Warrants......................................... 784 1 3,968 -- -- --
Issuance of warrants in connection with line
of credit........................................ 1,030 -- -- --
Issuance of stock options to employees below
estimated fair value on date of grant............ -- -- 12,731 -- (12,731) --
Amortization of deferred compensation................ -- -- -- -- 5,699 --
Issuance of stock options to non-employees........... -- -- 3,691 -- (3,691) --
Foreign currency adjustment.......................... -- -- -- -- -- --
Net unrealized appreciation in available-for-sale
securities...................................... -- -- -- -- -- --
LLC termination (Note 2)............................. -- -- (8,657) 8,657 -- --
Distribution to former LLC members................... -- -- -- (10,676) -- --
Other................................................ (429) -- (157) -- 207 --
Net loss............................................. -- -- -- (29,777) -- --
------- ------- ---------- -------- ----------- ------------
Balance as of December 31, 1999...................... 263,579 $ 264 $1,513,615 $(26,539) $ (11,846) $ (79,790)
======= ======= ========== ======== =========== ============
(in thousands) Accumulated
Other
Comprehensive
Income Total
------ ---------
Balance as of December 31, 1996...................... $ -- $ 12,859
Issuance of common stock............................. -- 20,137
Issuance of restricted stock......................... -- --
Forfeitures of restricted stock...................... -- --
Amortization of deferred compensation................ -- 218
Net loss............................................. -- (6,580)
------------- ----------
Balance as of December 31, 1997...................... -- 26,634
Issuance of common stock, net........................ -- 38,205
Issuance of stock options to non-employees.......... -- --
Net unrealized appreciation in available-for-sale
securities...................................... 1,733 1,733
Amortization of deferred compensation................ -- 253
Net income........................................... -- 13,899
------------- ----------
Balance as of December 31, 1998...................... 1,733 80,724
Issuance of common stock, net........................ -- 1,072,572
Issuance of common stock and income tax
benefit upon exercise of options................. -- 9,400
Shareholder loans principal payments................. -- 1,358
Issuance of common stock for acquisitions............ -- 172,003
Issuance of common stock and waiving of
accrued interest upon conversion of
convertible notes................................ -- 91,085
Issuance of common stock upon exercise of
Warrants......................................... -- 3,969
Issuance of warrants in connection with line
of credit........................................ -- 1,030
Issuance of stock options to employees below
estimated fair value on date of grant............ -- --
Amortization of deferred compensation................ -- 5,699
Issuance of stock options to non-employees........... -- --
Foreign currency adjustment.......................... (1) (1)
Net unrealized appreciation in available-for-sale
securities...................................... 22,785 22,785
LLC termination (Note 2)............................. -- --
Distribution to former LLC members................... -- (10,676)
Other................................................ -- 50
Net loss............................................. -- (29,777)
------------- ----------
Balance as of December 31, 1999...................... $ 24,517 $1,420,221
============= ==========
See notes to consolidated financial statements
39
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
Year Ended December 31,
(in thousands) 1997 1998 1999
------------- ------------- -------------
Net Income (Loss)............................................. $ (6,580) $13,899 $(29,777)
-------- -------- --------
Other Comprehensive Income (Loss) Before Tax
Unrealized holding gains in available-for-sale securities... -- 1,733 38,039
Foreign currency translation adjustment..................... -- -- (1)
Reclassification adjustments................................ -- -- (2,051)
Tax Related to Comprehensive Income (Loss)
Unrealized holding gains in available-for-sale securities... -- -- (13,920)
Reclassification adjustments................................ -- -- 717
-------- -------- --------
Other Comprehensive Income.................................... -- 1,733 22,784
-------- -------- --------
Comprehensive Income (Loss)................................... $ (6,580) $15,632 $ (6,993)
======== ======== ========
See notes to consolidated financial statements.
40
INTERNET CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 1997 1998 1999
------------- ------------- -------------
Operating Activities
Net income (loss).......................................................... $ (6,580) $ 13,899 $ (29,777)
Adjustments to reconcile to net cash used in operating activities:
Other income............................................................ -- (30,483) (67,636)
Depreciation and amortization........................................... 446 1,135 12,742
Equity (income) loss.................................................... (106) 5,869 92,099
Minority interest....................................................... 106 (5,382) (6,026)
Deferred taxes.......................................................... -- -- (23,722)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net................................................ 1,574 (1,183) (4,278)
Prepaid expenses and other assets....................................... (142) (1,347) (28,603)
Accounts payable........................................................ 566 620 7,194
Deferred revenue........................................................ 494 1,250 (49)
Accrued expenses........................................................ 205 1,415 6,700
-------- -------- --------
Net cash used in operating activities............................... (3,437) (14,207) (41,356)
Investing Activities
Capital expenditures.................................................... (272) (545) (7,120)
Proceeds from sales of available-for-sale securities.................... -- 36,431 2,496
Proceeds from sales of Partner Company ownership
interests........................................................... -- 300 3,506
Advances to Partner Companies........................................... (2,800) (12,779) (9,679)
Repayment of advances to Partner Companies.............................. 950 677 4,581
Acquisitions of ownership interests in Partner Companies................ (14,466) (35,822) (329,161)
Other acquisitions (Note 5).............................................. -- (1,858) (9,732)
Other advances........................................................... -- -- (12,850)
Purchase of short-term investments....................................... -- -- (22,279)
Proceeds from maturities of short-term investments....................... -- -- 18,920
Reduction in cash due to deconsolidation of Partner Companies............ -- -- (13,393)
------------- ------------- -------------
Net cash used in investing activities................................ (16,588) (13,596) (374,711)
Financing Activities
Issuance of common stock, net............................................ 20,138 38,205 1,077,405
Long-term debt and capital lease repayments.............................. (58) (322) (448)
Proceeds from convertible subordinated notes............................. -- -- 656,250
Line of credit borrowings................................................ 2,500 2,000 25,000
Line of credit repayments................................................ (2) (2,500) (25,281)
Distribution to former LLC members....................................... -- -- (10,676)
Advances to employees.................................................... -- -- (8,765)
Treasury stock purchase by subsidiary.................................... -- -- (4,469)
Issuance of stock by subsidiary.......................................... 200 11,293 23,669
-------- -------- --------
Net cash provided by financing activities............................ 22,778 48,676 1,732,685
-------- -------- ----------
Net Increase in Cash and Cash Equivalents.................................. 2,753 20,873 1,316,618
Cash and cash equivalents at beginning of period........................... 3,215 5,968 26,841
-------- -------- --------
Cash and Cash Equivalents at End of Period................................. $ 5,968 $ 26,841 $1,343,459
======== ======== ==========
See notes to consolidated financial statements.
41
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements
1. Significant Accounting Policies
Internet Capital Group, Inc. (or the "Company") was formed on March 4,
1996. The Company is an Internet company actively engaged in business-to-
business, or B2B, e-commerce through a network of companies. The Company defines
e-commerce as conducting or facilitating business transactions over the
Internet. As of December 31, 1999, the Company owned interests in 49 companies
engaged in e-commerce, which the Company calls its "Partner Companies". The
Company's goal is to become the premier B2B e-commerce company. The Company's
operating strategy is to integrate its Partner Companies into a collaborative
network that leverages the collective knowledge and resources of the Company and
the network.
Although the Company refers to the companies in which it has acquired an
equity ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of its Partner Companies, it does not have the power or
authority to legally bind any of its Partner Companies, and it does not have the
types of liabilities in relation to its Partner Companies that a general partner
of a partnership would have.
Basis of Presentation
On February 2, 1999, the Company converted from a Limited Liability
Corporation ("LLC") to a Corporation. All shareholder transactions have been
presented as if the conversion occurred on March 4, 1996.
The consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries, Internet Capital Group Operations, Inc. (the
"Operations Company") and Internet Capital Group (Europe) Limited, and its
majority owned subsidiaries, VerticalNet, Inc. ("VerticalNet") for the years
ended December 31, 1997 and 1998 and Animated Images, Inc. , ("Animated
Images"), CyberCrop.com, Inc., ("CyberCrop.com"), EmployeeLife.com, ICG
Commerce, Inc. ("ICG Commerce") and iParts for portions of the year ended
December 31, 1999.
Additionally, the consolidated financial statements for the year ended
December 31, 1999 reflect Breakaway Solutions' results of operations and cash
flows as a consolidated company from the date of acquisition through September
1999 and accounted for under the equity method for the remainder of the year due
to the decrease in the Company's direct and indirect voting ownership interest
to below 50% in October 1999 as a result of Breakaway Solutions' initial public
offering.
In December 1999, the Company recorded a two for one stock split effected
as a one hundred percent (100%) stock dividend. The common stock and additional
paid-in capital accounts and all share and per share amounts have been
retroactively restated in these financial statements to give effect to this
stock dividend.
Principles of Accounting for Ownership Interests in Partner Companies
The various interests that the Company acquires in its Partner Companies
are accounted for under three broad methods: consolidation, equity method and
cost method. The applicable accounting method is generally determined based on
the Company's voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities are generally
accounted for under the consolidation method of accounting. Under this method, a
Partner Company's results of operations are reflected within the Company's
Consolidated Statements of Operations. All significant intercompany accounts and
transactions are eliminated. Participation of other Partner Company shareholders
in the earnings or losses of a consolidated Partner Company is reflected in the
caption ''Minority interest'' in the Company's Consolidated Statements of
Operations. Minority interest adjusts the Company's consolidated results of
operations to reflect only the Company's share of the earnings or losses of the
consolidated Partner Company. The results of operations and cash flows of a
Consolidated Partner Company are included through the latest interim period in
which the Company owned a greater than 50% direct or indirect voting ownership
for the
42
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
entire interim period. Upon dilution of control below 50%, the accounting method
is adjusted to the equity or cost method of accounting, as appropriate, for
subsequent periods.
In 1999, the Company acquired a controlling majority interest in Breakaway
Solutions, Inc. for $17.2 million and in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce and iParts ("Other Majority Owned Subsidiaries")
for $29.8 million in the aggregate. Breakaway Solutions' operations have
historically consisted primarily of implementation of customer relational
management systems and custom integration to other related applications. In
1999, Breakaway Solutions expanded to provide service offerings in custom web
development and application hosting both through internal expansion and
acquisitions. Breakaway Solutions' revenue is generally recognized upon
performance of services. ICG Commerce provides strategic sourcing consulting and
on-line internet purchasing. The Other Majority Owned Subsidiaries, excluding
ICG Commerce, are development stage companies that have generated negligible
revenue since their inception. In connection with the acquisition of its
ownership interest in Breakaway Solutions and the Other Majority Owned
Subsidiaries, the Company recorded the excess of cost over net assets acquired
of $13.0 million and $11.8 million, respectively, as goodwill which is being
amortized over three years. Breakaway Solutions had revenue of $10.0 million and
$25.4 million for the years ended December 31, 1998 and 1999, respectively. ICG
Commerce had revenue of $1.3 million for the year ended December 31, 1999.
Direct and indirect voting interest in Animated Images, CyberCrop.com,
EmployeeLife.com, ICG Commerce, and iParts at December 31, 1999 was 50.1%, 80%,
52%, 60%, and 67%, respectively.
During the periods ended December 31, 1996, 1997 and 1998 the Company
acquired equity ownership interests in VerticalNet for $1.0 million, $2.0
million and $4.0 million, respectively. The excess of cost over net assets
acquired related to the 1996 and 1997 acquisitions was $.7 million and $.8
million, respectively. The Company's carrying value of VerticalNet, including
the excess of cost over net assets acquired related to the 1996 and 1997
acquisitions, was reduced to below zero and became a liability as a result of
consolidating VerticalNet's losses after amounts attributed to Minority Interest
were exhausted. For the same reason, the 1998 acquisition did not result in an
intangible asset. In 1998, the Company made advances in the form of convertible
notes to VerticalNet of $5.0 million. Of this amount, $.8 million was repaid by
VerticalNet, $2.1 million was purchased from the Company by one of its principal
shareholders, and $2.1 million was converted into common stock during the year
ended December 31, 1999. The Company's direct and indirect voting interest in
VerticalNet at December 31, 1997 and 1998 was 63% and 52%, respectively. The
consolidated financial statements for the year ended December 31, 1999, reflect
VerticalNet accounted for on the equity method of accounting due to the decrease
in the Company's ownership interest to below 50% in February 1999 as a result of
VerticalNet's initial public offering.
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are accounted for under
the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an evaluation
of several factors including, among others, representation on the Partner
Company's Board of Directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the Partner Company, including voting
rights associated with the Company's holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's results of operations are not reflected within
the Company's Consolidated Statements of Operations; however, the Company's
share of the earnings or losses of the Partner Company is reflected in the
caption ''Equity income (loss)'' in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the consolidation
or equity methods of accounting is amortized on a straight-line basis over three
years which adjusts the Company's share of the Partner Company's earnings or
losses. Goodwill
43
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
amortization of consolidated companies is included in selling, general, and
administrative, while goodwill amortization of equity method companies is
included in equity income (loss).
Cost Method. Partner Companies not accounted for under the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method Partner Company impairment charges are recognized in the
Consolidated Statement of Operations with the new cost basis not written-up if
circumstances suggest that the value of the Partner Company has subsequently
recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost as it has the ability and
intent to hold these securities until maturity. The Company records its
ownership interest in equity securities of Partner Companies accounted for under
the cost method at cost, unless these securities have readily determinable fair
values based on quoted market prices, in which case these interests would be
classified as available-for-sale securities or some other classification in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. In addition to the Company's investments in voting and non-
voting equity and debt securities, it also periodically makes advances to its
Partner Companies in the form of promissory notes which are accounted for in
accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have or have committed to invest in its Partner Companies.
Revenue Recognition
All of the Company's revenue during 1997 and 1998 was attributable to
VerticalNet.
VerticalNet's revenue is derived principally from advertising contracts
which include the initial development of storefronts. A storefront is a Web page
posted on one of VerticalNet's trade communities that provides information on an
advertiser's products, links a visitor to the advertiser's Web site and
generates sales inquiries from interested visitors. The advertising contracts
generally do not extend beyond one year. Advertising revenue is recognized
ratably over the period of the advertising contract. Deferred revenue of $2.2
million at December 31, 1998 represents the unearned portion of advertising
contracts for which revenue will be recognized over the remaining period of the
advertising contract.
VerticalNet also generates revenue through providing educational courses
and selling books. Revenue from educational courses is recognized in the period
in which the course is completed and revenue from the sale of books is
recognized in the period in which the books are shipped.
Barter transactions are recorded at the lower of estimated fair value of
goods or services received or the estimated fair value of the advertisements
given. Barter revenue is recognized when the VerticalNet advertising impressions
(VNAI) are delivered to the customer and advertising expense is recorded when
the customer
44
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
advertising impressions (CAI) are received from the customer. If the CAI are
received from the customer prior to VerticalNet delivering the VNAI, a liability
is recorded, and if VerticalNet delivers the VNAI to the customer prior to
receiving the CAI, a prepaid expense is recorded. For the period March 4, 1996
(inception) through December 31, 1997, VerticalNet barter transactions were
immaterial. For the year ended December 31, 1998, VerticalNet recognized
approximately $.6 million and $.5 million of advertising revenues and expenses,
respectively, from barter transactions. Included in prepaid expenses and other
current assets at December 31, 1998 is approximately $.2 million relating to
barter transactions.
The Company's 1999 revenue was attributable to its consolidated
subsidiaries, including Animated Images, Breakaway Solutions, and ICG Commerce.
Due to Breakaway Solutions' initial public offering in October 1999, our voting
ownership interest in Breakaway Solutions decreased below 50%, therefore, we
apply the equity method of accounting beginning in October 1999. The Company's
other consolidated entities, CyberCrop.com, EmployeeLife.com, and iParts, have
generated negligible revenue since their inception.
Animated Images, Breakaway Solutions and ICG Commerce's revenues are
generally recognized as services are rendered.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Certain
amounts recorded to reflect our share of losses of partner companies accounted
for under the equity method are based on unaudited results of operations of
those partner companies and may require adjustments in the future when audits of
these entities are made final.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents. Cash
and cash equivalents at December 31, 1998 and 1999 are invested principally in
money market accounts and commercial paper.
Short-term Investments
Short-term investments are debt securities maturing in less than one year
and are carried at amortized cost, which approximates fair value.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are carried at cost which approximates fair value due to the
short-term maturity of these instruments. The Company's interests in public
Partner Companies accounted for under the equity method of accounting had a fair
value of $2.6 billion as of December 31, 1999 compared to a carrying value of
$42.6 million. Available-for-sale securities are carried at fair value. Long-
term debt is carried at cost which approximates fair value as the debt bears
interest at rates approximating current market rates. The Company's convertible
subordinated notes had a fair value of $835.2 million as of December 31, 1999
versus a carrying value of $566.3 million.
Available-for-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net
45
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
unrealized gain or loss reported as a component of "Accumulated other
comprehensive income" in shareholders' equity.
Unrealized gains or losses related to available-for-sale securities
are recorded net of deferred taxes subsequent to February 2, 1999, the date the
Company converted from an LLC to a corporation.
Intangibles
Goodwill, the excess of cost over net assets of businesses acquired, and
other intangible assets are amortized on a straight-line basis over three to
five years. Goodwill at December 31, 1998 of $2.5 million, net of accumulated
amortization of $.3 million, was attributable to acquisitions by VerticalNet.
Goodwill and other intangible assets at December 31, 1999 of $23.6 million, net
of accumulated amortization of $1.1 million, is attributable to the Company's
acquisitions of ownership interests in Animated Images, Inc. ($6.6 million),
CyberCrop.com ($0.8 million), EmployeeLife.com ($1.1 million), ICG Commerce
($2.2 million) and iParts ($0.1 million) and ICG Commerce's acquisitions of
Purchasing Group, Inc and Integrated Sourcing, LLC ($12.8 million). Goodwill
related to the acquisition of Breakaway during 1999 was reclassified as of
December 31, 1999 in connection with the deconsolidation of Breakaway. The
carrying value of goodwill is evaluated for possible impairment based on
achievement of business plan objectives and milestones, the fair value of each
ownership interest in and advances to the partner company relative to carrying
value, the financial condition and prospects of the partner company, and other
relevant factors. If impairment exists, the carrying amount of the goodwill will
be reduced by the estimated shortfall of discounted cash flows.
Fixed Assets
Fixed assets are carried at cost less accumulated depreciation, which is
based on the estimated useful lives of the assets computed using the straight-
line method. Computer equipment and software, and office equipment have an
estimated useful life of three years, and furniture has an estimated useful life
of seven years. Leasehold improvements are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Equipment acquired under long-term capital lease arrangements is recorded
at amounts equal to the net present value of the future minimum lease payments
using the interest rate implicit in the lease. Amortization is provided by use
of the straight-line method over the estimated useful lives of the related
assets.
Income Taxes
------------
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
From the Company's inception in March 1996 to February 1999, the Company
was not subject to federal and state income taxes (Note 2).
Net Income (Loss) Per Share
Net income (loss) per share (EPS) is computed using the weighted average
number of common shares
46
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
outstanding during each year. Diluted EPS includes common stock equivalents
(unless anti-dilutive) which would arise from the exercise of stock options and
conversion of other convertible securities and is adjusted, if applicable, for
the effect on net income (loss) of such transactions and for the effect on net
income (loss) of the Company's share of dilution related to Partner Companies
which are consolidated or accounted under the equity method of accounting.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an IPO, are required to be included in the
calculation of basic and diluted net income per share as if they were
outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Gain or Loss on Issuances of Stock By Partner Companies
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner
Company accounted for under the consolidation or equity method of accounting
issues its common stock at a price different from the Partner Company's book
value per share, the Company's share of the Partner Company's net equity
changes. If at that time, the Partner Company is not a newly-formed, non-
operating entity, nor a research and development, start-up or development stage
company, nor is there question as to the Company's ability to continue in
existence, the Company records the change in its share of the Partner Company's
net equity as a gain or loss in its Consolidated Statements of Operations.
Foreign Currency Translation
The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenue,
expenses, gains and losses are translated at the average exchange rate in the
month those elements are recognized. Translation adjustments, which have not
been material to date, are included in other comprehensive income (loss).
Stock Based Compensation
The Company has adopted Statement of Financial Accounting No. 123,
Accounting for Stock Based Compensation (SFAS 123). As permitted by SFAS No.
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees
and related interpretations. Accordingly, no accounting recognition is given to
stock options issued to employees that are granted at fair market value until
they are exercised. Stock options issued to non-employees are recorded at fair
value at the date of grant. Fair value is determined using the Black-Scholes
method and the expense is amortized over the vesting period. Upon exercise, net
proceeds, including tax benefits realized, are credited to equity.
Comprehensive Income (Loss)
The Company reports and displays comprehensive income (loss) and its
components in the Consolidated Statements of Comprehensive Income (Loss).
Comprehensive income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non-
owner sources. Excluding net income (loss), the Company's sources of
comprehensive income (loss) is from net unrealized appreciation on its
available-for-sale securities and foreign currency translation adjustments; such
translation adjustments have been negligible through December 31, 1999.
Reclassification adjustments result from the recognition in net income of gains
or losses that were included in comprehensive income (loss) in prior periods.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation. The impact of these changes is not material and did
not affect net income (loss).
47
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
2. Pro Forma Information (Unaudited)
On February 2, 1999, the Company converted from an LLC to a C Corporation.
The Company became subject to corporate federal and state income taxes
concurrent with the conversion to a C corporation. The accompanying
Consolidated Statement of Operations for the years ended December 31, 1998 and
1999 and include pro forma information with respect to income taxes, net income
(loss) and net income (loss) per share assuming the Company had been taxed as a
C Corporation since January 1, 1998. The unaudited pro forma information
provided does not necessarily reflect the income taxes, net income (loss) and
net income (loss) per share that would have occurred had the Company been taxed
as a C corporation since January 1, 1998.
Pro Forma Income Taxes
The Company's 1998 and 1999 pro forma effective tax rate of 37% and 30%,
respectively differed from the federal statutory rate of 35% principally due to
non-deductible permanent differences.
Based upon the cumulative temporary differences (primarily relating to the
difference between the book and tax carrying value of its Partner Companies),
the Company would have recognized a pro forma net deferred federal and state
asset of $8.2 million at December 31, 1998. In the opinion of management, it is
more likely than not that such asset would be realized and accordingly, a
valuation allowance was not considered necessary in calculating this pro forma
amount.
In 1998, the difference between basic and diluted weighted average shares
outstanding of 94,000 was due to the dilutive effect of stock options.
3. Net Income (Loss) per Share
The calculations of Net Income (Loss) per Share were:
(in thousands except per share amounts) Year ended December 31,
1997 1998 1999
--------- -------- --------
Basic
Net Income (loss) $(6,580) $ 13,899 $(29,777)
------- -------- --------
Average common shares outstanding 68,198 112,205 201,851
======= ======== ========
Basic $ (0.10) $ 0.12 $ (0.15)
======= ======== ========
Diluted
Net Income (loss) $(6,580) $ 13,899 $(29,777)
------- -------- --------
Average common shares outstanding 68,198 112,205 201,851
Effect of dilutive securities -- 94 --
------- -------- --------
Average common shares assuming dilution 68,198 112,299 201,851
======= ======== ========
Diluted $ (0.10) $ 0.12 $ (0.15)
======= ======== ========
Options to purchase 188,000 and 5,173,000 shares of common stock at average
prices of $0.50 and $23.74, respectively, were outstanding as of December 31,
1997 and 1999, but were not included in the computation
48
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
of diluted EPS. Warrants to purchase 2,215,717 shares of common stock at $6.00
per share were outstanding as of December 31, 1999, but were not included in the
computation of diluted EPS. Convertible subordinated notes convertible into
4,443,267 shares of common stock were outstanding as of December 31, 1999, but
were not included in the computation of diluted EPS. An option to convert a Note
Payable into 1,049,426 shares of common stock was outstanding as of December 31,
1999, but was not included in the computation of diluted EPS. These options and
warrants are not included in diluted EPS as their effect would have been anti-
dilutive.
4. Ownership Interests in and Advances to Partner Companies
The following summarizes the Company's ownership interests in and advances
to Partner Companies accounted for under the equity method or cost method of
accounting. The ownership interests are classified according to applicable
accounting methods at December 31, 1998 and 1999. Cost basis represents the
Company's original acquisition cost less any impairment charges in such
companies.
(in thousands) As of December 31, 1998 As of December 31, 1999
--------------------------------- ----------------------------------
Carrying Value Cost Basis Carrying Value Cost Basis
----------------- ------------- ---------------- --------------
Equity Method.............. $21,311 $27,588 $491,977 $578,922
Cost Method................ 38,181 38,181 55,362 55,362
------- --------
$59,492 $547,339
======= ========
At December 31, 1999 the Company's carrying value in its Partner Companies
accounted for under the equity method of accounting exceeded its share of the
underlying equity in the net assets of such companies by $293.7 million. This
excess relates to ownership interests acquired through December 31, 1999 and is
being amortized over a three year period. Amortization expense of $.4 million
and $19.8 million is included in "Equity income (loss)" in the accompanying
Consolidated Statements of Operations for the years ended December 31, 1998 and
1999, respectively.
During the year ended December 31, 1999 the Company acquired an interest in
a new Partner Company from shareholders of the Partner Company who have an
option, exercisable at any time through August 2000, of electing to receive cash
of $11.3 million or 2,083,334 shares of the Company's common stock. As of
December 31, 1999, $5.6 million of the obligation has been converted into
1,033,908 shares of the Company's common stock.
During the year ended December 31, 1999 the Company acquired an interest in
a new Partner Company from shareholders of the Partner Company by exchanging
852,631 shares of the Company's common stock, valued at $150.2 million, as
consideration, in addition to cash.
During the year ended December 31, 1999 the Company acquired an interest
in a new Partner Company by issuing a short-term note payable for $21.2 million,
net of imputed interest of $1.8 million, in addition to cash.
During the year ended December 31, 1999 the Company acquired an interest in
a new Partner Company by committing $7 million in cash consideration to be paid
in 2000, in addition to cash consideration paid in 1999.
As of December 31, 1999, the Company had $9.6 million in advances to
Partner Companies which mature on various dates through 2004 and bear interest
rates between 5.25% and 12.50% and are convertible into the Partner Companies'
equity.
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at December 31,
1998 and 1999 and for each of the years in the three-year period ending December
31, 1999 has been compiled from the financial statements of the respective
Partner Companies.
49
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
Balance Sheets
(in thousands) As of December 31,
------------------
1998 1999
---- ----
Current assets.......................... $33,645 $494,745
Non-current assets...................... 7,148 329,133
------- --------
Total assets....................... $40,793 $823,878
------- --------
Current liabilities..................... 11,712 149,799
Non-current liabilities................. 759 268,197
Shareholder's equity.................... 28,322 405,882
------- --------
Total liabilities and
$40,793 $823,878
Shareholders' equity.............. ======= ========
Results of Operations
(in thousands) Year Ended December
-------------------
1997 1998 1999
---------- --------- ---------
Revenue................... $18,912 $ 21,496 $ 192,759
Net income (loss).......... $ 255 $(14,969) $(254,027)
5. Other Acquisitions
During 1999, the Company expended approximately $29.8 million to acquire
interests in five companies that it owns a direct or indirect interest of more
than 50% of the outstanding voting securities as of December 31, 1999. The
Company accounts for these Partner Companies under the consolidation method of
accounting, and accordingly, the purchase price of these acquisitions has been
allocated to the assets purchased and liabilities assumed based upon their fair
values at the dates of acquisition. The consolidated financial statements
reflect the operations and cash flows of the acquired interests since the
respective acquisition dates. The excess of the purchase price over the fair
value of the net assets acquired of approximately $11.8 million was recorded as
goodwill and is being amortized over three years. Accumulated amortization
relating to this goodwill totaled $1.1 million at December 31, 1999.
In May 1999, the Company expended approximately $3.9 million in the
acquisition of its interest in EmployeeLife.com, which provides Internet-based
solutions that enable the online procurement and management of employee health
and welfare benefits.
In June 1999, the Company expended approximately $.8 million in the
acquisition of its interest in iParts, which provides Internet-based sales and
distribution of electronic components.
In September 1999, the Company expended approximately $3.9 million and $9.2
million in its acquisitions of its interests in CyberCrop.com and Animated
Images, respectively. Cybercrop.com is developing a system to provide an
Internet-based service for agriculture producers to purchase services and
inputs, as well as market their grain crops that include corn and wheat
soybeans. Animated Images provides Internet-based design, communication, and
procurement services for the apparel and sewn goods industries.
In October 1999, the Company expended $12 million in its acquisition of its
interest in ICG Commerce which provides strategic sourcing consulting and on-
line Internet purchasing.In 1999, ICG Commerce acquired all of the outstanding
capital stock of Purchasing Group, Inc. (PGI) and Integrated Sourcing, LLC (ISL)
from two of ICG Commerce's founders for $14.9 million in cash and notes payable
to these founders. These acquisitions were accounted for using the purchase
method of accounting. The excess of purchase price over the fair value of the
net assets acquired of approximately $12.9 million was recorded as goodwill and
is being amortized over 5 years. Accumulated amortization relating to this
goodwill totaled $0.8 million at December 31, 1999.
50
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
The following unaudited pro forma financial information presents the
combined results of operations as if the Company had owned EmployeeLife.com,
iParts, CyberCrop.com Animated Images, and ICG Commerce since January 1, 1998;
and is if ICG Commerce had owned PGI and ISL since January 1, 1998, after giving
effect to certain adjustments including goodwill and income taxes. The unaudited
pro forma financial information is provided for informational purposes only and
should not be construed to be indicative of the Company's consolidated results
of operations had the acquisitions been consummated on the dates assumed and do
not project the Company's results of operations for any future period:
(Unaudited)
-----------
(in thousands) Year Ended December 31,
-----------------------
1998 1999
---------- ---------
Revenue.......................................... $11,441 $ 24,477
Pro forma net income (loss)...................... $ 9,788 $(32,486)
Pro forma net income (loss) per share............ $ (0.09) $ (0.16)
These pro forma amounts exclude the impact of 12 acquisitions of equity
method Partner Companies consummated or announced through March 8, 2000.
6. Fixed Assets
Fixed assets consists of the following:
(in thousands) As of December 31,
------------------
1998 1999
------- -------
Computer equipment and software, office
equipment and furniture.......................... $1,877 $2,855
Construction in progress............................ -- 1,483
Leasehold improvements.............................. 46 354
------ ------
1,923 4,692
Less: accumulated depreciation and amortization..... (772) (677)
------ ------
$1,151 $4,015
====== ======
7. Debt
Convertible Subordinated Notes
In May, 1999, the Company issued $90 million of convertible subordinated
notes which converted to 14,999,732 shares of the Company's common stock upon
the completion of the Company's initial public offering in August 1999. The
notes bore interest at an annual rate of 4.99% during the first year and at the
prime rate for the remaining two years. In connection with the conversion of
these notes, all accrued interest was waived and reclassed to additional paid-
in-capital and the Company issued 3,000,000 warrants to purchase the Company's
common stock at $6 per share (the IPO price) through May 2002 which will
increase additional paid-in capital upon exercise. The warrants may also be
exercised by a cashless exercise or net issue, whereby a portion of the warrants
are forfeited based upon an average fair market price in place of cash. During
1999, 661,434 and 122,849 shares of the Company's common stock were issued in
connection with cash and net issue warrant exercises, respectively.
In December, 1999, the Company issued $566.3 million of convertible
subordinated notes. The notes bear interest at an annual rate of 5.5% and
mature in December, 2004. The notes are convertible at the option of the
holder, at any time on or before maturity into shares of the Company's common
stock at a conversion price of $127.44 per share, which is equal to a conversion
rate of 7.8468 shares per $1,000 principal of notes. Additionally, the notes
may be redeemed by the Company if the Company's closing stock price exceeds 150%
of the conversion price then in effect for at least 20 trading days within a
period of 30 consecutive trading days. The conversion rate is subject to
adjustment. The Company recorded interest expense of $1.0 million relating to
these notes during 1999
51
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements - (Continued)
with the first interest payment due June 21, 2000 and subsequent interest
payments due each six months following through December 21, 2004. Issuance costs
of $18.3 million were recorded in other assets and are being amortized as
interest expense over the term of the notes using the effective interest method.
Revolving Credit Facilities
In March 1998, the Company entered into an unsecured $3 million revolving
credit facility. Borrowings under this facility accrued interest at a premium to
prime ranging from .75% to 1.5%. The Company borrowed up to $2 million under
this facility during 1998. No amounts were outstanding at December 31, 1998 and
the facility expired in March 1999.
In April 1999, the Company entered into a $50 million revolving bank credit
facility. In connection with the facility, the Company issued 400,000 warrants
exercisable for seven years at $5 per share. The warrants, valued at $1.0
million, were recorded as debt issuance costs in other assets and additional
paid-in-capital and are being amortized to interest expense over the one year
term of the credit facility.
The facility expires in April 2000, is subject to a .25% unused commitment
fee, bears interest, at the Company's option, at prime and/or LIBOR plus 2.5%,
and is secured by substantially all of the Company's assets. Borrowing
availability under the facility is based on the fair market value of the
Company's holdings of publicly traded Partner Companies and the value, as
defined in the facility, of the Company's private Partner Companies. During year
ended December 31, 1999, the Company borrowed and repaid $25 million under the
facility. The Company is currently in negotiations to replace this line of
credit on or before its expiration date.
EmployeeLife.com has a $1,000,000 revolving credit facility and a $500,000
equipment line of credit at December 31, 1999. Borrowings under the credit
facility accrue interest at a rate of prime plus .75% and the equipment line of
credit accrues interest at the two year treasury rate plus 1.75%. No amounts
were outstanding at December 31, 1999. The revolving credit facility expires in
March 2001 and the equipment line expires in June 2000.
Long-Term Debt
The Company's long-term debt relates to its Consolidated Partner Companies,
is non-recourse to the Company, and consists of the following:
(in thousands) As of December 31,
---------------------------
1998 1999
-------- --------
Term notes with related parties......... $ -- $ 6,136
Capital leases.......................... 640 49
----- -------
640 6,185
Less: current portion................... (288) (3,000)
----- -------
Long-term debt.......................... $ 352 $ 3,185
===== =======
The term notes with related parties of ICG Commerce and EmployeeLife.com
relate to a secured notes due to shareholders with interest rates ranging from
8.0% to 9.25% at December 31, 1999. These notes will mature through 2001.
CyberCrop.com has capital leases on its equipment with a lease term of five
years. The interest rate implicit in the leases is 11.0%. At December 31, 1999,
the book value of assets held under capital leases was approximately equal to
the principal balance due.
At December 31, 1999, long-term debt, including capital leases, is
scheduled to mature as follows:
52
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands)
2000............... $3,000
2001............... 3,158
2002............... 18
2003............... 6
2004............... 3
------
Total.............. $6,185
======
8. Other Liability
In October 1999, ICG Commerce sold shares of redeemable convertible
preferred stock that are convertible, at the option of the holder, into common
stock. The $4.3 million balance as of December 31, 1999 represents those shares
sold to a holder other than the Company and the related accrued dividend
payable. Upon conversion of this other liability balance by the holder, minority
interest will be increased.
9. Accrued Expenses
Accrued expenses consists of the following:
(in thousands) As of December 31,
------------------------
1998 1999
-------- --------
Accrued compensation and benefits..... $ 454 $ 868
Accrued interest...................... -- 952
Accrued marketing costs............... 446 --
Other................................. 923 2,385
------ ------
$1,823 $4,205
====== ======
10. Segment Information
The Company's reportable segments, using the "management approach", consist of
Partner Company Operations and General ICG Operations. Partner Company
Operations includes the effect of consolidating VerticalNet for the year ended
December 31, 1997 and December 31, 1998 and Animated Images, Breakaway
Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce, and iParts for the
period from acquisition in 1999 through December 31, 1999, excluding results of
operations subsequent to de-consolidation, if applicable, and recording the
Company's share of earnings and losses of Partner Companies accounted for under
the equity method of accounting. VerticalNet's operations include creating and
operating industry-specific trade communities on the Internet. Breakaway
Solutions' operations include implementation of various computer applications.
Animated Images' operations include software development and consulting services
and ICG Commerce's operations include purchasing services and consulting
services. CyberCrop.com, EmployeeLife.com and iParts are development stage
companies that have generated negligible revenue since their inception. Partner
Companies accounted for under the equity method of accounting operate in various
Internet-related businesses. General ICG Operations represents the expenses of
providing strategic and operational support to the Internet-related Partner
Companies, as well as the related administrative costs. General ICG Operations
also includes the effect of transactions and other events incidental to the
Company's general operations and the Company's ownership interests in and
advances to Partner Companies. The Company's and Partner Companies' operations
were principally in the United States of America during 1997, 1998 and 1999.
The following summarizes the information related to the Company's segments.
All significant intersegment activity has been eliminated. Assets are owned or
allocated assets used by each operating segment.
Year Ended December 31,
--------------------------------
(in thousands) 1997 1998 1999
-------- -------- ---------
Partner Company Operations
Revenue.................................... $ 792 $ 3,135 $ 16,536
-------- -------- ---------
Operating expenses
53
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements - (Continued)
Cost of revenue......................................... 1,767 4,643 8,156
Selling, general and administrative..................... 3,689 12,001 25,535
-------- -------- ---------
Total operating expenses................................ 5,456 16,644 33,691
-------- -------- ---------
( 4,664) (13,509) (17,155)
Other income (expense), net............................. -- -- (258)
Interest income......................................... 11 212 243
Interest expense........................................ (126) (297) (175)
-------- -------- ---------
Income (loss) before income taxes, minority interest
and equity income (loss)............................... ( 4,779) (13,594) (17,345)
Income taxes............................................ -- -- --
Minority interest....................................... (106) 5,382 6,026
Equity income (loss).................................... 106 (5,869) (92,099)
-------- -------- ---------
Loss from Partner Company Operations...................... $ (4,779) $(14,081) $(103,418)
======== ======== =========
General ICG Operations
General and administrative.............................. $ 2,054 $ 3,513 $ 23,389
-------- -------- ---------
Other income, net....................................... -- 30,483 67,642
Interest income......................................... 253 1,094 9,388
Interest expense........................................ --- (84) (3,722)
-------- -------- ---------
Income (loss) from General ICG Operations before
income taxes........................................... (1,801) 27,980 49,919
Income taxes............................................ -- -- 23,722
-------- -------- ---------
Income (loss) from General ICG Operations................. $ (1,801) $ 27,980 $ 73,641
======== ======== =========
(in thousands)
As of December 31,
---------------------
1998 1999
------- ---------
Assets
Partner Company Operations
Carrying value of equity method Partner Companies..................... $21,311 $ 491,977
Other................................................................. 12,343 45,075
------- ----------
33,654 537,052
General ICG Operations
Cash and cash equivalents............................................. 21,178 1,326,560
Carrying value of cost method Partner Companies....................... 38,181 55,362
Other................................................................. 3,772 131,410
------- ----------
63,131 1,513,332
------- ----------
$96,785 $2,050,384
======= ==========
11. Parent Company Financial Information
Parent Company financial information is provided to present the financial
position and results of operations of the Company as if VerticalNet, Animated
Images, Breakaway Solutions, CyberCrop.com, EmployeeLife.com, ICG Commerce and
iParts ("consolidated companies") were accounted for under the equity method of
accounting for all periods presented. The Company's share of consolidated
companies' losses is included in "Equity income (loss)" in the Parent Company
Statements of Operations for all periods presented based on the Company's
ownership percentage in each period. The losses recorded in excess of carrying
value of VerticalNet at December 31, 1998 are
54
INTERNET CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements - (Continued)
included in "Non-current liabilities" and the carrying value of the consolidated
companies as of December 31, 1999 are included in "Ownership interests in and
advances to Partner Companies" in the Parent Company Balance Sheets.
Parent Company Balance Sheets
(in thousands) As of December 31,
---------------------------
1998 1999
-------- -----------
Assets
Current assets.................................................. $21,597 $1,332,803
Ownership interests in and advances to Partner Companies........ 59,492 571,706
Other........................................................... 3,354 125,166
------- ----------
Total assets................................................. $84,443 $2,029,675
======= ==========
Liabilities and shareholders' equity
Current liabilities............................................. 2,082 43,204
Non-current liabilities......................................... 1,637 566,250
Shareholders' equity............................................ 80,724 1,420,221
------- ----------
Total liabilities and shareholders' equity................... $84,443 $2,029,675
======= ==========
Parent Company Statements of Operations
(in thousands) Year ended December 31,
1997 1998 1999
---------- ------------ ------------
Revenue................................. $ -- $ -- $ --
Operating expenses
General and administrative.......... 2,054 3,513 23,389
------- -------- ---------
Total operating expenses........... 2,054 3,513 23,389
------- -------- ---------
(2,054) (3,513) (23,389)
Other income, net....................... -- 30,483 67,642
Interest income, net.................... 253 1,010 5,666
------- -------- ---------
Income (loss) before income taxes
and equity income (loss).............. (1,801) 27,980 49,919
Income taxes............................ -- -- 23,722
Equity income (loss).................... (4,779) (14,081) (103,418)
------- -------- ---------
Net income (loss)....................... $(6,580) $ 13,899 $ (29,777)
======= ======== =========
Parent Company Statements of Cash Flows
(in thousands) Year Ended December 31,
1997 1998 1999
-------- -------- ----------
Operating Activities
Net income (loss).................................................... $ (6,580) $ 13,899 $ (29,777)
Adjustments to reconcile to net cash used in operating activities:
Gains included in other income .................................. -- (32,552) (67,636)
55
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements -- (Continued)
Depreciation and amortization.............................................. 55 298 6,558
Equity (income) loss....................................................... 4,779 16,150 103,418
Deferred taxes............................................................. -- -- (23,722)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net................................................... 2,003 (125) --
Prepaid expenses and other assets.......................................... 1 (262) (23,382)
Accounts payable........................................................... 56 39 5,344
Accrued expenses........................................................... 70 12 3,844
-------- -------- ----------
Net cash provided by (used in) operating activities...................... 384 (2,541) (25,353)
Investing Activities
Capital expenditures....................................................... (37) (61) (3,558)
Proceeds from sales of available-for-sale securities....................... -- 36,431 2,496
Proceeds from sales of Partner Company ownership
interests and advances to shareholders.................................... -- 300 3,506
Advances to Partner Companies.............................................. (2,640) (12,224) (10,079)
Repayment of advances to Partner Companies................................. 950 677 4,581
Acquisitions of ownership interests in Partner Companies................. (16,466) (44,822) (368,159)
Other advances............................................................. -- -- (12,850)
Purchase of short-term investments......................................... -- -- (18,920)
Proceeds from maturities of short-term investments........................ -- -- 18,920
-------- -------- ----------
Net cash provided by (used in) investing activities...................... (18,193) (19,699) (384,063)
Financing Activities
Issuance of common stock, net.............................................. 20,138 38,205 1,077,405
Proceeds from convertible subordinated notes............................... -- -- 656,250
Line of credit borrowings.................................................. -- -- 25,000
Line of credit repayments.................................................. -- -- (25,000)
Distribution to former LLC members......................................... (2) -- (10,676)
Advances to employees...................................................... -- -- (8,181)
-------- -------- ----------
Net cash provided by financing activities................................ 20,136 38,205 1,714,798
-------- -------- ----------
Net Increase in Cash and Cash Equivalents.................................... 2,327 15,965 1,305,382
Cash and cash equivalents at beginning of period............................. 2,886 5,213 21,178
-------- -------- ----------
Cash and Cash Equivalents at End of Period................................... $ 5,213 $ 21,178 $1,326,560
======== ======== ==========
12. Shareholders' Equity
During 1999, the Company increased it's authorized capital stock to
300,000,000 shares of common stock, par value $.001 per share. The holders of
common stock are entitled to one vote per share and are entitled to dividends as
declared.
Dividends may be restricted by the inability to liquidate ownership
interests in Partner Companies to fund cash dividends and may be subject to the
preferential rights of the holders of the Company's preferred stock, if any. No
cash dividends have been declared to date and may not be declared for the
foreseeable future. As of December 31, 1999, the Company's bank line of credit
agreement precludes dividends.
The Company may establish one or more classes or series of preferred stock.
The holders of the preferred stock may be entitled to preferences over common
stock or shareholders with respect to dividends, liquidation, dissolution, or
winding up of the Company, as established by the Company's Board of Directors.
At December 31, 1999, 10,000,000 shares of preferred stock were authorized.
Certain shareholders were granted registration rights and piggy-back rights
which were effective after completion of the Company's public offering in August
1999.
Shareholders' equity contributions are recorded when received. The Company
issued 31,980,000 shares of common stock for net proceeds of $32 million in
1999. These shares had been subscribed at December 31, 1998.
Initial Public Offering
56
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements -- (Continued)
In August 1999, the Company completed its initial public offering ("IPO")
of 30,620,000 shares of its common stock at $6.00 per share. Concurrently, the
Company completed a private placement of 7,500,000 shares of its common stock at
$6.00 per share. Net proceeds to the Company from these transactions aggregated
approximately $209.5 million (net of underwriters' commission and offering
expenses of approximately $19.2 million).
Stock Dividend
In December 1999, the Company recorded a one hundred percent (100%) stock
dividend effected in the form of a 2 for 1 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 stock
dividend.
Secondary Offering
In December 1999, the Company completed its secondary offering of common
stock and convertible subordinated notes (Note 7). The Company sold 6,900,000
shares of its common stock at $108.00 per share. Just prior to and concurrent
with the secondary offering, the Company completed private placements of 609,533
shares and 648,147 shares of its common stock at $82.02 and $108.00 per share,
respectively. Net proceeds to the Company from these transactions aggregated
approximately $831.0 million (net of underwriters' commission and offering
expenses of approximately $34.2 million).
Issuance of Common Stock Under Equity Compensation Plans
During 1996 and 1997, 12,054,034 and 1,513,216 shares of restricted common
stock ("restricted stock") were granted, net of forfeitures, to employees,
consultants and advisors at no cost as performance incentives under the
Membership Profit Interest Plan. The restricted stock vests in equal annual
installments over a five year period.
At December 31, 1997 and 1998, the 13,567,250 shares of restricted stock
has been granted at a weighted average fair value of $0.10 per share or an
aggregate of $1.3 million based on independent valuations of the shares. These
independent valuations took into account certain factors, primarily the
restrictions on the ability of restricted shareholders to receive distributions
of dividends or profits and the uncertainty of realization of any return from
these shares. The $1.3 million of deferred compensation is classified as a
reduction of shareholders' equity and is being amortized over the five-year
vesting period. Through 1999, 486,532 shares were forfeited and were available
for grant in the form of restricted stock or stock options. These forfeitures
reduced additional paid-in capital by $0.1 million. Compensation expense
related to the restricted stock totaling $0.2 million, $0.3 million and $0.2
million was recorded in 1997, 1998 and 1999, respectively.
In April through July 1999 the Company's Board of Directors authorized the
acceptance of full recourse promissory notes totaling $79.8 million from its
employees and a director as consideration for exercising all or a portion of
their vested and unvested stock options issued under the 1999 Equity
Compensation Plan (a total of 35,991,500 shares of common stock were issued in
connection with these exercises). The $79.8 million notes receivable from
employees is recorded as a reduction of Shareholders' Equity at December 31,
1999 to offset the increase in additional paid-in capital as a result of the
common stock issuance. The Company has the right, but not the obligation, to
repurchase unvested shares under certain circumstances. The exercise of
unvested options by the employees and director and the acceptance of promissory
notes by the Company was in accordance with the terms of the Company's equity
compensation plans and related option agreements. The Company's Board of
Directors also
57
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements -- (Continued)
approved loaning employees the funds, under the terms of full recourse
promissory notes, to pay the income taxes that become due in connection with the
option exercises. These loans totaled $8.1 million and are classified as Other
Assets. The Company recorded 1999 interest income of $3.3 million related to
these loans of which $2.3 million is included in other current assets as a
receivable at December 31, 1999.
Through December 31, 1999, the Company recorded aggregate unearned
compensation expense of $17.1 million, net of $5.5 million in accumulated
amortization, in connection with the grant of stock options to non-employees and
the grant of stock options to employees, under the 1999 Equity Compensation
Plan, where it was determined that the exercise prices was less than the deemed
fair value on the respective dates of grant.
Tax Distribution
In March 1999 the Company made a distribution of $10.7 million to former
LLC members in accordance with the LLC agreements to satisfy the members' tax
liabilities.
13. Stock Option Plans
Incentive or non-qualified stock options may be granted to Company
employees, directors and consultants under the Membership Profit Interest Plan
("MPI") or the 1999 Equity Compensation Plan ("1999 Plan") (together the
"Plans"). Generally, the options vest over a four to five year period and
expire eight to ten years after the date of grant. At December 31, 1999, the
Company reserved 6,008,500 and 486,532 shares of common stock under the 1999
Plan and MPI Plan, respectively, for possible future issuance. Most Partner
Companies also maintain their own stock option plans.
The following table summarizes the activity of the Company's stock option
plans:
Weighted
Average
Shares Exercise Price
----------- --------------
Outstanding at January 1, 1997...................................................... -- $ --
Options granted..................................................................... 188,000 0.50
-----------
Options canceled/forfeited.......................................................... -- --
Outstanding at December 31, 1997.................................................... 188,000 0.50
Options granted..................................................................... 12,144,000 1.00
Options canceled/forfeited.......................................................... (94,000) (0.50)
-----------
Outstanding at December 31, 1998.................................................... 12,238,000 1.00
Options granted..................................................................... 28,995,500 6.82
Options exercised................................................................... (35,991,500) 2.26
Options cancelled/forfeited......................................................... (69,000) 2.44
-----------
Outstanding at December 31, 1999.................................................... 5,173,000 $23.74
===========
At December 31, 1997, 1998 and 1999 there were 188,000, 12,238,000 and
4,688,000 options exercisable at $0.50, $1.00 and $24.62 per share under the
plans, respectively.
The following table summarizes information about stock options outstanding
at December 31:
Weighted Weighted Weighted
Number Average Number Average Number Average
Outstanding Remaining Outstanding Remaining Outstanding Remaining
at Contractual at Contractual at Contractual
Exercise Price 1997 Life (in Years) 1998 Life (in Years) 1999 Life (in Years)
- ------------------ ------------ ---------------- ------------- ----------------- ------------ ----------------
$0.50 - $ 4.00 188,000 9.0 12,238,000 10.0 2,771,000 9.2
$4.01 - $50.00 -- -- -- -- 606,000 9.6
58
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
$50.01- $ 60.00 -- -- -- -- 1,450,000 9.8
$60.01- $108.13 -- -- -- -- 346,000 9.9
------- --- ---------- ---- --------- ---
188,000 9.0 12,238,000 10.0 5,173,000 9.5
Included in the 1998 option grants are 94,000 stock options to non-
employees. The fair value of these options of $.4 million was recorded as
deferred compensation in 1998 and is being amortized over the five year vesting
period. The fair value of these options was determined using the Black-Scholes
method assuming a volatility of 80%, a dividend yield of 0%, an average expected
option life of 5 years, and a risk-free interest rate of 5.2%.
Included in the 1999 option grants are 1,636,000 stock options to non-
employees. The fair value of these options of $3.7 million was recorded as
deferred compensation in 1999 and is being amortized over the five year vesting
period. The fair value of these options was determined using the Black-Scholes
method assuming a volatility of 80%, a dividend yield of 0%, an average expected
option life of 5 years, and a risk-free interest rate of 5.2%.
Included in the 1999 option grants are 23,047,500 stock options to
employees issued below market value on the date of grant. The aggregate
difference between the strike price and market value on the date of grant, for
these options granted, of $12.7 million was recorded as deferred compensation in
1999 and is being amortized over the five year vesting period.
The Company applies APB 25 and related interpretations to account for its
stock options plans. Had compensation cost been recognized pursuant to SFAS
123, the Company's net income (loss) would have been as follows:
(in thousands except per share amounts) Year Ended December 31,
1997 1998 1999
---------- ---------- --------
Net income (loss)
As reported..................................................... $(6,580) $13,899 $(29,777)
SFAS 123 pro forma.............................................. $(6,649) $13,437 $(41,499)
Net income (loss) per share
As reported..................................................... $ (.10) $ .12 $ (.15)
SFAS 123 pro forma.............................................. $ (.10) $ .12 $ (.21)
The per share weighted-average fair value of options issued by the Company
during 1997, 1998 and 1999 was approximately $0.11, $0.22 and $3.94,
respectively.
Prior to its initial public offering, the Company used the minimum value
method to value option grants using a 5.2% to 5.5% risk-free interest rate, an
expected life of 5 years, and no dividend yield. The following assumptions were
used to determine the fair value of stock options granted to employees by the
Company following its initial public offering through December 31, 1999:
Volatility................................................ 101.5%
Average expected option life.............................. 5 years
Risk-free interest rate.................................. 5.5%
Dividend yield............................................ 0.0%
The Company also includes its shares of its Partner Companies SFAS 123 pro
forma expense in the Company's SFAS 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 with
assumptions between 2 to 6 years for average expected option life, 5.0% to 5.5%
for risk-free interest rate, no dividend yield, and volatility up to 100%.
14. Income Taxes
59
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
At December 31, 1999, the Company had a net operating loss carry forward of
approximately $6.0 million which may be used to offset future taxable income.
These carry forwards expire beginning in 2019 and may be limited should certain
changes in the Company's ownership occur.
Income taxes for the year ended December 31, 1999 comprise a $23.7 million
deferred tax benefit relating primarily to differences in the book and tax basis
of ownership interests in Partner Companies.
The Company's net deferred tax assets consist of the following:
(in thousands) As of December 31, 1999
-------------------------
Net operating loss carryforward $ 2,065
Partner Company basis difference 37,695
Stock compensation 8,283
Other, net (466)
Other comprehensive income (13,189)
--------
Net deferred tax asset $ 34,388
========
The Company's deferred tax asset includes approximately $15.0 million of
additional Partner Company basis difference generated from the conversion of
1,033,908 shares of the Company's common stock (Note 4).
The effective tax rate differs from the federal statutory rate as follows:
Year ended
December 31, 1999
-----------------
Tax benefit at statutory rate (35.0)%
Change in tax status (14.5)%
Stock-based compensation 3.0 %
Non-deductible expenses and other 2.2 %
------
(44.3)%
======
15. Related Parties
The Company provides strategic and operational support to its Partner
Companies in the normal course of its business. These services are generally
provided by the Company's employees, members of its Advisory Board and Board of
Directors and outside consultants. The costs related to employees are paid by
the Company and are reflected by the Company in general and administrative
expenses of the General ICG Operations segment. Members of the Company's
Advisory Board and Board of Directors are generally compensated with stock
options in the Company which are accounted for in accordance with Statement of
Financial Accounting Standards No. 123 with any expense related to these options
included in general and administrative expenses of the General ICG Operations
segment. The cost of outside consultants are generally paid directly by the
Partner Company.
The Company entered into various cost sharing arrangements with the same
principal shareholder during 1997, 1998 and 1999, whereby the Company
reimbursed, under fair market terms, this shareholder for certain operational
expenses. The amounts incurred for such items were $0.1 million, $0.2 million
and $0.3 million in 1997, and 1998 and 1999, respectively.
The Company loaned an officer $.1 million during 1998, evidenced by a term
note with an interest rate of prime plus 1% (8.75% at December 31, 1998) to
purchase a portion of the Company's interest in a Partner Company at the
Company's cost. This note was repaid in January 1999 and is included in other
current assets in the December 31, 1998 Consolidated Balance Sheet.
In September 1998 the Company entered into a $.2 million one-year
consulting contract with a Partner Company.
60
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
The Company shares certain acquisition rights with certain of its
principal shareholders whereby these shareholders have the ability to purchase a
portion of the Company's interest in certain Partner Companies. During 1998 and
1999, one shareholder exercised this right and acquired a portion of the
Company's interest in or advances to three Partner Companies for cash of $3.0
million and assumption of $.4 million of a payable to a Partner Company. At the
time of the transactions, there was no difference between the consideration
received and the Company's cost basis of the ownership interest or advance sold.
These rights terminated upon our initial public offering in August 1999.
The Company loaned an officer $0.6 million during 1999, evidenced by a term
note with an interest rate of 4.98% to purchase the Company's stock in the
initial public offering. This note was repaid in 1999.
Certain executives of the Company and its Partner Companies have the option
to purchase a portion of the Company's ownership interest in various Partner
Companies at the Company's cost.
16. Other supplemental non-cash financing and investing activities
During the years ended December 31, 1997, 1998 and 1999, the Company
converted $1.4 million, $1.8 million and $2.8 million, respectively, of advances
to Partner Companies into ownership interests in Partner Companies.
During the year ended December 31, 1998, the Company exchanged all of its
holdings in Matchlogic and Wisewire for shares of Excite and Lycos, respectively
(Note 18).
Interest paid in the periods ended December 31, 1998 and 1999 was $0.2
million and $0.1 million, respectively.
The Company paid no income taxes in 1997 and 1998 due to its tax status as
an LLC. No income taxes were paid in 1999 as the Company had a net operating
loss.
In 1998, the Company acquired an ownership interest in a Partner Company in
exchange for a $1.7 million note payable. The note was payable in two equal
installments through June 1999, did not bear interest and was secured with the
acquired stock of the Partner Company. In March 1999, a shareholder of the
Company assumed $.4 million of this note. This note was paid in 1999.
17. Defined Contribution Plan
In 1997, the Company established a defined contribution plan that covers
all of its employees. Participants may contribute 1% to 15% of pre-tax
compensation, as defined. The Company may make discretionary contributions to
the plan but has never done so.
18. Other Income
Other income consists of the following:
Year Ended December 31,
(in thousands) 1998 1999
---- ----
Issuance of stock by VerticalNet ................. $ -- $50,717
61
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
Issuance of stock by Breakaway Solutions.......... -- 17,304
Sale of SMART Technologies to i2 Technologies..... -- 2,942
Sale of Matchlogic to Excite...................... 12,822 --
Sales of Excite holdings.......................... 16,814 2,051
Sale of Excite to @Home Corporation............... -- 2,719
Sale of WiseWire to Lycos......................... 3,324 --
Sales of Lycos holdings........................... 1,472 --
Partner company impairment charges................ (3,949) (8,097)
Other............................................. -- (252)
-------- -------
$ 30,483 $67,384
======== =======
Gains on sales of Partner Companies' and available-for-sale securities are
determined using average cost.
As a result of VerticalNet completing its initial public offering in
February 1999 and issuing additional shares for acquisitions in 1999, the
Company's share of VerticalNet's net equity increased by $50.7 million. This
increase adjusts the Company's carrying value in VerticalNet and results in a
non-operating gain of $50.7 million, before deferred taxes of $17.7 million, in
the year ended December 31, 1999. As a result of Breakaway Solutions completing
its initial public offering in October 1999, the Company's share of Breakaway
Solutions' net equity increased by $17.3 million. This increase adjusts the
Company's carrying value in Breakaway Solutions and results in a non-operating
gain of $17.3 million, before deferred taxes of $6.1 million, in the year ended
December 31, 1999. These gains were recorded in accordance with SEC Staff
Accounting Bulletin No. 84 and the Company's accounting policy with respect to
such transactions.
In August 1999, the Company divested its ownership interest in SMART
Technologies, Inc. due to the agreement of merger of SMART Technologies, Inc.
and i2 Technologies, Inc. Upon completion of this merger, during the three
months ended September 30, 1999, the Company's ownership interest in and
advances to SMART Technologies, Inc. were converted into cash, common stock and
warrants to purchase common stock of i2 Technologies, Inc. The Company's non-
operating gain before taxes from this transaction was $2.9 million.
In February 1998, the Company exchanged all of its holdings of Matchlogic,
Inc. for 763,820 shares of Excite, Inc. The $14.3 million market value of the
Excite shares received on the date of exchange was used to determine the gain of
$12.8 million. Throughout the remainder of 1998, the Company sold 716,082 shares
of Excite, which resulted in $30.2 million of proceeds and $16.8 million of
gains. During 1999, the Company sold 23,738 shares of Excite, which resulted in
$2.5 million of proceeds and $2.1 million of gains.
In May 1999, @Home Corporation announced it would exchange its shares for
all of the outstanding stock of Excite. As part of this merger, the Company
received shares of @Home Corporation in exchange for its shares in Excite,
resulting in a non-operating gain before taxes of $2.7 million.
In April 1998, the Company exchanged all of its holdings of WiseWire for
191,922 shares of Lycos, Inc. The $5.3 million market value of the Lycos shares
received on the date of exchange was used to determine the gain of $3.3 million.
Throughout the remainder of 1998, the Company sold 169,548 shares of Lycos which
resulted in $6.2 million of proceeds and $1.5 million of gains.
The Company's remaining holdings of @Home Corporation, Lycos, and i2
Technologies at December 31, 1999 are accounted for as available-for-sale
securities and are marked to market, with the difference between carrying value
and market value, net of deferred taxes, recorded in "Accumulated other
comprehensive income" in the shareholders' equity section of its Consolidated
Balance Sheets in accordance with Statement of Financial Accounting Standards
No. 115.
62
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
In December 1998, the Company recorded an impairment charge of $1.9 million
for the decrease in value of one of its partner companies accounted for under
the cost method of accounting as a result of selling the partner company
interest below its carrying value. The Company had acquired its ownership
interest in the partner company during 1996 and 1997. In December 1998, the
partner company agreed to be acquired by an independent third party. The
transaction was completed in January 1999. The impairment charge it recorded was
determined by calculating the difference between the proceeds it received from
the sale and its carrying value.
For the years ended December 31, 1998 and 1999, the Company recorded
impairment charges of $2 million and $8.1 million, respectively, for the other
than temporary decline in the fair value of a cost method partner company. From
the date the Company initially acquired an ownership interest in this partner
company through December 31, 1999, its funding to this partner company
represented all of the outside capital the company had available to fund its net
losses and capital asset requirements. During the year ended December 31, 1999
the Company fully guaranteed the partner company's new bank loan and agreed to
provide additional funding. The Company acquired additional non-voting
convertible debentures of this partner company for $8 million in 1999. The
impairment charges the Company recorded were determined by the decrease in net
book value of the partner company caused by its net losses, which were funded
entirely based on the Company's funding and bank guarantee. Given its continuing
losses, the Company will continue to determine and record impairment charges in
a similar manner for this partner company until the status of its financial
position improves.
19. Commitments and Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the amount of the ultimate liability with respect to these actions
will not materially affect the financial position, results of operations or cash
flows of the Company and its subsidiaries.
In connection with its ownership interests in certain Partner Companies as
of December 31, 1999, the Company guaranteed $5.5 million of bank loan and other
commitments and has committed capital of $9.2 million to existing Partner
Companies to be funded in 2000.
The Company and its consolidated subsidiaries, Animated Images,
CyberCrop.com, Breakaway Solutions, EmployeeLife.com, ICG Commerce and iParts,
lease their facilities under operating lease agreements expiring through 2004.
Future minimum lease payments as of December 31, 1999 under the leases are as
follows:
(in thousands)
2000...................... $ 1,640
2001...................... 1,641
2002...................... 1,531
2003...................... 1,329
2004...................... 1,161
Thereafter................ 10,205
Rent expense under the noncancelable operating leases was approximately $.1
million in 1997, $.3 million in 1998 and $.4 million in 1999.
Because many of its Partner Companies are not majority-owned subsidiaries,
changes in the value of the Company's interests in Partner Companies and the
income or loss and revenue attributable to them could require the
63
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
Company to register under the Investment Company Act unless it takes action to
avoid being required to register. However, the Company believes it can take
steps to avoid being required to register under the Investment Company Act which
would not adversely affect its operations or shareholder value.
Animated Images, CyberCrop.com, EmployeeLife.com, and ICG Commerce have
entered into employment agreement with certain employees. The agreements are
cancelable, but require severance upon termination. As of December 31, 1999,
Animated Images, CyberCrop.com, EmployeeLife.com, and ICG Commerce would be
required to pay up to $1.3 million in aggregate severance in the event that
these employment agreements are cancelled.
20. Selected Quarterly Financial Information (Unaudited)
The following table sets forth selected quarterly financial and stock price
information for the years ended December 31, 1998 and 1999. The operating
results for any given quarter are not necessarily indicative of results for any
future period.
(in thousands)
Fiscal 1998 Quarter Ended Fiscal 1999 Quarter Ended
Mar. 31 Jun.30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31
-------- -------- -------- -------- -------- --------- --------- ---------
Revenue $ 377 $ 587 $ 897 $ 1,273 $ 3,111 $ 4,480 $ 7,192 $ 1,753
Cost of revenue 628 1,075 1,195 1,744 1,553 2,450 3,421 731
Selling, general and
administrative 2,459 3,220 4,151 5,684 3,848 9,428 17,727 17,922
_____ ______ ______ _____ ______ _______ _______ _______
(2,710) (3,708) (4,449) (6,155) (2,290) (7,398) (13,956) (16,900)
Other income, net 12,322 11,727 (534) 6,969 28,677 2,397 15,927 20,382
Interest income 56 247 443 559 310 975 2,892 5,454
Interest expense (110) (108) (15) (148) (14) (953) (803) (2,125)
------- ------- ------- ------- ------- -------- -------- --------
9,558 8,158 (4,555) 1,225 26,683 (4,979) 4,060 6,811
Income taxes -- -- -- -- 663 5,134 7,044 10,882
Minority interest -- 976 1,723 2,682 146 1,302 2,685 1,893
Equity income (loss) (290) (2,390) (1,289) (1,899) (7,413) (12,667) (29,063) (42,958)
------- ------- ------- ------- ------- -------- -------- --------
Net income (loss) $ 9,268 $ 6,744 $(4,121) $ 2,008 $20,079 $(11,210) $(15,274) $(23,372)
======= ======= ======= ======= ======= ======== ======== ========
The selected quarterly financial information includes the accounts of the
Company, its wholly owned subsidiary, Internet Capital Group Operations, Inc.
and its majority owned subsidiaries, VerticalNet, for each of the quarters in
the year ended December 31, 1998; Breakaway Solutions for the period from
January 1, 1999 through October 4, 1999 (the date of Breakaway's initial public
offering); EmployeeLife.com and iParts for each of the quarters in the year
ended December 31, 1999; CyberCrop.com for the quarters ended September 30, 1999
and
64
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 1999; and Applied Intranet Technologies and ICG Commerce for the
quarter ended December 31, 1999, all of which were consolidated from their date
of acquisition.
During the period January 1 through March 8, 2000, the Company has issued
150,000 shares of common stock for an acquisition, is contingently obligated to
issue up to 11,197,238 shares of common stock for acquisitions, and has granted
options to purchase 6,766,000 shares of common stock at an average exercise
price of $110.50 per share.
21. Fiscal 2000 Events (Unaudited)
In February 2000, eMerge Interactive completed its initial public offering
(IPO), selling 7,200,000 newly issued shares of its common stock at $15 per
share. The Company's ownership following the offering was approximately 22%.
In March 2000, Onvia.com, Inc. completed its IPO, selling 8,000,000 newly
issued shares of its common stock at $21 per share, including 2,666,666 shares
sold to the Company at the IPO price in a concurrent private placement. The
Company's ownership following the offering was approximately 22%.
During the period from January 1, 2000 through February 29, 2000 we
utilized $220.6 million to acquire interests in or make advances to new and
existing partner companies. These companies included: asseTRADE.com, Arbinet
Communications, AUTOVIA, Benchmarking Partners, Buymedia, Centrimed,
ClearCommerce, Collabria, CourtLink, e-Chemicals, Entegrity Solutions, EU Medix,
EU Supply, FarmingOn-line, FreeBorders, Industrial America LLC, iSky, LinkShare,
Logistics.com, Inc., MetalSite, ServiceSoft Technologies, TALPX, TeamOn,
Universal Access, and Vivant!
During January 2000, we acquired an additional interest in an existing
partner company from a shareholder of the partner company for 150,000 shares of
our common stock valued at $26.6 million.
During the year ended December 31, 1999, Ariba, Inc. announced its
intention to acquire all of the outstanding stock of one of our partner
companies, TRADEX Technologies, in exchange for approximately $2.0 billion in
Ariba stock. Ariba closed its acquisition of TRADEX Technologies on March 9,
2000. Based on Ariba's closing price of $320.88 on March 9, 2000, we will record
a non-operating gain of approxiamtely $290 million during the quarter ended
March 31, 2000. Our holdings of Ariba after the transaction will be accounted
for as available-for-sale securities and will be marked to market, with the
difference between carrying value and market value, net of deferred taxes,
recorded in "Accumulated other comprehensive income" in the shareholders' equity
section of our Consolidated Balance Sheets in accordance with Statement of
Financial Accounting Standards No. 115.
During the year ended December 31, 1999, VerticalNet acquired all of the
outstanding stock of NECX Exchange LLC in exchange for $70 million in
convertible notes, $10 million in cash and the assumption of debt and certain
other liabilities. Upon conversion of the $70 million in convertible notes
(expected in the first quarter of 2000), our voting ownership in VerticalNet
will decrease from 35% to approximately 34%. In addition, we expect to record a
non-operating gain due to the increase in our share of VerticalNet's net equity
as a result of their issuance of shares.
In January, 2000, Breakaway Solutions announced it had signed a definitive
agreement to acquire EggRock Partners for 3,636,000 shares of Breakaway
Solutions common stock valued at $250 million at the date of signing of the
definitive agreement. Consummation of the transaction is subject to customary
closing conditions and is expected to close in April 2000. Upon closing, our
voting ownership in Breakaway Solutions will decrease from 40% to approximately
33%. In addition, we expect to record a non-operating gain due to the increase
in our share of Breakaway Solutions' net equity as a result of their issuance of
shares.
65
INTERNET CAPITAL GROUP, INC.
Notes to the Consolidated Financial Statements - (Continued)
In February 2000, we entered into an agreement to form a joint venture with
DuPont named CapSpan. CapSpan will provide management, growth capital,
financial, technical and infrastructure capabilities designed to accelerate the
development of B2B e-commerce.
In February, 2000, we entered into an agreement to acquire a significant
interest in eCredit.com, a leading provider of Internet based financing. We
will issue common stock worth approximately $450 million to eCredit.com
shareholders. We expect the transaction to close in the quarter ending June 30,
2000.
In March, 2000, we entered into an agreement to acquire a majority interest
in RightWorks, a leading provider of e-procurement software for B2B exchanges.
We will issue approximately $635 million in Internet Capital Group common stock
(valued at $111.48 per share) to tendering RightWorks' preferred shareholders
(subject to adjustment based on the number of RightWorks' shares tendered) and
also will purchase newly issued RightWorks shares for $22 million in cash. We
expect the transaction to close in the quarter ending June 30, 2000.
In March 2000, we entered into an agreement to acquire a majority interest
in Harbour Ring International Holdings, which will be renamed ICG AsiaWorks
Limited, with Hutchison Whampoa Ltd., a Hong Kong based multi-national
conglomerate, to facilitate our entrance into the Asian e-commerce markets. We
will expend approximately $117 million upon the closing of this transaction
which is expected to take place in the quarter ending June 30, 2000.
During the period January 1 through March 8, 2000, the Company has issued
150,000 shares of common stock for an acquisition, is contingently obligated to
issue up to 11,197,238 shares of common stock for acquisitions, and has granted
options to purchase 6,766,000 shares of common stock at an average exercise
price of $110.50 per share.
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate by reference the information contained under the captions
"Election of Directors (Item 1 on Proxy Card)" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Definitive Proxy Statement relative to
our annual meeting of shareholders, to be filed within 120 days after the end of
the year covered by this Form 10-K Report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. We also incorporate by reference
"Executive Officers of the Registrant" as set forth under Item 4A of this Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information contained under the captions
"Executive Compensation" and "Other Forms of Compensation" in our Definitive
Proxy Statement relative to its annual meeting of shareholders, to be filed
within 120 days after the end of the year covered by this Form 10-K Report
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Directors and Officers" in
our Definitive Proxy Statements relative to our annual meeting of shareholders,
to be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Internet Capital Group incorporates by reference the information
contained under the caption "Certain Relationships and Related Transactions" in
its Definitive Proxy Statement relative to its annual meeting of shareholders,
to be filed within 120 days after the end of the year covered by this Form 10-K
Report pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
The Consolidated Financial Statements and related Notes thereto as set
forth under Item 8 of this Report on Form 10-K are incorporated herein by
reference.
2. Financial Statement Schedules
67
Report of Independent Auditors
The Board of Directors and Shareholders
Internet Capital Group, Inc.:
Under date of March 8, 2000, we reported on the consolidated balance sheets of
Internet Capital Group, Inc. and subsidiaries as of December 31, 1998 and 1999,
and the related consolidated statements of operations, shareholders' equity,
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule. The financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
March 8, 2000
The following financial statement schedule of Internet Capital Group, Inc.
for each of the years ended December 31, 1997, 1998 and 1999 should be read in
conjunction with our Consolidated Financial Statements and related Notes
thereto.
INTERNET CAPITAL GROUP
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1997, 1998 and 1999
(in thousands)
Balance at
the Balance at
Beginning Charged to Costs the End of
of the Year and Expenses Write-offs the Year
----------- ------------ ---------- --------
Allowance for Doubtful Accounts:
December 31, 1997 $19 $ 11 $ -- $30
December 31, 1998 $30 $ 62 $ (31) $61
December 31, 1999 $61 $ 72 (a) $ (66) (b) $67
Ownership interests in and advances to Partner Companies:
December 31, 19997 $-- $ 80 $ -- $80
December 31, 1998 $80 $1,820 $(1,880) (c) $20
December 31, 1999 $20 $ -- $ (20) $--
(a) Reserve of $72 established from acquisition of Animated Images.
(b) Reserve of $61 was eliminated upon deconsolidation of VeticalNet.
(c) Reserve of $80 was eliminated upon acquiring Informatrix.
Schedules other than those listed above have been omitted since they are
either not required, not applicable, or the information has otherwise been
included.
(b) Report of Form 8-K
On November 16, 1999, we filed a Current Report on Form 8-K dated November
19, 1999 to report under Item 2 (Other Events) the execution of the Securities
Purchase Agreement between Internet Capital Group, eMerge Interactive, Inc. and
J Technologies, LLC. The filing included the required financial statements and
pro forma financial information.
On January 11, 2000, we filed a Current Report on Form 8-K dated December
29, 1999 to report under Item 2 the execution of the Securities Purchase
Agreement between Internet Capital Group and Weirton Steel Corporation. The
financial statements required were omitted and will be filed by amendment as
soon as practicable but not later than 60 days after the date that this report
must be filed.
On March 13, 2000, we filed an amended Current Report on Form 8-K/A dated
December 29, 1999 to report under Item 5 (Other Events) the execution of the
Securities Purchase Agreement between Internet Capital Group and Weirton Steel
Corporation. The filing included the required financial statements and pro
forma financial information.
68
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated in
parentheses.
Exhibit
Number Document
- ------ --------
2.1 Agreement of Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C. and Internet Capital Group, Inc. (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form S-1
filed by the Company on May 11, 1999 (Registration No. 333-78193) (the
"IPO Registration Statement"))
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form 8-A filed by the
Company on August 4, 1999 (Registration No. 000-26989) (the "8-A
Registration Statement"))
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 2.2
to the 8-A Registration Statement)
4.1 Specimen Certificate for Internet Capital Group's Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
IPO Registration Statement filed by the Company on August 2, 1999
(Registration No. 333-78193) (the "IPO Amendment No. 3"))
4.2 Indenture between Internet Capital Group, Inc. and Chase Manhattan
Trust Company, National Association, as Trustee, for the 5 1/2%
Convertible Subordinated Notes due 2004
4.3 Form of 5 1/2% Convertible Subordinated Notes due 2004 of Internet
Capital Group (included in Exhibit 4.2)
10.1 Internet Capital Group, L.L.C. 1998 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the IPO Registration
Statement)
10.1.1 Internet Capital Group, Inc. 1999 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1.1 to the IPO Registration
Statement)
10.1.2 Internet Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1, 1999 (incorporated by reference to Exhibit 10.1.2
to the IPO Registration Statement)
10.1.3 Amendment No. 1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as Amended and Restated May 1, 1999 (incorporated by
reference to Exhibit 10.1.3 to Amendment No. 2 to the IPO Registration
Statement filed by the Company on July 16, 1999 (Registration No. 333-
79193) (the "IPO Amendment No. 2"))
10.2 Internet Capital Group, L.L.C. Option Plan for Non-Employee Managers
(incorporated by reference to Exhibit 10.2 to the IPO Registration
Statement)
10.2.1 Internet Capital Group, Inc. Directors' Option Plan (incorporated by
reference to Exhibit 10.2.1 to the IPO Registration Statement)
69
10.3 Internet Capital Group, L.L.C. Membership Profit Interest Plan
(incorporated by reference to Exhibit 10.3 to the IPO Registration
Statement)
10.4 Form of Internet Capital Group, Inc. Long-Term Incentive Plan
10.5 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated September 30, 1998 (incorporated by
reference to Exhibit 10.5 to the IPO Registration Statement)
10.5.1 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated January 4, 1999 (incorporated by reference
to Exhibit 10.5.1 to the IPO Registration Statement)
10.6 Securities Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and certain holders named therein (incorporated by
reference to Exhibit 10.6 to the IPO Registration Statement)
10.7 Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the May 10, 1999
Convertible Notes (incorporated by reference to Exhibit 10.21 to the
IPO Registration Statement)
10.8 Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999 (incorporated by reference to Exhibit 10.22 to the IPO
Registration Statement)
10.9 Stock Purchase Agreement between Internet Capital Group, Inc. and
Safeguard Scientifics, Inc. (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.9.1 Stock Purchase Agreement between Internet Capital Group, Inc. and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.23.1 to the IPO Amendment No. 2)
10.10 Letter describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for premises located in Wayne,
Pennsylvania (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to the IPO Registration Statement filed by the Company on June
22, 1999 (Registration No. 333-78193) (the "IPO Amendment No. 1"))
10.11 Form of Office Lease between Friends' Provident Life Office and IBIS
(505) Limited for premises located in London, England (incorporated by
reference to Exhibit 10.11 to Amendment No. 3 to the Registration
Statement filed by the Company on December 15, 1999 (Registration No.
333-91447) (the "Follow-on Amendment No. 3"))
10.12 Office Lease dated September, 1999 between Internet Capital Group
Operations, Inc. and 45 Milk Street, L.P. for premises located in
Boston, Massachusetts (incorporated by reference to Exhibit 10.12 to
the Registration Statement filed by the Company on November 22, 1999
(Registration No. 333-91447) (the "Follow-on Registration Statement"))
10.13 Office Lease dated February 25, 1999 between OTR and Internet Capital
Group Operations, Inc. for premises located in San Francisco,
California (incorporated by reference to Exhibit 10.27 to the IPO
Amendment No. 1)
10.14 Credit Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet Capital Group Operations, Inc., the
Banks named therein and PNC Bank, N.A. (incorporated by reference to
Exhibit 10.26 to the IPO Registration Statement)
70
10.15 Amendment No. 1 to the Credit Agreement dated October 27, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15 to the Follow-on Registration Statement)
10.15.1 Amendment No. 2 to the Credit Agreement dated November 19, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15.1 to the Follow-on Registration Statement)
10.15.2 Amended and Restated Amendment No. 2 to the Credit Agreement dated
November 19, 1999 by and among Internet Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC Bank,
N.A.
10.15.3 Amendment No. 3 to the Credit Agreement dated February 25, 2000 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.
10.16 Benchmarking Partners, Inc. Option Agreement dated January 1, 1997 by
and between Christopher H. Greendale and Internet Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.28 to the IPO
Registration Statement)
10.16.1 Amendment to Benchmarking Partners, Inc. Option Agreement dated July
19, 1999 by and between Christopher H. Greendale and Internet Capital
Group, Inc. (incorporated by reference to Exhibit 10.29.1 to the IPO
Amendment No. 3)
10.17 Syncra Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H. Forester and Internet Capital Group, L.L.C.
(incorporated by reference to Exhibit 10.29 to the IPO Registration
Statement)
10.18 Letter Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18, 1997 (incorporated by reference to Exhibit
10.31 to the IPO Amendment No. 1)
10.19 Letter Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998 (incorporated by reference to Exhibit
10.32 to the IPO Amendment No. 1)
10.20 Form of Promissory Note issued in connection with the exercise of
Internet Capital Group's stock options in May, June and July of 1999
(incorporated by reference to Exhibit 10.33 to the IPO Amendment No.
1)
10.21 Form of Restrictive Covenant Agreement issued in connection with the
exercise of Internet Capital Group's stock options in May, June and
July of 1999 (incorporated by reference to Exhibit 10.34 to the IPO
Amendment No. 1)
10.22 Securities Purchase Agreement dated October 27, 1999 by and among
eMerge Interactive, Inc., J. Technologies, LLC and Internet Capital
Group, Inc. (incorporated by reference to the Company's Current Report
on Form 8-K filed November 22, 1999 (File No. 0-26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between Internet
Capital Group, Inc. and Safeguard Scientifics, Inc. (incorporated by
reference to Exhibit 10.23 to the Follow-on Registration Statement)
10.24 Purchase Agreement dated November 5, 1999 between JusticeLink, Inc.
and Internet Capital Group, Inc. (incorporated by reference to Exhibit
10.24 to the Registration
71
Statement filed by the Company on December 6, 1999 (Registration No.
333-91447) (the "Follow-on Amendment No. 1"))
10.25 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and AT&T Corp. (incorporated by reference to Exhibit 10.25
to the Follow-on Amendment No. 1)
10.26 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Internet Assets, Inc. (incorporated by reference to
Exhibit 10.26 to the Follow-on Amendment No. 1)
10.27 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Ford Motor Company (incorporated by reference to
Exhibit 10.27 to the Follow-on Amendment No. 3)
10.28 Securities Purchase Agreement dated December 28, 1999 between Internet
Capital Group, Inc. and Weirton Steel Corporation (incorporated by
reference to the Company's Current Report on Form 8-K filed January
11, 2000 (File No. 0-26929))
10.29 Press Release regarding Acquisition of eCredit.com (incorporated by
reference to the Company's filing on Form 425 filed February 24, 2000
(File No. 132-01812))
10.30 Sublease Agreement dated January 6, 2000 between SP Investments Inc.
and Internet Capital Group, Inc. for premises located in Seattle,
Washington
11.1 Statement Regarding Computation of Per Share Earnings (included herein
at Note 1-"Significant Accounting Policies" in the subsection "Net
Income (Loss) Per Share" to the Consolidated Financial Statements and
Note 3-"Net Income (Loss) Per Share" to the Consolidated Financial
Statements)
13.1 Sections entitled "Election of Directors (Item 1 on Proxy Card),"
"Section 16(a) Beneficial Ownership Reporting Compliance," "Executive
Compensation," "Other Forms of Compensation," "Security Ownership of
Certain Beneficial Owners and Directors and Officers" and "Certain
Relationships and Related Transactions" in the Company's Definitive
Proxy Statement relative to its annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form
10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended
21.1 Subsidiaries of Internet Capital Group
27.1 Financial Data Schedule for the Year ended December 31, 1999
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Security Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 16, 2000 INTERNET CAPITAL GROUP, INC.
By: /s/ David D. Gathman
--------------------
Name: David D. Gathman
Title: Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities set forth above.
Signature Title
- --------- -----
/s/ Walter W. Buckley President, Chief Executive Officer and
- ---------------------
Walter W. Buckley Director (Principal Executive Officer)
/s/ David D. Gathman Chief Financial Officer and Treasurer
- --------------------
David D. Gathman (Principal Financial and Accounting
Officer)
/s/ Kenneth A. Fox Director
- ------------------
Kenneth A. Fox
/s/ Julian A. Brodsky Director
- ---------------------
Julian A. Brodsky
/s/ Thomas P. Gerrity Director
- ---------------------
Thomas P. Gerrity
/s/ Warren V. Musser Director
- --------------------
Warren V. Musser
/s/ Peter A. Solvik Director
- -------------------
Peter A. Solvik
73
Exhibit Index
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Report. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits incorporated
by reference, the location of the exhibit in the previous filing is indicated in
parentheses.
Exhibit
Number Document
- ------ --------
2.1 Agreement of Merger, dated February 2, 1999, between Internet Capital
Group, L.L.C. and Internet Capital Group, Inc. (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form S-1
filed by the Company on May 11, 1999 (Registration No. 333-78193) (the
"IPO Registration Statement"))
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form 8-A filed by the
Company on August 4, 1999 (Registration No. 000-26989) (the "8-A
Registration Statement"))
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 2.2
to the 8-A Registration Statement)
4.1 Specimen Certificate for Internet Capital Group's Common Stock
(incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the
IPO Registration Statement filed by the Company on August 2, 1999
(Registration No. 333-78193) (the "IPO Amendment No. 3"))
4.2 Indenture between Internet Capital Group, Inc. and Chase Manhattan
Trust Company, National Association, as Trustee, for the 5 1/2%
Convertible Subordinated Notes due 2004
4.3 Form of 5 1/2% Convertible Subordinated Notes due 2004 of Internet
Capital Group (included in Exhibit 4.2)
10.1 Internet Capital Group, L.L.C. 1998 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1 to the IPO Registration
Statement)
10.1.1 Internet Capital Group, Inc. 1999 Equity Compensation Plan
(incorporated by reference to Exhibit 10.1.1 to the IPO Registration
Statement)
10.1.2 Internet Capital Group, Inc. 1999 Equity Compensation Plan as Amended
and Restated May 1, 1999 (incorporated by reference to Exhibit 10.1.2
to the IPO Registration Statement)
10.1.3 Amendment No. 1 to the Internet Capital Group, Inc. 1999 Equity
Compensation Plan as Amended and Restated May 1, 1999 (incorporated by
reference to Exhibit 10.1.3 to Amendment No. 2 to the IPO Registration
Statement filed by the Company on July 16, 1999 (Registration No. 333-
79193) (the "IPO Amendment No. 2"))
10.2 Internet Capital Group, L.L.C. Option Plan for Non-Employee Managers
(incorporated by reference to Exhibit 10.2 to the IPO Registration
Statement)
10.2.1 Internet Capital Group, Inc. Directors' Option Plan (incorporated by
reference to Exhibit 10.2.1 to the IPO Registration Statement)
74
10.3 Internet Capital Group, L.L.C. Membership Profit Interest Plan
(incorporated by reference to Exhibit 10.3 to the IPO Registration
Statement)
10.4 Form of Internet Capital Group, Inc. Long-Term Incentive Plan
10.5 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated September 30, 1998 (incorporated by
reference to Exhibit 10.5 to the IPO Registration Statement)
10.5.1 Amended and Restated Limited Liability Company Agreement of Internet
Capital Group, L.L.C. dated January 4, 1999 (incorporated by reference
to Exhibit 10.5.1 to the IPO Registration Statement)
10.6 Securities Holders Agreement dated February 2, 1999 among Internet
Capital Group, Inc. and certain holders named therein (incorporated by
reference to Exhibit 10.6 to the IPO Registration Statement)
10.7 Form of Internet Capital Group, Inc. Common Stock Purchase Warrant
dated May 10, 1999 issued in connection with the May 10, 1999
Convertible Notes (incorporated by reference to Exhibit 10.21 to the
IPO Registration Statement)
10.8 Form of Internet Capital Group, Inc. Convertible Note dated May 10,
1999 (incorporated by reference to Exhibit 10.22 to the IPO
Registration Statement)
10.9 Stock Purchase Agreement between Internet Capital Group, Inc. and
Safeguard Scientifics, Inc. (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999)
10.9.1 Stock Purchase Agreement between Internet Capital Group, Inc. and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.23.1 to the IPO Amendment No. 2)
10.10 Letter describing the oral lease between Internet Capital Group and
Safeguard Scientifics, Inc. for premises located in Wayne,
Pennsylvania (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to the IPO Registration Statement filed by the Company on June
22, 1999 (Registration No. 333-78193) (the "IPO Amendment No. 1"))
10.11 Form of Office Lease between Friends' Provident Life Office and IBIS
(505) Limited for premises located in London, England (incorporated by
reference to Exhibit 10.11 to Amendment No. 3 to the Registration
Statement filed by the Company on December 15, 1999 (Registration No.
333-91447) (the "Follow-on Amendment No. 3"))
10.12 Office Lease dated September, 1999 between Internet Capital Group
Operations, Inc. and 45 Milk Street, L.P. for premises located in
Boston, Massachusetts (incorporated by reference to Exhibit 10.12 to
the Registration Statement filed by the Company on November 22, 1999
(Registration No. 333-91447) (the "Follow-on Registration Statement"))
10.13 Office Lease dated February 25, 1999 between OTR and Internet Capital
Group Operations, Inc. for premises located in San Francisco,
California (incorporated by reference to Exhibit 10.27 to the IPO
Amendment No. 1)
10.14 Credit Agreement dated as of April 30, 1999 by and among Internet
Capital Group, Inc., Internet Capital Group Operations, Inc., the
Banks named therein and PNC Bank, N.A. (incorporated by reference to
Exhibit 10.26 to the IPO Registration Statement)
75
10.15 Amendment No. 1 to the Credit Agreement dated October 27, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15 to the Follow-on Registration Statement)
10.15.1 Amendment No. 2 to the Credit Agreement dated November 19, 1999 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A. (incorporated by
reference to Exhibit 10.15.1 to the Follow-on Registration Statement)
10.15.2 Amended and Restated Amendment No. 2 to the Credit Agreement dated
November 19, 1999 by and among Internet Capital Group, Inc., Internet
Capital Group Operations, Inc., the Banks named therein and PNC Bank,
N.A.
10.15.3 Amendment No. 3 to the Credit Agreement dated February 25, 2000 by and
among Internet Capital Group, Inc., Internet Capital Group Operations,
Inc., the Banks named therein and PNC Bank, N.A.
10.16 Benchmarking Partners, Inc. Option Agreement dated January 1, 1997 by
and between Christopher H. Greendale and Internet Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.28 to the IPO
Registration Statement)
10.16.1 Amendment to Benchmarking Partners, Inc. Option Agreement dated July
19, 1999 by and between Christopher H. Greendale and Internet Capital
Group, Inc. (incorporated by reference to Exhibit 10.29.1 to the IPO
Amendment No. 3)
10.17 Syncra Software, Inc. Option Agreement dated August 1, 1998 by and
between Michael H. Forester and Internet Capital Group, L.L.C.
(incorporated by reference to Exhibit 10.29 to the IPO Registration
Statement)
10.18 Letter Agreement between Internet Capital Group, L.L.C. and Douglas
Alexander dated July 18, 1997 (incorporated by reference to Exhibit
10.31 to the IPO Amendment No. 1)
10.19 Letter Agreement between Internet Capital Group, L.L.C. and Robert
Pollan dated April 27, 1998 (incorporated by reference to Exhibit
10.32 to the IPO Amendment No. 1)
10.20 Form of Promissory Note issued in connection with the exercise of
Internet Capital Group's stock options in May, June and July of 1999
(incorporated by reference to Exhibit 10.33 to the IPO Amendment No.
1)
10.21 Form of Restrictive Covenant Agreement issued in connection with the
exercise of Internet Capital Group's stock options in May, June and
July of 1999 (incorporated by reference to Exhibit 10.34 to the IPO
Amendment No. 1)
10.22 Securities Purchase Agreement dated October 27, 1999 by and among
eMerge Interactive, Inc., J. Technologies, LLC and Internet Capital
Group, Inc. (incorporated by reference to the Company's Current Report
on Form 8-K filed November 22, 1999 (File No. 0-26929))
10.23 Joint Venture Agreement dated October 26, 1999 by and between Internet
Capital Group, Inc. and Safeguard Scientifics, Inc. (incorporated by
reference to Exhibit 10.23 to the Follow-on Registration Statement)
10.24 Purchase Agreement dated November 5, 1999 between JusticeLink, Inc.
and Internet Capital Group, Inc. (incorporated by reference to Exhibit
10.24 to the Registration
76
Statement filed by the Company on December 6, 1999 (Registration No.
333-91447) (the "Follow-on Amendment No. 1"))
10.25 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and AT&T Corp. (incorporated by reference to Exhibit 10.25
to the Follow-on Amendment No. 1)
10.26 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Internet Assets, Inc. (incorporated by reference to
Exhibit 10.26 to the Follow-on Amendment No. 1)
10.27 Purchase Agreement dated December 6, 1999 between Internet Capital
Group, Inc. and Ford Motor Company (incorporated by reference to
Exhibit 10.27 to the Follow-on Amendment No. 3)
10.28 Securities Purchase Agreement dated December 28, 1999 between Internet
Capital Group, Inc. and Weirton Steel Corporation (incorporated by
reference to the Company's Current Report on Form 8-K filed January
11, 2000 (File No. 0-26929))
10.29 Press Release regarding Acquisition of eCredit.com (incorporated by
reference to the Company's filing on Form 425 filed February 24, 2000
(File No. 132-01812))
10.30 Sublease Agreement dated January 6, 2000 between SP Investments Inc.
and Internet Capital Group, Inc. for premises located in Seattle,
Washington
11.1 Statement Regarding Computation of Per Share Earnings (included herein
at Note 1 - "Significant Accounting Policies" in the subsection "Net
Income (Loss) Per Share" to the Consolidated Financial Statements and
Note 3 - "Net Income (Loss) Per Share" to the Consolidated Financial
Statements)
13.1 Sections entitled "Election of Directors (Item 1 on Proxy Card),"
"Section 16(a) Beneficial Ownership Reporting Compliance," "Executive
Compensation," "Other Forms of Compensation," "Security Ownership of
Certain Beneficial Owners and Directors and Officers" and "Certain
Relationships and Related Transactions" in the Company's Definitive
Proxy Statement relative to its annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form
10-K Report pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended
21.1 Subsidiaries of Internet Capital Group
27.1 Financial Data Schedule for the Year ended December 31, 1999
77