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INTERNET CAPITAL GROUP, INC.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2002
COMMISSION FILE NUMBER 0-26929
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INTERNET CAPITAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2996071
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
600 BUILDING, 435 DEVON PARK DRIVE, WAYNE, PA 19087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(610) 989-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes | | No
Number of shares of Common Stock outstanding as of August 13, 2002:
286,474,678 shares.
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INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I--FINANCIAL INFORMATION
ITEM PAGE NO.
- ---- --------
Item 1--Financial Statements:
Consolidated Balance Sheets--June 30, 2002 (unaudited)
and December 31, 2001 ..................................... 4
Consolidated Statements of Operations (unaudited)--Three
Months and Six Months Ended June 30, 2002 and 2001......... 5
Consolidated Statements of Cash Flows (unaudited)--Six
Months Ended June 30, 2002 and 2001........................ 6
Notes to Consolidated Financial Statements.................... 7
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 20
Item 3--Quantitative and Qualitative Disclosures About Market Risk.... 41
PART II -- OTHER INFORMATION
Item 1--Legal Proceedings............................................. 42
Item 2--Changes in Securities and Use of Proceeds..................... 42
Item 3--Defaults Upon Senior Securities............................... 42
Item 4--Submission of Matters to a Vote of Security Holders........... 42
Item 5--Other Information............................................. 43
Item 6--Exhibits and Reports on Form 8-K.............................. 43
Signatures............................................................ 44
Exhibit Index......................................................... 45
Although we refer in this Report to the companies in which we have
acquired a convertible debt or an equity ownership interest as our "partner
companies" and that we indicate that we have a "partnership" with these
companies, we do not act as an agent or legal representative for any of our
partner companies, and we do not have the power or authority to legally bind any
of our partner companies, and we do not have the types of liabilities in
relation to our partner companies that a general partner of a partnership would
have.
This Quarterly Report on Form 10-Q includes forward looking statements
within the meaning of Section 21E of the Securities Exchange Act, as amended.
See the subsection of Part I, Item 2 entitled "Risk Factors" for more
information.
2
INTERNET CAPITAL GROUP, INC.
PARTNER COMPANIES AS OF JUNE 30, 2002
Agribuys, Inc. ("Agribuys") inreon Limited ("inreon")
Anthem/CIC Ventures Fund LP ("Anthem") Internet Commerce Systems, Inc. ("Internet Commerce Systems")
Arbinet - thexchange Inc. ("Arbinet") Investor Force Holdings, Inc. ("Investor Force")
Blackboard, Inc. ("Blackboard") iSky, Inc. ("iSky")
BuyMedia, Inc. ("BuyMedia") Jamcracker, Inc. ("Jamcracker")
Citadon, Inc. ("Citadon") LinkShare Corporation ("LinkShare")
ClearCommerce Corporation ("ClearCommerce") Logistics.com, Inc. ("Logistics.com")
CommerceQuest, Inc. ("CommerceQuest") Mobility Technologies, Inc. (fka traffic.com, Inc.)("Mobility Technologies")
ComputerJobs.com, Inc. ("ComputerJobs.com") OneCoast Network Holdings, Inc. (fka USgift Corporation)("OneCoast")
Co-nect, Inc. (fka Simplexis.com)("Co-nect") OnMedica Group PLC ("OnMedica")
Context Integration, Inc. ("Context Integration") Onvia.com, Inc. ("Onvia.com")
CreditTrade Inc. ("CreditTrade") Persona, Inc. ("Persona")
Delphion, Inc. ("Delphion") Sourceree Limited ("Sourceree")
eCredit.com, Inc. ("eCredit") StarCite, Inc. ("StarCite")
eMarket Capital, Inc. ("eMarket Capital") Surgency, Inc. (fka Benchmarking)("Surgency")
eMerge Interactive, Inc. ("eMerge Interactive") Syncra Systems, Inc. ("Syncra Systems")
Emptoris, Inc. ("Emptoris") TeamOn Systems, Inc. ("TeamOn")
Entegrity Solutions Corporation ("Entegrity Solutions") Textiles Online Marketplaces Limited ("Texyard")
FreeBorders, Inc. ("FreeBorders") Tibersoft Corporation ("Tibersoft")
FuelSpot.com, Inc. ("FuelSpot") Universal Access Global Holdings, Inc. ("Universal Access")
GoIndustry AG ("GoIndustry") United Messaging, Inc. ("United Messaging")
ICG Commerce Holdings, Inc. ("ICG Commerce") Verticalnet, Inc. ("Verticalnet")
3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
2002 2001
---- ----
(UNAUDITED) (AS ADJUSTED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Current Assets
Cash and cash equivalents ......................................... $ 155,910 $ 245,935
Restricted cash ................................................... 5,153 10,457
Short-term investments ............................................ 13,424 13,731
Accounts receivable, net .......................................... 30,484 33,333
Prepaid expenses and other current assets ......................... 7,305 11,064
----------- -----------
Total current assets ........................................... 212,276 314,520
Fixed assets, net ...................................................... 16,982 25,453
Ownership interests in Partner Companies ............................... 96,725 163,137
Available-for-sale securities .......................................... 10,479 17,389
Goodwill, net .......................................................... 77,658 77,452
Other .................................................................. 44,163 57,096
----------- -----------
Total Assets ................................................... $ 458,283 $ 655,047
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt .............................. $ 16,954 $ 17,156
Accounts payable .................................................. 15,897 17,409
Accrued expenses .................................................. 46,199 55,759
Accrued compensation and benefits ................................. 20,714 15,386
Deferred revenue .................................................. 23,911 25,962
Other ............................................................. -- 806
----------- -----------
Total current liabilities ...................................... 123,675 132,478
Long-term debt ......................................................... 6,798 16,276
Other liabilities ...................................................... 10,447 8,985
Minority interest ...................................................... 4,994 16,510
Convertible subordinated notes ......................................... 353,474 446,061
----------- -----------
Total Liabilities .............................................. 499,388 620,310
Commitments and contingencies
Stockholders' Equity (Deficit)
Preferred stock, $.01 par value; 10,000 shares authorized;
none issued .................................................... -- --
Common stock, $.001 par value; 2,000,000 shares authorized;
286,475 (2002) and 287,689 (2001) issued and outstanding ....... 286 288
Additional paid-in capital ........................................ 3,106,476 3,107,601
Accumulated deficit ............................................... (3,106,604) (3,031,817)
Unamortized deferred compensation ................................. (3,980) (9,610)
Notes receivable--stockholders .................................... (31,234) (31,234)
Accumulated other comprehensive loss .............................. (6,049) (491)
----------- -----------
Total Stockholders' Equity (Deficit) ........................... (41,105) 34,737
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) ........... $ 458,283 $ 655,047
=========== ===========
See notes to consolidated financial statements.
4
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue ................................................................. $ 29,920 $ 22,340 $ 58,196 $ 50,777
Operating expenses
Cost of revenue .................................................... 19,799 23,055 40,672 52,570
Selling, general and administrative ................................ 24,991 60,835 50,814 140,022
Research and development ........................................... 10,293 12,487 19,678 28,993
Stock-based compensation ........................................... 2,528 8,061 6,330 18,851
Amortization of goodwill and other intangibles ..................... 3,959 15,264 8,694 109,231
Impairment related and other ....................................... 7,378 72,978 8,389 825,275
--------- --------- ----------- -----------
Total operating expenses ........................................... 68,948 192,680 134,577 1,174,942
--------- --------- ----------- -----------
(39,028) (170,340) (76,381) (1,124,165)
Other income (loss), net ................................................ 58,230 (9,498) 52,311 (155,174)
Interest income ......................................................... 1,010 5,210 2,452 12,595
Interest expense ........................................................ (6,289) (9,599) (13,961) (20,969)
--------- --------- ----------- -----------
Income (loss) before income taxes, minority interest and equity loss .... 13,923 (184,227) (35,579) (1,287,713)
Income taxes ............................................................ -- 44 -- (25,741)
Minority interest ....................................................... 7,604 47,915 16,065 93,990
Equity loss - share of partner company losses ........................... (25,174) (164,941) (45,781) (287,623)
Equity loss - goodwill and other intangibles amortization ............... -- (34,910) -- (108,949)
Equity loss - impairment related ........................................ (9,492) (20,739) (9,492) (436,589)
--------- --------- ----------- -----------
Net loss before cumulative effect of change in accounting principle.... (13,139) (356,858) (74,787) (2,052,625)
Cumulative effect of change in accounting principle ..................... -- -- -- (7,886)
--------- --------- ----------- -----------
Net loss ................................................................ $ (13,139) $(356,858) $ (74,787) $(2,060,511)
========= ========= =========== ===========
Basic and diluted loss per share:
Prior to cumulative effect of change in accounting principle ............ $ (0.05) $ (1.29) $ (0.27) $ (7.37)
Cumulative effect of change in accounting principle ..................... -- -- -- (0.03)
--------- --------- ----------- -----------
$ (0.05) $ (1.29) $ (0.27) $ (7.40)
========= ========= =========== ===========
Shares used in computation of basic and diluted loss per share .......... 281,534 276,807 280,405 278,646
========= ========= =========== ===========
See notes to consolidated financial statements.
5
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30,
-------
2002 2001
--------- ---------
(IN THOUSANDS)
Net cash used in operating activities ........................................... $ (52,909) $(149,881)
--------- ---------
Investing Activities
Capital expenditures ....................................................... (787) (9,148)
Proceeds from sales of available-for-sale securities ....................... 287 88,565
Proceeds from sales of Partner Company ownership interests ................. 12,463 32,000
Advances to and acquisitions of ownership interests in Partner Companies.... (8,252) (88,300)
Proceeds from short-term investments ....................................... 347 12,077
Reduction in cash due to deconsolidation of a subsidiary ................... (5,876) (4,997)
--------- ---------
Net cash (used in) provided by investing activities ............................. (1,818) 30,197
--------- ---------
Financing Activities
Repurchase of convertible notes............................................. (27,804) --
Long-term debt and capital lease obligations................................ (7,024) 22,952
Issuance of common stock, net .............................................. -- 256
Repayment of line of credit borrowing ...................................... (450) --
Proceeds from convertible notes ............................................ -- 2,042
Repayments of advances to employees ........................................ -- 1,890
Issuance of stock by Partner Company ....................................... 394 3,220
--------- ---------
Net cash (used in) provided by financing activities ............................. (34,884) 30,360
--------- ---------
Effect of exchange rates on cash ................................................ (414) (464)
Net decrease in cash and cash equivalents ....................................... (90,025) (89,788)
Cash and cash equivalents at the beginning of period ............................ 245,935 412,497
--------- ---------
Cash and cash equivalents at the end of period .................................. $ 155,910 $ 322,709
========= =========
See notes to consolidated financial statements.
6
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the
Company for the three and six months ended June 30, 2002 and 2001, included
herein, have been prepared by the Company pursuant to accounting principles
generally accepted in the United States of America and the interim financial
statements rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, the accompanying unaudited consolidated
interim financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the results of the Company's
operations for the three and six months ended June 30, 2002 and 2001 and its
cash flows for the six months ended June 30, 2002 and 2001 and are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002 or for any other interim period. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations
relating to interim financial statements. The information included in this Form
10-Q should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's financial
statements and notes thereto included in the Company's 2001 Annual Report on
Form 10-K.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The consolidated financial statements also
include the following majority owned subsidiaries for the periods indicated,
each of which was consolidated since the date the Company acquired majority
control (collectively, the "Consolidated Subsidiaries"):
THREE MONTHS ENDED JUNE 30, 2002
CommerceQuest
Delphion ICG Commerce
eCredit Logistics.com
eMarket Capital OneCoast
THREE MONTHS ENDED JUNE 30, 2001
AssetTRADE.com, Inc. ("AssetTRADE")
CyberCrop.com, Incorporated ICG Commerce
("CyberCrop.com") iParts, Inc. ("iParts")
Delphion iVOWS Interactive Limited
eMarket Capital (d/b/a Mesania.com) ("Mesania")
Emptoris MROLink Corporation ("MROLink")
eu-Supply.com Svenska AB ("eu-Supply") OnMedica
ICG Asia Ltd. ("ICG Asia") RightWorks Corporation ("RightWorks")
SIX MONTHS ENDED JUNE 30, 2002
CommerceQuest
Delphion ICG Commerce
eCredit Logistics.com
eMarket Capital OneCoast
7
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001
AssetTRADE ICG Commerce
CyberCrop.com iParts
Delphion Mesania
eMarket Capital MROLink
Emptoris OnMedica
eu-Supply PaperExchange.com
ICG Asia RightWorks
Adjustments to Prior Year Amounts
During 2002, the Company changed its method of accounting for its
ownership interest in a Partner Company from the cost method to the equity
method of accounting due to the acquisition of an additional ownership interest.
Accordingly, an equity loss totaling $2.9 million and $6.4 million,
respectively, was recorded to adjust the three and six months ended June 30,
2001. In addition, the cumulative losses as of December 31, 2001 result in an
adjustment to our ownership interest and accumulated deficit in the amount of
$16.3 million.
New Accounting Pronouncement
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections". This Statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements and also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The new standard requires
that the extinguishment of debt be treated as an ordinary item instead of an
extraordinary item. Accordingly, the new standard encourages reclassification of
previously recorded debt extinguishments from extraordinary to ordinary. The
Company adopted SFAS No. 145 effective April 1, 2002.
Reclassifications
In addition to the adjustments noted above, 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 loss.
2. PARTNER COMPANY OWNERSHIP INTERESTS AND IMPAIRMENTS
The following summarizes the Company's goodwill and other intangibles and
ownership interests in Partner Companies by method of accounting.
AS OF JUNE 30, AS OF DECEMBER 31,
2002 2001
-------------- ------------------
(UNAUDITED) (AS ADJUSTED)
(IN THOUSANDS)
Goodwill - Consolidated ................................... $ 77,658 $ 77,452
Other intangibles - Consolidated ......................... 27,377 34,683
-------- --------
$105,035 $112,135
======== ========
Ownership interests in Partner Companies - Equity Method .. $ 79,290 $135,990
Ownership interests in Partner Companies - Cost Method .... 17,435 27,147
-------- --------
$ 96,725 $163,137
======== ========
8
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. PARTNER COMPANY OWNERSHIP INTERESTS AND IMPAIRMENTS (CONTINUED)
Impairments related to Consolidated Companies
During the three and six months ended June 30, 2001, the Company recorded
impairment charges of $28.7 million and $765.5 million, respectively, related to
consolidated companies. There were no impairment charges related to consolidated
companies during the three and six months ended June 30, 2002. Impairment
charges related to consolidated companies have been included in the Consolidated
Statements of Operations as "Impairment Related and Other".
In June 2000, the Company acquired a controlling interest in RightWorks
for 5,892,048 shares of the Company's common stock valued at $754 million ($128
per share) and $22 million in cash. On March 8, 2001, the Company announced the
merger of RightWorks with i2 Technologies, Inc. ("i2"). Based on the closing
price of i2 stock at the date of the announcement ($21.43 per share), the
Company recorded a non-cash, pre-tax loss of approximately $672.3 million. As of
March 31, 2001, i2's stock had declined significantly resulting in revaluation
of the assets held for sale and an additional loss of $26.9 million for a total
loss on sale of $699.2 million. On August 23, 2001, the merger closed and the
Company received approximately 4.5 million shares of i2 common stock.
In May 2000, the Company acquired a 50.2% interest in Harbour Ring
International Holdings Limited, a listed company on the Hong Kong Stock Exchange
which was renamed ICG Asia, for $116.5 million in cash. In June 2001, the
Company agreed to sell its stake in ICG Asia to Asian conglomerate Hutchison
Whampoa Limited and Reading Investments Limited for $98.6 million, which
included proceeds from the sale of the Company's subsidiary in Japan to ICG
Asia, and recorded a net loss on sale of $15.2 million.
Other impairment charges include $13.5 million and $51.1 million, for the
three and six months ended June 30, 2001, respectively, related to three other
consolidated Partner Companies for which the Company has determined that it will
not be able to recover its full investment.
The Company's consolidated Partner Companies recorded impairment charges
of $22.4 million during the three months ended June 30, 2001.
Impairments related to Equity Method Companies
The Company's original cost basis of Partner Companies accounted for under
the equity method was $843.2 million and $859.7 million at June 30, 2002 and
December 31, 2001, respectively. The excess of the Company's carrying value in
the ownership interests in these Partner Companies over its share of their net
equity resulted in amortization of $34.9 million and $108.9 million,
respectively, for the three and six months ended June 30, 2001.
During the three and six months ended June 30, 2002, the Company recorded
impairment charges of $9.5 million related to equity method companies. During
the three and six months ended June 30, 2001, the Company recorded impairment
charges of $20.7 million and $436.6 million, respectively, related to equity
method companies. Impairment charges related to equity method companies have
been included in the Consolidated Statements of Operations as "Equity
loss-impairment related".
In June 2000, the Company acquired a 39% interest in eCredit for 4,655,558
shares of the Company's common stock valued at $424.7 million or approximately
$91 per share. The Company increased its interest in eCredit to approximately
42% for an additional $25.6 million in cash and notes through the remainder of
2000. In accordance with its accounting policy, the Company determined that it
was necessary to record an impairment charge of $367.5 million as of March 31,
2001. The impairment charge was based on the estimated current fair value of
eCredit, which was determined by estimating the Company's future discounted cash
flows related to eCredit including the estimated proceeds upon disposition.
9
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. PARTNER COMPANY OWNERSHIP INTERESTS AND IMPAIRMENTS (CONTINUED)
In addition to the equity impairment noted above, the Company also
recorded impairment charges during the three and six months ended June 30, 2001
of $20.7 million and $69.1 million, respectively, related to five other equity
method Partner Companies.
The following unaudited summarized financial information for Partner
Companies accounted for under the equity method of accounting at June 30, 2002
and 2001 has been compiled from the financial statements of the respective
Partner Companies.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenue ............ $ 121,186 $ 473,442 $ 478,446 $ 956,919
Net loss ........... $(136,267) $(530,187) $(220,437) $(873,614)
Impairment of Cost Method Companies
The Company's original cost basis of Partner Companies accounted for by
the cost method was $43.4 million and $74.8 million at June 30, 2002 and
December 31, 2001, respectively.
During the three and six months ended June 30, 2002, the Company recorded
$9.9 million in impairment charges related to cost method Partner Companies for
which it has been determined that the Company will not be able to recover its
full investment. The Company recorded $7.9 million and $56.6 million in
impairment charges during the three and six months ended June 30, 2001,
respectively. Impairment charges related to cost method companies have been
included in the Consolidated Statements of Operations as a component of "Other
income (loss), net".
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 no longer permits the amortization of
goodwill and indefinite-lived intangible assets. Instead, these assets must be
reviewed annually for impairment in accordance with this statement. Accordingly,
the Company has ceased amortization of all goodwill and indefinite-lived
intangible assets as of January 1, 2002. During the first quarter of 2002, the
Company completed the transitional impairment test of other intangible assets,
which indicated that the Company's other intangible assets were not impaired.
During the second quarter of 2002, the Company completed the transitional
impairment test of goodwill, which indicated that the Company's goodwill was not
impaired. As of June 30, 2002, goodwill was allocated to the Company's segments
as follows: Core - $75.5 million; Emerging - $2.2 million. Amortizable
intangible assets as of June 30, 2002 and December 31, 2001 of $26.3 and $33.8
million, respectively, are included in Other Assets in the Company's
Consolidated Balance Sheets. Unamortizable intangible assets of $1.0 million and
$0.9 million, as of June 30, 2002 and December 31, 2001, respectively, are
included in Other Assets in the Company's Consolidated Balance Sheets. Other
intangible assets that meet the new criteria continue to be amortized as shown
in the table below over their useful lives.
10
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
AS OF JUNE 30, 2002
-------------------
(IN THOUSANDS)
GROSS CARRYING ACCUMULATED NET CARRYING
AMORTIZABLE INTANGIBLE ASSETS AMOUNT AMORTIZATION AMOUNT
----------------------------- -------- -------- -------
Customer Base ............... $ 27,467 $(13,856) $13,611
Technology .................. 25,601 (13,255) 12,346
Information Database ........ 7,134 (7,134) --
Other ....................... 1,023 (675) 348
-------- -------- -------
$ 61,225 $(34,920) $26,305
======== ======== =======
Amortization expense for intangible assets during the three and six months
ended June 30, 2002 was $4.0 million and $8.7 million, respectively. Estimated
amortization expense for the remainder of 2002 and the five succeeding fiscal
years ended is as follows (in thousands) :
December 31, 2002 (remainder) $6,185
December 31, 2003 $9,759
December 31, 2004 $5,024
December 31, 2005 $3,174
December 31, 2006 $1,435
December 31, 2007 and thereafter $ 728
The actual compared to the "as adjusted" impact of adding goodwill
amortization back to the net loss and loss per share for the three and six
months ended June 30, 2001 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(AS ADJUSTED) (AS ADJUSTED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Reported loss ........................................ $ (13,139) $ (356,858) $ (74,787) $(2,060,511)
Amortization of goodwill ............................. -- 11,516 -- 98,558
Equity loss - goodwill amortization .................. -- 29,717 -- 98,563
----------- ----------- ----------- -----------
Adjusted loss ........................................ $ (13,139) $ (315,625) $ (74,787) $(1,863,390)
=========== =========== =========== ===========
Basic and diluted loss per share:
Reported ............................................. $ (0.05) $ (1.29) $ (0.27) $ (7.40)
Amortization of goodwill ............................. -- 0.04 -- 0.35
Equity loss - goodwill amortization .................. -- 0.11 -- 0.35
----------- ----------- ----------- -----------
Adjusted loss per share .............................. $ (0.05) $ (1.14) $ (0.27) $ (6.70)
=========== =========== =========== ===========
4. DERIVATIVE FINANCIAL INSTRUMENTS
In September 2001, the Company entered into a variable share forward
contract to hedge 1.8 million shares of its holdings of i2 common stock. In
addition, as of June 30, 2002 the Company held approximately 460,000 shares of
i2 common stock in escrow that have not been hedged. At June 30, 2002 the
Company's holdings of i2 and the related forward contract were valued at $10.2
million. Based on the terms of the contract, the i2 forward contract and related
shares will be worth a minimum of $9.7 million or $5.38 per share and a maximum
of $20.2 million or $11.23 per share at maturity in September 2003.
11
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
In March 2000, the Company entered into three cashless collar agreements
(the "Equity Collars") to hedge forecasted sales of its holdings of Ariba, Inc.
("Ariba") common stock. The Equity Collars were terminated in December 2000,
March 2001 and December 2001. The Equity Collars and forward contract limit the
Company's exposure to and benefits from price fluctuations in the underlying
equity securities. The Company designated the Equity Collars and forward
contract as cash flow hedges and recorded the Equity Collars and forward
contract at their estimated fair value, with unrealized gains and losses
resulting from changes in fair value recorded as a component of "Accumulated
other comprehensive loss" on the Company's Consolidated Balance Sheets and
changes due to the ineffectiveness of these instruments in "Other income (loss),
net" on the Company's Consolidated Statements of Operations. Unrealized gains
and losses as a result of these instruments are recognized in the Company's
Consolidated Statements of Operations when the underlying hedged item is
extinguished or otherwise terminated.
The fair value of warrants issued to the Company by Partner Companies,
which are derivative instruments, are recorded in the Consolidated Balance
Sheets at issuance in "Ownership interests in Partner Companies" and are valued
using the Black-Scholes method. Changes in the fair value of the warrants are
recorded to "Other income (loss), net".
The adoption of SFAS No. 133 resulted in recording $7.9 million of decline
in fair value of warrants held in Partner Companies to "Cumulative effect of
change in accounting principle" in the Consolidated Statements of Operations as
of January 1, 2001. Estimated loss for the three and six months ended June 30,
2002 was approximately $0.7 million. Estimated losses on the fair value of all
outstanding warrants for the three and six months ended June 30, 2001 was
approximately $6.4 and $49.4 million, respectively. The estimated fair value of
warrants held in Partner Companies was approximately $1.0 million at June 30,
2002.
5. INCOME TAXES
The Company's deferred tax asset before valuation allowance of $683
million at June 30, 2002 consists primarily of $434 million related to the
carrying value of its Partner Companies, capital loss carryforwards of
approximately $134 million and net operating loss carryforwards of approximately
$92 million.
The tax assets relate primarily to the excess of tax basis over book basis
of the Partner Companies and net operating loss and capital loss carryforwards.
Most of the Partner Companies are in an early stage of development and have
generated significant losses. The marketability of the securities held in the
Partner Companies is generally limited as they primarily represent ownership
interest in companies whose stock is not publicly traded. As of June 30, 2002,
the publicly traded Partner Companies were Verticalnet, eMerge Interactive,
Onvia.com, and Universal Access. Each of these companies has experienced a
significant decline in the value of its stock price along with the business
sectors in which it operates. Accordingly, a full valuation allowance has been
recorded against the Company's net deferred tax assets at June 30, 2002.
6. COMPREHENSIVE LOSS
Comprehensive loss is the change in equity of a business enterprise during
a period resulting from transactions and other events and circumstances from
non-owner sources. Excluding net loss, the Company's primary source of
comprehensive loss is net unrealized appreciation (depreciation) related to its
available-for-sale securities. The following summarizes the components of
comprehensive loss:
12
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. COMPREHENSIVE LOSS (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2002 2001 2002 2001
-------- --------- -------- -----------
(AS ADJUSTED) (AS ADJUSTED)
(UNAUDITED)
(IN THOUSANDS)
Net loss ........................................... $(13,139) $(356,858) $(74,787) $(2,060,511)
Other comprehensive income (loss):
Unrealized depreciation, net of tax ............ (3,852) (6,407) (6,623) (46,310)
Change of value of cashflow hedge, net of tax .. -- 2,698 -- 33,539
Reclassification adjustments, net of tax ....... 13 (31,782) 1,065 32,661
Foreign currency translation adjustment ........ -- 1,099 -- 1,539
-------- --------- -------- -----------
Comprehensive loss .................................. $(16,978) $(391,250) $(80,345) $(2,039,082)
======== ========= ======== ===========
7. NET LOSS PER SHARE
The calculations of net loss per share were:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ------------------------
2002 2001 2002 2001
--------- --------- --------- -----------
(AS ADJUSTED) (AS ADJUSTED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic and Diluted:
Net loss prior to cumulative effect of change in accounting
principle .................................................. $ (13,139) $(356,858) $ (74,787) $(2,052,625)
Cumulative effect of change in accounting principle ........ -- -- -- (7,886)
--------- --------- --------- -----------
Net loss ................................................... $ (13,139) $(356,858) $ (74,787) $(2,060,511)
========= ========= ========= ===========
Average common shares outstanding .......................... 281,534 276,807 280,405 278,646
========= ========= ========= ===========
Prior to cumulative effect of change in accounting principle $ (0.05) $ (1.29) $ (0.27) $ (7.37)
Cumulative effect of change in accounting principle ........ -- -- -- (0.03)
--------- --------- --------- -----------
$ (0.05) $ (1.29) $ (0.27) $ (7.40)
========= ========= ========= ===========
If a consolidated or equity method Partner Company has dilutive options or
securities outstanding, diluted net income (loss) per share is computed first by
deducting from income (loss) from continuing operations the income attributable
to the potential exercise of the dilutive options or securities of the Partner
Company. For the three and six months ended June 30, 2002 and 2001, the impact
of a Partner Company's dilutive securities has not been included as the impact
would be anti-dilutive.
The following options, restricted stock grants and warrants were not
included in the computation of diluted EPS as their effect would have been
anti-dilutive: options to purchase 13,544,403 and 20,800,247 shares of common
stock at average prices of $8.83 and $15.61, respectively, outstanding as of
June 30, 2002 and 2001; 3,737,333 and 4,644,550 shares of unvested restricted
stock outstanding as of June 30, 2002 and 2001; warrants to purchase 1,570,676
shares of common stock at $6.00, outstanding as of June 30, 2001, and
convertible subordinated notes convertible into 2,773,650 and 4,443,267 shares
of common stock outstanding as of June 30, 2002 and 2001, respectively.
13
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. DEBT
Convertible Subordinated Notes
In December 1999, the Company issued $566.3 million of convertible
subordinated notes. The notes bear interest at an annual rate of 5.5% and mature
in December 2004. The notes are convertible at the option of the holder, at any
time on or before maturity into shares of the Company's common stock at a
conversion price of $127.44 per share, which is equal to a conversion rate of
7.8468 shares per $1,000 principal of notes. Additionally, the notes may be
redeemed by the Company if the Company's closing stock price exceeds 150% of the
conversion price then in effect for at least 20 trading days within a period of
30 consecutive trading days. The conversion rate is subject to adjustment.
In November 2001, the Company purchased and extinguished $120.2 million
face value of convertible subordinated notes for $35.5 million in cash. The
purchase resulted in a gain from the extinguishment of debt in the amount of $81
million. This amount was originally recorded as an extraordinary item. As a
result of the Company's adoption of SFAS No. 145, this item will be reclassified
to "Other income (loss), net" in the Company's Consolidated Statements of
Operations. (See Note 1.)
In June 2002, the Company purchased and extinguished $92.6 million face
value of convertible subordinated notes for $27.8 million in cash. The purchase
resulted in a gain from the extinguishment of debt in the amount of $63 million
included as a component of "Other income (loss), net" in the Company's
Consolidated Statements of Operations.
In July 2002, the Company purchased and extinguished $67.5 million face
value of convertible subordinated notes for $20.0 million in cash. The purchase
will result in a gain from the extinguishment of debt in the amount of
approximately $46 million for the three months ended September 30, 2002.
The fair value of the convertible subordinated notes at June 30, 2002 was
approximately $102.4 million.
The Company recorded interest expense of $6.1 million and $12.2 million
during the three and six months ended June 30, 2002 with interest payments due
semiannually through December 31, 2004. Issuance costs of $18.3 million were
recorded in other assets and are being amortized as interest expense over the
terms of the notes using the effective interest method. In connection with the
Company's early extinguishments of debt in November 2001 and June 2002
approximately $2.5 million and $1.4 million, respectively, of these issuance
costs were immediately expensed and included in the computation of the gain.
In July 2002, the Company commenced a "Modified Dutch Auction" tender
offer for up to $143 million of principal amount of the convertible subordinated
notes. The offer expires on August 23, 2002, could require up to $42 million in
cash and could be modified.
Loan and Credit Agreements
On August 9, 2001, the Company entered into a loan agreement (the "Loan
Agreement") with PNC Bank to provide for the issuance of letters of credit. The
Loan Agreement provides for issuances of letters of credit up to $15 million
subject to a cash secured borrowing base as defined by the Loan Agreement.
Issuance fees of 0.25% per annum of the face amount of each letter of credit
will be paid to PNC Bank subsequent to issuance. The Loan Agreement also is
subject to a 0.125% per annum unused commitment fee payable to the bank
quarterly. As of June 30, 2002, $1.0 million in letters of credit were
outstanding under the agreement. Amounts secured under the Loan Agreement have
been reported as "Restricted cash" on the Consolidated Balance Sheets.
Long-Term Debt
The Company's long-term debt of $6.8 million (net of current maturities of
$17.0 million) as of June 30, 2002, relates to its consolidated Partner
Companies, and primarily consists of secured notes due to stockholders and
outside lenders of CommerceQuest, OneCoast, Logistics.com and capital lease
commitments.
14
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. RESTRUCTURING
In 2002 and 2001, the Company and its consolidated Partner Companies
implemented restructuring plans designed to reduce cost structures by closing
and consolidating offices, disposing of fixed assets, and reducing their
workforce. Restructuring charges totaling $8.4 million and $38.7 million were
recorded in the six months ended June 30, 2002 and 2001, respectively. These
charges are included in "Impairment related and other" in the Consolidated
Statements of Operations.
RESTRUCTURING ACTIVITY IS SUMMARIZED AS FOLLOWS:
NON-CASH
ACCRUAL AT ITEMS ACCRUAL AT
DECEMBER 31, RESTRUCTURING CASH EXPENSED JUNE
2001 CHARGE PAYMENTS IMMEDIATELY 30, 2002
----------- ------------- -------- ----------- --------
RESTRUCTURING - 2002
Office closure costs ....... $ -- $ 2,246 $ -- $ (1,059) $ 1,187
Employee severance and
related benefits ........... $ -- $ 6,143 $(2,386) (1,015) 2,742
------- ------- ------- -------- -------
RESTRUCTURING - 2001 $ 8,389 $(2,386) $(2,074) $ 3,929
Office closure costs ....... 11,960 -- (1,729) -- 10,231
Employee severance and
related benefits ........... 3,071 -- (2,073) -- 998
------- ------- ------- -------- -------
RESTRUCTURING - 2000 15,031 -- (3,802) -- 11,229
Lease termination costs .... 203 -- (54) -- 149
------- ------- ------- -------- -------
$15,234 $ 8,389 $(6,242) $ (2,074) $15,307
======= ======= ======= ======== =======
10. SEGMENT INFORMATION
The Company's reportable segments using the "management approach" under
SFAS No. 131, "Disclosures About Segments of a Business Enterprise and Related
Information" consist of two operating segments, the Core Operating Segment and
the Emerging Operating Segment. The Core Operating Segment includes those
Partner Companies in which the Company's management takes a very active role in
providing strategic direction and management assistance. The Emerging Operating
Segment includes investments in Partner Companies that are managed to provide
the greatest near term stockholder value. The Company's and Partner Companies'
operations were principally in the United States of America during all periods
presented.
In periods prior to the fourth quarter of 2001, the Company's segments
were composed of Partner Company Operations and General ICG Operations. All
prior periods have been restated to reflect this change in the composition of
the Company's reporting segments. The development of the Core and Emerging
Segments was based on Partner Companies in the Company's network in the fourth
quarter of 2001. The dispositions column includes the results for Partner
Companies which were disposed of before the new segments were developed. The
most significant individual Partner Companies revenues, where applicable, and
net loss related to these dispositions for the three and six months ended June
30, 2001 were as follows (in thousands):
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001
-------------------------------- ------------------------------
Revenues Net Loss Revenues Net Loss
-------- -------- -------- ---------
RightWorks $ 5,286 $(22,472) $11,433 $(119,043)
Breakaway Solutions, Inc. $ -- $ -- $ -- $ (27,152)
PaperExchange.com $ -- $ -- $ 4,442 $ (10,259)
The following tables summarize the unaudited selected financial
information related to the Company's segments. Each segment includes the results
of the Company's Consolidated Partner Companies and records the Company's share
of earnings and losses of Partner Companies accounted for under the equity
method of accounting
15
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
and captures our basis in the assets of all of the Company's Partner
Companies. All significant intersegment activity has been eliminated and assets
are either owned by or allocated to each operating segment. The measure of
segment net loss reviewed by the Company's chief operating decision maker does
not include items such as impairment related charges, income taxes,
extraordinary items and accounting changes, which are reflected as other
reconciling items in the following tables.
THREE MONTHS ENDED JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
-------------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
--------- -------- --------- ------------ --------- ----- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 29,780 $ 140 $ 29,920 $ -- $ -- $ -- $ 29,920
Cost of revenue $ (19,689) $ (110) $ (19,799) $ -- $ -- $ -- $ (19,799)
Selling, general and
administrative $ (19,444) $ (335) $ (19,779) $ -- $ (5,212) $ -- $ (24,991)
Amortization of goodwill
and other intangibles $ (3,959) $ -- $ (3,959) $ -- $ -- $ -- $ (3,959)
Equity loss -- share of losses $ (22,512) $ (3,447) $ (25,959) $785 $ -- $ -- $ (25,174)
Net loss $ (52,185) $ (3,749) $ (55,934) $785 $ (14,309) $56,319* $ (13,139)
Assets $ 234,591 $ 42,178 $ 276,769 $ -- $ 181,514 $ -- $ 458,283
Capital expenditures $ (575) $ -- $ (575) $ -- $ -- $ -- $ (575)
THREE MONTHS ENDED JUNE 30, 2001 (AS ADJUSTED)
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
------------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
--------- --------- --------- ------------ --------- ----- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 17,263 $ 257 $ 17,520 $ 5,699 $ -- $ (879) $ 22,340
Cost of revenue $ (18,137) $ (239) $ (18,376) $ (4,679) $ -- $ -- $ (23,055)
Selling, general and
administrative $ (25,881) $ (5,117) $ (30,998) $ (20,650) $ (9,815) $ 628 $ (60,835)
Amortization of goodwill
and other intangibles $ (11,769) $ (2,132) $ (13,901) $ (1,363) $ -- $ -- $ (15,264)
Equity loss - share of losses $(108,330) $ (15,674) $(124,004) $ (40,937) $ -- $ -- $ (164,941)
Equity loss - goodwill
amortization $ (17,653) $ (9,092) $ (26,745) $ (8,165) $ -- $ -- $ (34,910)
Net loss $(196,791) $ (44,923) $(241,714) $ (78,986) $ (25,203) $(10,955)* $ (356,858)
Assets $ 436,963 $ 146,551 $ 583,514 $ 279,736 $ 245,123 $ -- $ 1,108,373
Capital expenditures $ (2,264) $ (38) $ (2,302) $ (626) $ -- $ -- $ (2,928)
* Other reconciling items to net loss are as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------------
2002 2001
-------- --------
Impairment related and other ..... $(19,403) $(57,344)
Gain on debt extinguishment ...... 63,227 --
Minority interest ................ 7,604 47,915
Other income (loss) .............. 4,891 (1,526)
-------- --------
$ 56,319 $(10,955)
======== ========
16
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
----------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
--------- --------- --------- ------------ --------- ------- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 57,994 $ 216 $ 58,210 $ -- $ -- $ (14) $ 58,196
Cost of revenue $ (40,462) $ (210) $ (40,672) $ -- $ -- $ -- $ (40,672)
Selling, general and administrative $ (39,442) $ (663) $ (40,105) $ -- $ (10,723) $ 14 $ (50,814)
Amortization of goodwill and
other intangibles $ (8,694) $ -- $ (8,694) $ -- $ -- $ -- $ (8,694)
Equity loss - share of losses $ (32,514) $ (14,052) $ (46,566) $ 785 $ -- $ -- $ (45,781)
Net loss $ (91,782) $ (14,703) $(106,485) $ 785 $ (28,142) $ 59,055 $ (74,787)
Assets $ 234,591 $ 42,178 $ 276,769 $ -- $ 181,514 $ -- $ 458,283
Capital expenditures $ (808) $ -- $ (808) $ -- $ 21 $ -- $ (787)
SIX MONTHS ENDED JUNE 30, 2001 (AS ADJUSTED)
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
--------------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
----------- ----------- ----------- ------------ --------- -------- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 32,194 $ 852 $ 33,046 $ 18,610 $ -- $ (879) $ 50,777
Cost of revenue $ (34,086) $ (519) $ (34,605) $ (17,965) $ -- $ -- $ (52,570)
Selling, general and
administrative $ (48,253) $ (9,567) $ (57,820) $ (58,919) $ (23,914) $ 631 $ (140,022)
Amortization of goodwill
and other intangibles $ (33,806) $ (7,202) $ (41,008) $ (68,223) $ -- $ -- $ (109,231)
Equity loss - share of losses $ (163,130) $ (31,059) $ (194,189) $ (93,434) $ -- $ -- $ (287,623)
Equity loss - goodwill
amortization $ (75,549) $ (15,070) $ (90,619) $ (18,330) $ -- $ -- $ (108,949)
Net loss $ (362,440) $ (79,630) $ (442,070) $ (262,379) $ (60,378) $(1,295,684)* $(2,060,511)
Assets $ 436,963 $ 146,551 $ 583,514 $ 279,736 $ 245,123 $ -- $ 1,108,373
Capital expenditures $ (5,828) $ (120) $ (5,948) $ (3,372) $ 172 $ -- $ (9,148)
* Other reconciling items to net loss are as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
----------- -----------
Impairment related and other ....................... $ (19,403) $(1,258,676)
Gain on debt extinguishment ........................ 63,227 --
Income tax ......................................... -- (26,151)
Minority interest .................................. 16,065 93,990
Cumulative effect of change in accounting
principle ........................................ -- (7,886)
Other income (loss) ................................ (834) (96,961)
----------- -----------
$ 59,055 $(1,295,684)
=========== ===========
17
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 the Partner Companies
accounted for under the consolidation method of accounting were accounted for
under the equity method of accounting for all applicable periods presented. The
Company's share of the consolidated Partner Companies' losses is included in
"Equity loss" in the Parent Company Statements of Operations for all periods
presented based on the Company's ownership percentage in each period. The
carrying value of the consolidated companies as of June 30, 2002 and December
31, 2001 is included in "Ownership interests in and advances to Partner
Companies" in the Parent Company Balance Sheets.
Parent Company Balance Sheets
AS OF JUNE 30, AS OF DECEMBER 31,
2002 2001
-------------- ------------------
(UNAUDITED) (AS ADJUSTED)
(IN THOUSANDS)
ASSETS
Current assets .......................................... $ 153,782 $ 238,402
Ownership interests in and advances to Partner Companies 159,100 236,832
Available-for-sale securities and other ................. 27,732 37,916
--------- ---------
Total assets ....................................... $ 340,614 $ 513,150
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities ..................................... $ 28,245 $ 32,352
Non-current liabilities ................................. 353,474 446,061
Stockholders' equity (deficit) .......................... (41,105) 34,737
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 340,614 $ 513,150
========= =========
Parent Company Statements of Operations
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(AS ADJUSTED) (AS ADJUSTED)
(UNAUDITED)
(IN THOUSANDS)
Revenue ............................................................ $ -- $ -- $ -- $ --
Operating expenses
General and administrative ................................... 5,212 10,066 10,723 24,165
Stock-based compensation ..................................... 1,598 5,960 4,313 7,328
Impairment related and other ................................. 1,499 32,510 1,499 782,807
Research and development ..................................... -- (251) -- (251)
----------- ----------- ----------- -----------
Total operating expenses ........................................... 8,309 48,285 16,535 814,049
----------- ----------- ----------- -----------
(8,309) (48,285) (16,535) (814,049)
Other income (loss), net ..................................... 58,207 (9,475) 52,482 (153,585)
Interest income (expense), net .............................. (6,000) (5,574) (11,607) (11,792)
----------- ----------- ----------- -----------
Income (loss) before income taxes and equity loss .................. 43,898 (63,334) 24,340 (979,426)
Income taxes ................................................. -- 44 -- (26,151)
Equity loss .................................................. (57,037) (293,568) (99,127) (1,047,048)
----------- ----------- ----------- -----------
Net loss before cumulative effect of change in accounting
principle .......................................................... (13,139) (356,858) (74,787) (2,052,625)
Cumulative effect of change in accounting principle ................ -- -- -- (7,886)
----------- ----------- ----------- -----------
Net income (loss) .................................................. $ (13,139) $ (356,858) $ (74,787) $(2,060,511)
=========== =========== =========== ===========
18
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Other Income (Loss), net
Other income (loss), net consists of the effect of transactions and other
events incidental to the Company's ownership interests in its Partner Companies
and its operations in general.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
Gain on Debt Extinquishment (Note 8) ............................... $ 63,227 $ -- $ 63,227 $ --
Partner Company Impairment Charges (Note 2) ........................ (9,911) (7,949) (9,911) (56,624)
Loss on Partner Company Warrants (Note 4) .......................... (681) (6,439) (681) (49,464)
Sales/Dispositions of Ownership interests in Partner Companies ..... 5,582 4,228 1,789 6,271
Realized losses on available-for-sale securities ................... (13) (6,470) (1,065) (38,761)
Loss on transfer of Onvia.com from available-for-sale .............. -- -- -- (27,434)
Other .............................................................. 3 7,155 (877) 12,427
--------- --------- --------- ---------
$ 58,207 $ (9,475) $ 52,482 $(153,585)
========= ========= ========= =========
During the three and six months ended June 30, 2002 and 2001, the Company
sold its ownership interests in various Partner Companies in exchange for cash.
Sales of Partner Company interests resulted in a gain of $5.6 million for the
three months ended June 30, 2002 principally related to a dividend distribution
related to Onvia.com, and a $4.2 million gain in the three months ended June 30,
2001 principally related to its sale of Buy.Co.UK. The gains during the three
months ended June 30, 2002 and 2001 were reduced by losses during the six months
ended June 30, 2002 and 2001 principally related to NetVendor, Inc. in the first
quarter of 2002.
During the three and six months ended June 30, 2002, the Company recorded
losses to reflect the other-than-temporary decline in market value of divine,
Inc. During the three and six months ended June 30, 2001, the Company recorded a
$2.7 million gain related to the ineffective portion of the Equity Collars. In
March 2001, the Company sold 733,334 shares of Ariba common stock at an average
price of $114.52 and recorded a loss of $33.7 million. During the three and six
months ended June 30, 2001, the Company sold shares of other available-for-sale
securities resulting in a loss of $6.4 million and a loss of $7.8 million,
respectively.
Due to Onvia.com's stock repurchase program in March 2001, the Company's
interest in Onvia.com increased to greater than 20%. On the date the Company's
ownership interest increased to greater than 20%, the Company transferred its
interest in Onvia.com from available-for-sale securities to ownership interests
in Partner Companies resulting in the recognition of a loss of $27.4 million.
19
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. 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.
Although we refer in this report to the companies in which we have
acquired a convertible debt or an equity ownership interest as our "partner
companies" and indicate that we have a "partnership" with these companies we do
not act as an agent or legal representative for any of our partner companies,
and we do not have the power or authority to legally bind any of our partner
companies, and we do not have the types of liabilities in relation to our
partner companies that a general partner of a partnership would have.
We are an internet holding company actively engaged in B2B e-commerce
through a network of partner companies. Because we own significant interests in
B2B e-commerce companies, many of which generate net losses, we have
experienced, and expect to continue to experience, significant volatility in our
quarterly results. While many of our partner companies have consistently
reported losses, we have recorded net income in certain periods and experienced
significant volatility from period to period due to one-time transactions and
other events incidental to our ownership interests in partner companies. These
transactions and events are described in more detail in Notes 2 and 11 of our
consolidated financial statements and include dispositions of and changes to our
partner company ownership interests, dispositions of our holdings of
available-for-sale securities, and impairment charges.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to our investments in our partner companies, marketable
securities, revenues, income taxes and commitments and contingencies. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies are most important
to the presentation of our financial statements and require the most difficult,
subjective and complex judgments.
Impairment Charges
Effective January 1, 2002, we adopted certain provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." Upon adoption of SFAS No. 142, we reassessed the useful lives and
residual values of all intangible assets acquired in purchase business
combinations. Our intangible assets having indefinite useful lives were tested
for impairment in accordance with SFAS No. 142 in the first quarter of 2002. The
goodwill related to our consolidated and equity method partner companies, which
had been amortized over a three-year period, will no longer be subject to
amortization. Goodwill related to our consolidated partner companies was
evaluated for impairment under SFAS No. 142 in the second quarter of 2002, which
indicated the Company's goodwill is not impaired. Goodwill associated with our
equity method partner companies will continue to be assessed for impairment
under the provisions of APB Opinion No. 18, "Equity Method Investments."
Ownership of Marketable Securities
We own shares of marketable equity securities that are publicly traded and
are highly volatile. We record an impairment charge when we believe such shares
have experienced a decline in value that is other-than-temporary, generally six
months. In
20
determining if a decline in market value below cost for a publicly traded
security is other-than-temporary, we evaluate the relevant market conditions,
offering prices, trends of earnings, price multiples and other key measures
providing an indication of the instrument's fair value. When a decline in value
is deemed to be other-than-temporary, we recognize an impairment loss in the
current period to the extent of the decline below the carrying value of the
investment. Adverse changes in market conditions or poor operating results of
underlying investments could result in additional other-than-temporary losses in
future periods.
Revenues
Our revenues are the combination of the revenues of all of our
consolidated partner companies. These revenues are derived from software license
sales, product sales where we act as a principal or an agent, and a wide variety
of service arrangements. The recognition of revenue requires various subjective
estimates depending on our arrangements with our customers. These estimates
include estimated costs of service arrangements, expected customers lives over
which certain revenues have been allocated, probability of collections and
estimates of returns and allowances.
Deferred Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We consider future taxable
income and prudent and feasible tax planning strategies in determining the need
for a valuation allowance. In the event that we determine that we would not be
able to realize all or part of our net deferred tax assets, an adjustment to the
deferred tax assets is charged to earnings in the period such determination is
made. Likewise, if we later determine that it is more likely than not that the
net deferred tax assets would be realized, then the previously provided
valuation allowance would be reversed.
Commitments and Contingencies
From time to time, we are a defendant or plaintiff in various legal
actions that arise in the normal course of business. We are also a guarantor of
various third-party obligations and commitments. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required for these contingencies, if any, which would be charged to earnings, is
made after careful analysis of each individual issue. The required reserves may
change in the future due to new developments in each matter or changes in
circumstances, such as a change in settlement strategy. Changes in required
reserves could increase or decrease our earnings in the period the changes are
made.
BASIS OF PRESENTATION
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
possess voting control or those where we have effective control are generally
accounted for under the consolidation method of accounting. Under this method, a
partner company's accounts are reflected within our Consolidated Statements of
Operations. Participation of other partner company stockholders in the earnings
or losses of a consolidated partner company is reflected in the caption
"Minority interest" in our Consolidated Statements of Operations. Minority
interest adjusts our consolidated net results of operations to reflect only our
share of the earnings or losses of the consolidated partner company.
Equity Method. Partner companies whose results we do not consolidate, but
over whom we exercise significant influence, are generally accounted for under
the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, representation on the partner company's board
of directors and ownership level, which is generally a 20% to 50% interest in
the voting securities of the partner company, including voting rights associated
with our holdings in common, preferred and other convertible instruments in the
partner company. Under the equity method of accounting, a partner company's
accounts are not reflected within our Consolidated Statements of Operations;
however, our share
21
of the earnings or losses of the partner company is reflected in the caption
"Equity loss - share of partner company losses" in our Consolidated Statements
of Operations.
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.
REPORTABLE SEGMENTS
Our reportable segments using the "management approach" under SFAS No.
131, "Disclosures About Segments of a Business Enterprise and Related
Information" consist of two operating segments, the Core Operating Segment and
the Emerging Operating Segment. The Core Operating Segment includes those
partner companies in which we take a very active role in providing strategic
direction and management assistance. The Emerging Operating Segment includes
investments in partner companies that we manage to provide the greatest
near-term stockholder value. The Company's and partner companies' operations
were principally in the United States of America during all periods presented.
As of June 30, 2002 we owned interests in 44 partner companies which are
categorized below based on segment and method of accounting.
CORE PARTNER COMPANIES (%VOTING INTEREST)
------------------------------------------------------------------------------------------------------------
CONSOLIDATED EQUITY COST
-------------------------- ------------------------------------ -------------------------------------
CommerceQuest (80%) BuyMedia (40%) Blackboard (15%)
Delphion (32%) CreditTrade (30%)
eCredit (99.9%) eMerge Interactive (18%)
ICG Commerce (56%) FreeBorders (34%)
Logistics.com (97%) GoIndustry (30%)
OneCoast (97%) Investor Force (38%)
iSky (25%)
Jamcracker (21%)
LinkShare (40%)
Syncra Systems (35%)
United Messaging (27%)
Universal Access (22%)
Verticalnet (22%)
EMERGING PARTNER COMPANIES (%VOTING INTEREST)
------------------------------------------------------------------------------------------------------------
CONSOLIDATED EQUITY COST
-------------------------- ------------------------------------ -------------------------------------
eMarket Capital (54%) Agribuys (35%) Anthem (9%)
ComputerJobs.com (46%) Arbinet (3%)
Co-nect (36%) Citadon (2%)
Emptoris (25%) ClearCommerce (12%)
inreon (20%) Context Integration (12%)
Internet Commerce Systems (44%) Entegrity Solutions (5%)
Mobility Technologies (25%) FuelSpot (9%)
OnMedica (41%) Persona (8%)
Onvia.com (22%) Surgency (21%)
Sourceree (39%) Tibersoft (15%)
StarCite (20%)
TeamOn.com (33%)
Texyard (33%)
In periods prior to the fourth quarter of 2001, our segments were composed
of Partner Company Operations and General ICG Operations. All prior periods have
been restated to reflect this change in the composition of our reporting
segments. The development of the Core Operating and Emerging Operating Segments
was based on partner companies in our network in the fourth quarter of 2001. The
dispositions column includes the results for
22
partner companies which were disposed of before the new segments were developed.
The most significant individual partner companies' revenues, where applicable,
and net loss related to these dispositions were as follows (in thousands):
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001
-------------------------------- ------------------------------
Revenues Net Loss Revenues Net Loss
--------- -------- -------- ---------
RightWorks $ 5,286 $ (22,472) $ 11,433 $(119,043)
Breakaway Solutions, Inc. $ -- $ -- $ -- $ (27,152)
PaperExchange.com $ -- $ -- $ 4,442 $ (10,259)
The following summarizes the unaudited selected financial information
related to our segments. Each segment includes the results of our consolidated
partner companies and records our share of earnings and losses of partner
companies accounted for under the equity method of accounting and captures our
basis in the assets our partner companies. All significant intersegment activity
has been eliminated and assets are either owned by or allocated to each
operating segment. The measure of segment net loss reviewed by us does not
include items such as impairment related charges, income taxes, extraordinary
items and accounting changes, which are reflected as other reconciling items in
the information which follows.
THREE MONTHS ENDED JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
-----------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
-------- -------- -------- ------------ --------- -------- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 29,780 $ 140 $ 29,920 $ -- $ -- $ -- $ 29,920
Cost of revenue $(19,689) $ (110) $(19,799) $ -- $ -- $ -- $(19,799)
Selling, general and administrative $(19,444) $ (335) $(19,779) $ -- $ (5,212) $ -- $(24,991)
Amortization of goodwill and other
intangibles $ (3,959) $ -- $ (3,959) $ -- $ -- $ -- $ (3,959)
Equity loss--share of losses $(22,512) $ (3,447) $(25,959) $ 785 $ -- $ -- $(25,174)
Net loss $(52,185) $ (3,749) $(55,934) $ 785 $(14,309) $ 56,319* $(13,139)
THREE MONTHS ENDED JUNE 30, 2001 (AS ADJUSTED)
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
-----------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
--------- --------- --------- ------------ --------- ------- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 17,263 $ 257 $ 17,520 $ 5,699 $ -- $ (879) $ 22,340
Cost of revenue $ (18,137) $ (239) $ (18,376) $ (4,679) $ -- $ -- $ (23,055)
Selling, general and administrative $ (25,881) $ (5,117) $ (30,998) $ (20,650) $ (9,815) $ 628 $ (60,835)
Amortization of goodwill and other
intangibles $ (11,769) $ (2,132) $ (13,901) $ (1,363) $ -- $ -- $ (15,264)
Equity loss--share of losses $(108,330) $ (15,674) $(124,004) $ (40,937) $ -- $ -- $(164,941)
Net loss $(196,791) $ (44,923) $(241,714) $ (78,986) $ (25,203) $ (10,955)* $(356,858)
* Other reconciling items to net loss are as follows:
THREE MONTHS ENDED
JUNE 30,
---------------------
2002 2001
-------- --------
Impairment related and other ........................... $(19,403) $(57,344)
Gain on debt extinguishment ............................ 63,227 --
Minority interest ...................................... 7,604 47,915
Other income (loss) .................................... 4,891 (1,526)
-------- --------
$ 56,319 $(10,955)
======== ========
23
SIX MONTHS ENDED JUNE 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
----------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
--------- --------- --------- ------------ --------- ------- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 57,994 $ 216 $ 58,210 $ -- $ -- $ (14) $ 58,196
Cost of revenue $ (40,462) $ (210) $ (40,672) $ -- $ -- $ -- $ (40,672)
Selling, general and
administrative $ (39,442) $ (663) $ (40,105) $ -- $ (10,723) $ 14 $ (50,814)
Amortization of goodwill
and other intangibles $ (8,694) $ -- $ (8,694) $ -- $ -- $ -- $ (8,694)
Equity loss--share of losses $ (32,514) $ (14,052) $ (46,566) $ 785 $ -- $ -- $ (45,781)
Net loss $ (91,782) $ (14,703) $(106,485) $ 785 $ (28,142) $ 59,055* $ (74,787)
SIX MONTHS ENDED JUNE 30, 2001 (AS ADJUSTED)
- ------------------------------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS
---------------------------------------
TOTAL CONSOLIDATED
CORE EMERGING SEGMENTS DISPOSITIONS CORPORATE OTHER RESULTS
----------- -------- ----------- ------------ --------- --------- ------------
SELECTED DATA: (IN THOUSANDS)
Revenues $ 32,194 $ 852 $ 33,046 $ 18,610 $ -- $ (879) $ 50,777
Cost of revenue $ (34,086) $ (519) $ (34,605) $ (17,965) $ -- $ -- $ (52,570)
Selling, general and
administrative $ (48,253) $ (9,567) $ (57,820) $ (58,919) $ (23,914) $ 631 $ (140,022)
Amortization of goodwill
and other intangibles $ (33,806) $ (7,202) $ (41,008) $ (68,223) $ -- $ -- $ (109,231)
Equity loss--share of losses $ (163,130) $(31,059) $ (194,189) $ (93,434) $ -- $ -- $ (287,623)
Net loss $ (362,440) $(79,630) $ (442,070) $ (262,379) $ (60,378) $(1,295,684)* $(2,060,511)
* Other reconciling items to net loss are as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
----------- -----------
Impairment related and other ...................... $ (19,403) $(1,258,676)
Gain on debt extinguishment 63,227 --
Income tax ........................................ -- (26,151)
Minority interest ................................. 16,065 93,990
Cumulative effect of change in accounting principle -- (7,886)
Other income (loss) ............................... (834) (96,961)
----------- -----------
$ 59,055 $(1,295,684)
=========== ===========
24
The Core Operating Segment includes those partner companies in which we
take a very active role in providing strategic direction and management
assistance. The Emerging Operating Segment includes investments in partner
companies that we manage to provide the greatest near term stockholder value.
Dispositions are those partner companies which have been sold or ceased
operations and are no longer included in a segment for all periods presented.
Corporate expenses represent our general and administrative expenses of
supporting the partner companies. "Other" represents those items incidental to
our operations.
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
RESULTS OF OPERATIONS - CORE COMPANIES
The following presentation of our Results of Operations - Core companies
includes the results of our consolidated Core partner companies and our share of
the losses of our equity method Core partner companies which are reflected in
the caption "Equity loss-share of losses".
CORE SEGMENT RESULTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
SELECTED DATA: (AS ADJUSTED) (AS ADJUSTED)
(IN THOUSANDS) (IN THOUSANDS)
Revenue ........................................................ $ 29,780 $ 17,263 $ 57,994 $ 32,194
Cost of revenue ................................................ $ (19,689) $ (18,137) $ (40,462) $ (34,086)
Selling, general and administrative ............................ $ (19,444) $ (25,881) $ (39,442) $ (48,253)
Amortization of goodwill and other intangibles ................. $ (3,959) $ (11,769) $ (8,694) $ (33,806)
Equity loss--share of losses ................................... $ (22,512) $(108,330) $ (32,514) $(163,130)
Equity loss--goodwill and other intangibles amortization ....... $ -- $ (17,653) $ -- $ (75,549)
Revenues
Revenue from Consolidated Core companies was $29.8 million and $57.9
million for the three and six months ended June 30, 2002, respectively, versus
$17.3 million and $32.2 million for the corresponding 2001 periods. As a result
of our acquisitions of majority ownership positions in CommerceQuest, eCredit,
Logistics.com and OneCoast, Core revenue increased $15.7 million and $32.6
million for the 2002 periods versus the 2001 periods. Increases in the customer
bases and increased activity of existing customers of ICG Commerce and Delphion
as well as an acquisition at ICG Commerce resulted in increased revenues of $3.5
million and $5.1 million for the 2002 periods versus the 2001 periods. These
increases were offset by $6.7 million and $12.0 million decreases due to the
deconsolidation of AssetTRADE.com during the fourth quarter of 2001.
Cost of revenue and selling, general and administrative
Cost of revenue represents costs of providing our services as well as
costs of products sold in an exchange business where we acted as a principal.
Selling, general and administrative costs relate to promotion of our products
and services as well as administrative support and facility expenses. Cost of
revenue and selling, general and administrative for Core companies was $39.1
million and $79.9 million for the three and six months ended June 30, 2002,
respectively, versus $44.0 million and $82.4 million for the corresponding 2001
periods These operating expenses have increased for the three and six months
ended June 30, 2002 versus the corresponding 2001 periods by approximately $21.0
and $44.2 million due to our acquisition of majority ownership positions in
CommerceQuest, eCredit, Logistics.com and OneCoast offset by a $9.7 million and
$19.1 million decrease due to the deconsolidation of AssetTRADE.
In addition, those costs attributable to ICG Commerce and Delphion
decreased by approximately $16.2 million and $27.6 million for the three and six
months ended June 30, 2002 versus the corresponding 2001 periods as a result of
reduced costs at both companies.
25
Amortization of goodwill and other intangibles
Amortization of goodwill and other intangibles related to Core companies
was $3.9 million and $8.7 million for the three and six months ended June 30,
2002 versus $11.8 million and $33.8 million for the corresponding 2001 periods.
Amortization for the three and six months ended June 30, 2001 primarily related
to goodwill which was previously amortized over a three year period. Effective
January 1, 2002, we adopted the provisions of SFAS No. 142 "Goodwill and Other
Intangible Assets". Upon adoption of SFAS No. 142, goodwill amortization ceased.
Amortization for the three and six months ended June 30, 2002 relates primarily
to certain identified intangible assets acquired as the result of our majority
acquisition of eCredit, CommerceQuest, Logistics.com and OneCoast as well as an
ICG Commerce acquisition. The intangible assets, which primarily include
customer bases and technology, will be amortized over a period of three to eight
years.
Equity Loss
A significant portion of our net results from our Core companies is
derived from those Core companies in which we hold a significant minority
ownership interest. Our share of income or losses of these companies is recorded
in our Consolidated Statements of Operations under "Equity loss-share of partner
company losses." Our carrying value for a partner company accounted for under
the equity method of accounting includes unamortized goodwill.
Our equity loss-share of partner company losses related to our Core
companies was $22.5 million and $32.5 million for the three and six months ended
June 30, 2002 versus $108.3 million and $163.1 million for the corresponding
2001 periods. Approximately $75.4 million and $98.3 million, respectively, of
this decrease is due to our recording our share of Verticalnet's losses for the
three and six months ended June 30, 2001, which included significant impairment
and restructuring charges, versus zero in the 2002 periods. In addition, equity
loss decreased $9.6 million and $20.4 million related to CommerceQuest, eCredit,
Logistics.com and OneCoast becoming consolidated companies during 2001. The
remainder of the decrease is due to decreased losses at a majority of our Core
equity method partner companies resulting from increased revenue and reduced
cost structures, offset by increased losses at Universal Access in the 2002
periods resulting from their impairment charges.
Our carrying value in certain equity method partner companies has been
reduced to or is approaching zero. When our carrying value reaches zero, we will
not record our share of these company's losses until such time as our share of
income equals the unrecorded losses or the partner companies' equity
transactions result in an adjustment of our carrying value. Of those companies
which had a zero carrying value at December 31, 2001, Verticalnet has had the
largest impact on our past results. As a result of our share of Verticalnet's
results for the three months ended June 30, 2002, our carrying value in
Verticalnet is no longer zero, but approximately $0.2 million. Our partner
companies with a carrying value at or approaching zero may continue to incur
losses in 2002 which may not have an impact on our 2002 results.
"Equity loss - goodwill and other intangibles amortization" related to
Core companies was $17.7 million and $75.6 million for the three and six months
ended June 30, 2001. As a result of our adoption of SFAS No. 142, goodwill
amortization ceased effective January 1, 2002.
RESULTS OF OPERATIONS - EMERGING COMPANIES
The following presentation of our Results of Operations - Emerging
Companies includes the results of our consolidated Emerging partner companies
and our share of the losses of our equity method Emerging partner companies,
which are reflected in the caption "Equity loss-share of losses".
26
EMERGING SEGMENT RESULTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
SELECTED DATA: (AS ADJUSTED) (AS ADJUSTED)
(IN THOUSANDS) (IN THOUSANDS)
Revenue ............................................................ $ 140 $ 257 $ 216 $ 852
Cost of revenue .................................................... $ (110) $ (239) $ (210) $ (519)
Selling, general and administrative ................................ $ (335) $ (5,117) $ (663) $ (9,567)
Amortization of goodwill and other intangibles ..................... $ -- $ (2,132) $ -- $ (7,202)
Equity loss - share of losses ...................................... $ (3,447) $(15,674) $(14,052) $(31,059)
Equity loss - goodwill and other intangibles amortization .......... $ -- $ (9,092) $ -- $(15,070)
Revenue, cost of revenue and selling, general and administrative
Our consolidated Emerging companies have generated negligible revenues to
date. Cost of revenue represents the costs of providing our services. Selling,
general and administrative costs relate to promotion of our products and
services as well as administrative support and facility expenses. The operating
expenses for the three and six months ended June 30, 2002 were $0.4 million and
$0.9 million versus $5.3 million and $10.1 million for the corresponding 2001
periods. This decrease was primarily due to the deconsolidation of Emptoris and
OnMedica.
Equity Loss
Our equity loss-share of partner company losses related to our Emerging
companies was $3.4 million and $14.0 million for the three and six months ended
June 30, 2002 versus $15.7 million and $31.1 million for the corresponding 2001
periods. The decreases are principally the result of disposition of partner
companies accounted for under the equity method, reduced operating losses and
carrying values being reduced to zero.
"Equity loss - goodwill and other intangibles amortization" related to
Emerging companies was $9.1 million and $15.1 million for the three and six
months ended June 30, 2001. As a result of the adoption of SFAS No. 142,
goodwill amortization ceased effective January 1, 2002.
CORPORATE OPERATING EXPENSES
CORPORATE OPERATING EXPENSES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
-------- -------- -------- --------
SELECTED DATA: (AS ADJUSTED) (AS ADJUSTED)
(IN THOUSANDS) (IN THOUSANDS)
General and Administrative ......................... $ (5,212) $ (9,815) $(10,723) $(23,914)
Stock-based compensation ........................... (1,598) (5,960) (4,313) (7,328)
Impairment related and other ....................... (1,499) (3,854) (1,499) (17,344)
Interest income (expense), net ..................... (6,000) (5,574) (11,607) (11,792)
-------- -------- -------- --------
Total corporate operating expenses ................. $(14,309) $(25,203) $(28,142) $(60,378)
======== ======== ======== ========
General and Administrative
Our general and administrative costs consist primarily of employee
compensation, facilities, outside services such as legal, accounting and
consulting, and travel-related costs. General and administrative expenses were
$5.2 million and $10.7 million for the three months and six months ended June
30, 2002, respectively, versus $9.8 million and $23.9 million in the
corresponding 2001 periods. The decrease is the result of the restructuring of
our operations. See the subsection "Restructuring" below.
27
Stock-Based Compensation
Stock based compensation for the three and six months ended June 30, 2002,
was $1.6 million and $4.3 million versus $6.0 million and $7.3 million for the
corresponding 2001 periods. The decreases are principally the result of more
restricted stock and options granted below fair value in 1999 being subject to
vesting in 2001 versus 2002. Aggregate deferred compensation will be amortized
over the remaining vesting periods for stock options or the lapse of
restrictions in the case of restricted stock.
Restructuring (Impairment Related and Other)
During 2002 and 2001, we restructured our operations to better align our
general and administrative expenses with the reduction in the number of our
partner companies. The restructuring resulted in charges of $1.5 million for the
three and six months ended June 30, 2002 versus $3.9 million and $17.3 million
for the corresponding 2001 periods. These charges are included in "Impairment
related and other" in the Consolidated Statements of Operations (See Note 9 to
our Consolidated Financial Statements.)
Interest Income (Expense), net
The increase in interest expense, net for the three months ended June 30,
2002 versus the corresponding 2001 period is the result of a decrease in
interest income due to the decrease in the average balance of cash offset
partially by a decrease in interest expense resulting from convertible note
extinguishment.
The decrease in interest expense, net for the six months ended June 30,
2002 versus the corresponding 2001 period is the result of a decrease in
interest expense related to our convertible subordinated notes resulting from
extinguishments of principal amount in November 2001 and June 2002 and a
decrease in interest income due to the decrease in the average balance of cash
and cash equivalents.
OTHER ITEMS
Impairment Charges
We operate in an industry that is rapidly evolving and extremely
competitive. Many internet-based businesses, including some with B2B business
models, have experienced difficulty in raising additional capital necessary to
fund operating losses and continued investments that their management teams
believe are necessary to sustain operations. Valuations of public companies
operating in the internet B2B e-commerce sector declined significantly during
2001 and 2002. In 1999 and 2000, we announced several significant acquisitions
that were financed principally with shares of our common stock and, based on the
price of the common stock at that time, were valued in excess of $1 billion.
Based on our periodic review of our partner company holdings, impairment charges
of $19.4 million were recorded during the three and six months ended June 30,
2002 and $57.4 million and $1.3 billion during the corresponding 2001 periods to
write off certain partner company holdings (See Note 2 to our Consolidated
Financial Statements).
Income Taxes
Our deferred tax asset before valuation allowance of $683 million at June
30, 2002 consists primarily of $434 million related to the carrying value of our
partner companies, capital loss carryforwards of approximately $134 million and
net operating loss carryforwards of approximately $92 million. (See Note 5 to
our Consolidated Financial Statements).
Other Income (Loss), net
See additional information in Note 11 to our Consolidated Financial
Statements.
28
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, we had $147.3 million in cash, cash equivalents and
short-term investments, $10.5 million in available-for-sale securities,
principally shares in divine, Inc. and i2 and $4.4 million in restricted cash
for total liquidity of $162.2 million. In addition, our consolidated partner
companies had cash, cash equivalents, restricted cash and short-term investments
of $22.8 million. Consolidated working capital decreased to $88.6 million at
June 30, 2002 compared to $182.0 million at December 31, 2001, primarily as a
result of net cash outflows from operations, repurchase of convertible notes and
fundings we made to partner companies during the six months ended June 30, 2002.
Net cash used in operating activities was approximately $52.9 million for
the six months ended June 30, 2002 compared to $149.9 million during the same
prior year period. The decrease is primarily the result of the decreased losses
at our consolidated partner companies.
Net cash used by investing activities during the six months ended June
30, 2002 was $1.8 million versus net cash provided by investing activities of
$30.2 million during the comparable 2001 period. The decrease is primarily due
to reduced acquisitions of ownership interests in 2002 versus 2001, and proceeds
from partner company dispositions and sales of available-for-sale securities.
Net cash used in financing activities was approximately $34.9 million for
the six months ended June 30, 2002 versus net cash provided by financing
activities of $30.4 million during the same prior year period. The increase in
cash used is principally the result of $27.8 million being used to repurchase
$92.6 million of principal amount of our Convertible Notes. In July 2002, we
used $20.2 million in cash to repurchase $67.5 million of principal amount of
our Convertible Notes. In July 2002, we commenced a "Modified Dutch Auction"
tender offer for up to $143 million of principal amount of our Convertible
Notes. The offer could result in the use of up to approximately $42 million of
our cash. The current offer expires on August 23, 2002 and could be modified.
Existing cash, cash equivalents and short-term investments, proceeds from
the issuance of debt and equity securities of our consolidated partner companies
to third parties, proceeds from the potential sales of all or a portion of our
available-for-sale securities or minority interests in certain partner
companies, and other internal sources of cash flow are expected to be sufficient
to fund our cash requirements through the next twelve months, including
commitments to new and existing partner companies, debt obligations and general
operations requirements. At June 30, 2002, we were obligated for $26.9 million
of funding and guarantee commitments to existing partner companies. If a certain
consolidated partner company achieves a fair market value in excess of $1.0
billion, we will be obligated to pay, in cash or stock at our option, 4% of the
partner company's fair market value in excess of $1.0 billion, up to $70 million
to a venture capital firm. We, a significant stockholder and two of our
executive officers are limited partners of this venture capital firm. This
contingent obligation will expire on the earlier to occur of May 31, 2005 or an
unaffiliated company sale, if the valuation milestone is not achieved.
Currently, the fair market value of this partner company is well below $1.0
billion. We will continue to evaluate acquisition opportunities and may acquire
additional ownership interests in new and existing partner companies in the next
twelve months; however, such acquisitions will be made at our discretion. If we
elect to make additional acquisitions, it may become necessary for us to raise
additional funds. We may not be able to raise additional capital and failure to
do so could have a material adverse effect on our business. If additional funds
are raised through the issuance of equity securities, our existing stockholders
may experience significant dilution.
We and our consolidated subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. We do not expect the
ultimate liability with respect to these actions will materially affect our
financial position or cash flows.
RISK FACTORS
Forward-looking statements made with respect to our financial condition
and results of operations and business in this document and those made from time
to time by us through our senior management are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on our current expectations and
projections about future events but are subject to known and unknown risks,
uncertainties and assumptions about us and our partner companies that may cause
our actual results, levels of activity, performance, or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by such forward-looking statements.
29
Factors that could cause our actual results, levels of activity,
performance or achievements to differ materially from those anticipated in
forward-looking statements include, but are not limited to, factors discussed
elsewhere in this report and include among other things:
- our ability and our partner companies' ability to access the capital
markets;
- our ability to effectively manage existing capital resources;
- our ability to retain key personnel;
- our ability to maximize value in connection with divestitures;
- development of the B2B e-commerce market;
- our outstanding indebtedness; and
- our partner companies' ability to compete successfully against
competitors.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue" or the negative of such terms or
other similar expressions. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this Form 10-Q. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this Form
10-Q might not occur.
RISKS PARTICULAR TO INTERNET CAPITAL GROUP
Our ability to grow our business and the businesses of our partner companies may
be adversely affected if economic conditions in the United States are not
favorable.
The United States economy has been weakened by, among other things, a
recession and the terrorist attacks of September 11, 2001 and the response of
the United States to such attacks. These matters, and potential future terrorist
attacks or hostilities or economic deterioration, could continue to result in
further weakness in the United States economy, which could negatively affect our
business.
We have a limited operating history upon which you may evaluate us.
We were formed in March 1996 and have a limited operating history upon
which you may evaluate our business and prospects. We and our partner companies
are among the many companies that have entered into the emerging B2B e-commerce
market. Many of our partner companies are in the early stages of their
development. Our business and prospects must be considered in light of the risk,
expense and difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets such as
B2B e-commerce. If we are unable to effectively allocate our resources and help
develop those existing partner companies that we believe have the most near term
potential, our stock price may be adversely affected and we may be unable to
execute our strategy of developing and maintaining a collaborative network of
partner companies.
Our stock price has been volatile in the past and may continue to be volatile in
the future.
Our stock price has historically been very volatile. Stock prices of
companies engaged in B2B e-commerce have generally been volatile as well. This
volatility may continue in the future.
The following factors, among others, will add to our common stock price's
volatility:
- actual or anticipated variations in our quarterly results and those
of our partner companies;
- changes in the market valuations of our partner companies and other
internet companies;
- conditions or trends in the internet industry in general and the B2B
sector in particular;
- negative public perception of the prospects of internet companies;
- changes in our financial estimates and those of our partner
companies by securities analysts;
- new products or services offered by us, our partner companies and
their competitors;
- announcements by our partner companies and their competitors of
technological innovations;
- announcements by us or our partner companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
- our capital commitments;
30
- additional sales of our securities;
- additions to or departures of our key personnel or key personnel of
our partner companies; and
- general economic conditions such as a recession or interest rate or
currency rate fluctuations.
Many of these factors are beyond our control. These factors may decrease
the market price of our common stock, regardless of our operating performance.
Because we are not in compliance with the continued listing standards of the
Nasdaq National Market, we recently moved to the Nasdaq SmallCap Market, which
could adversely affect the price and liquidity of our common stock.
Our recent move from the Nasdaq National Market to the Nasdaq SmallCap
Market could be perceived negatively and the trading market for our common stock
could be affected, which could depress our stock price and adversely affect the
liquidity of our common stock.
If our common stock ceases to be listed for trading on the Nasdaq SmallCap
Market, the price and liquidity of our common stock may be adversely affected.
Companies listed on the Nasdaq SmallCap Market are required to maintain a
minimum bid price of $1.00 per share. While we are not currently in compliance
with this requirement, we have until October 22, 2002 to come back into
compliance. An additional 180-day grace period may be granted if the Company
remains in compliance with all the other listing criteria of the Nasdaq SmallCap
Market. However, there can be no assurance that we will achieve compliance with
the $1.00 per share minimum bid price or that we will continue to satisfy all of
the listing requirements of the Nasdaq SmallCap Market. In the event that we do
not qualify for listing on the Nasdaq SmallCap Market, sales of our common stock
would likely be conducted only in the over-the-counter market. This may have a
negative impact on the price and liquidity of our common stock and investors
could find it more difficult to purchase or dispose of, or to obtain accurate
quotations as to the market value of, our common stock.
Our business depends upon the performance of our partner companies, which is
uncertain.
Economic, governmental, industry and internal company factors outside our
control affect each of our partner companies. If our partner companies do not
succeed, the value of our assets and the price of our common stock could
decline. The material risks relating to our partner companies include:
- fluctuations in the market price of the common stock of Verticalnet,
eMerge Interactive, Onvia.com, and Universal Access, our publicly
traded partner companies, and other future publicly traded partner
companies, which are likely to affect the price of our common stock;
- many of our partner companies are in the early stages of their
development with limited operating history, little revenue and
substantial losses;
- lack of the widespread commercial use of the internet, which may
prevent our partner companies from succeeding;
- intensifying competition for the products and services our partner
companies offer, which could lead to the failure of some of our
partner companies; and
- the inability of our partner companies to secure additional
financing, which may force some of our partner companies to cease or
scale back operations.
Of our $458.3 million in total assets as of June 30, 2002, $96.7 million,
or 21%, consisted of ownership interests in our partner companies. The carrying
value of our partner company ownership interests includes our original
acquisition cost, the effect of accounting for certain of our partner companies
under the equity method of accounting, the effect of adjustments to our carrying
value resulting from certain issuances of equity securities by our partner
companies, and the effect of impairment charges recorded for the decrease in
value of certain partner companies. The carrying value of our partner companies
will be impaired and decrease if one or more of our partner companies do not
succeed. The carrying value of our partner companies is not marked to market;
therefore, a decline in the market value of one of our publicly traded partner
companies may impact our financial position by not more
31
than the carrying value of the partner company. However, this decline would
likely affect the price of our common stock. For example, our stakes in our
publicly traded partner companies, Verticalnet, eMerge Interactive, Onvia.com,
and Universal Access, were valued at approximately $12.9 million in the
aggregate as of June 30, 2002. A decline in the market value of Verticalnet,
eMerge Interactive, Onvia.com, and Universal Access will likely cause a decline
in the price of our common stock.
Other material risks relating to our partner companies are more fully
described below under "Risks Particular to Our Partner Companies."
Because we have limited resources to dedicate to our partner companies, some of
our partner companies may not be able to raise sufficient capital to sustain
their operations.
Our allocation of resources to our partner companies is discretionary.
Because our resources and our ability to raise capital are limited we cannot
commit to provide our partner companies with sufficient capital resources to
allow them to reach a cash flow positive position. If our partner companies are
not able to raise capital from other outside sources, then they may need to
cease operations.
Our partner company network may suffer a negative effect as a result of our
reduction in support of some of our partner companies.
We intend to allocate the majority of our capital and human resources to
those partner companies that we believe present the greatest long-term
stockholder value. Although those partner companies that do not fall within this
category will remain within our network so long as we continue to own an
interest in them, the quality of the network may suffer if a large number of the
participants do not receive sufficient support from us or from other sources.
Additionally, partner companies that believe that we are not allocating an
appropriate level of resources to them may choose not to participate in our
network, which would adversely affect our strategy of building and maintaining a
collaborative network of B2B companies.
We may not be able to pay our long-term debt when it matures.
In December 1999, we issued convertible subordinated notes that bear
interest at an annual rate of 5.5% and mature in December 2004. As of August 8,
2002, $286 million face value of these notes was outstanding. We may be unable
to repay this long-term debt when it matures. If we are unable to satisfy this
obligation, substantial liquidity problems could result.
If public and private capital markets are not favorable for the B2B sector we
may not be able to execute on our strategy.
Our strategy involves creating value for our stockholders by building
leading B2B e-commerce companies. Our success depends on the acceptance by the
public and private capital markets of B2B companies in general, including
initial public offerings of those companies. The B2B market has experienced
significant volatility recently and the market for initial public offerings of
B2B e-commerce companies has been extremely weak since 2000 . If these
conditions continue, we may not be able to create stockholder value by taking
our partner companies public. In addition, reduced market interest in B2B
e-commerce companies may reduce the market value of our publicly traded partner
companies.
Fluctuations in our quarterly results may adversely affect our stock price.
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
- the operating results of our partner companies;
- significant fluctuations in the financial results of B2B e-commerce
companies generally;
- changes in equity losses or income;
- the acquisition or divestiture of interests in partner companies;
- changes in our methods of accounting for our partner company
interests, which may result from changes in our ownership
percentages of our partner companies;
32
- sales of equity securities by our partner companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
- the pace of development or a decline in growth of the B2B e-commerce
market;
- competition for the goods and services offered by our partner
companies; and
- our ability to effectively manage our growth and the growth of our
partner companies.
We believe that period-to-period comparisons of our operating results may
not always be meaningful. If our operating results in one or more quarters do
not meet securities analysts' or investors' expectations, the price of our
common stock could decrease.
The loss of any of our or our partner companies' executive officers or other key
personnel or our or our partner companies' inability to attract additional key
personnel could disrupt our business and operations.
We believe that our success will depend on continued employment by us and
our partner companies of executive officers and key personnel, as well as on our
and our partner companies' ability to attract additional qualified personnel. If
one or more members of our executive officers or key personnel, or our partner
companies' executive offices or key personnel were unable or unwilling to
continue in their present positions, or if we or our partner companies were
unable to hire qualified personnel, our business and operations could be
disrupted and our operating results and financial condition would be seriously
harmed.
The success of some of our partner companies also depends on their having
highly trained technical and marketing personnel. A shortage in the number of
trained technical and marketing personnel could limit the ability of our partner
companies to increase sales of their existing products and services and launch
new product offerings.
We may have reduced our staffing levels to levels that are not adequate to
conduct our business.
We have made significant reductions in our headcount in order to reduce
our corporate expenses. Although we believe our current staffing levels are
adequate to conduct our business, we cannot ensure that we will not need to
increase our headcount in the future.
We have had a history of losses and expect continued losses in the foreseeable
future.
We have had significant operating losses and, excluding the effect of any
future non-operating gains, we expect to continue incurring significant
operating losses in the future. As a result, we may not have sufficient
resources to expand our operations in the future. We can give no assurances as
to when or whether we will achieve profitability, and if we ever have profits,
we may not be able to sustain them.
We may have difficulty assisting our partner companies in managing their
operations.
Our partner companies are facing different challenges. Some are growing
rapidly and some face elongated sales cycles. These situations are likely to
place significant strain on their resources and on the resources we allocate to
assist our partner companies. In addition, our management may be unable to
assist our partner companies in adopting ideas for effectively and successfully
managing such situations.
Our accounting estimates with respect to the useful life and ultimate
recoverability of our basis in our partner companies could change materially in
the near term.
We operate in an industry that is rapidly evolving and extremely
competitive. Many internet-based businesses, including some with B2B business
models, have experienced difficulty in raising additional capital necessary to
fund operating losses and continue investments that their management teams
believe are necessary to sustain operations. Valuations of public companies
operating in the internet B2B e-commerce sector declined significantly during
2000 and 2001. In the first quarter of 2000 we announced several significant
acquisitions that were financed principally with shares of our stock and based
on the price of our stock at that time, were valued in excess of $1 billion.
Based on our periodic review of our partner company holdings, including those
valued during 2001, impairment charges of $1.3 billion were recorded to write
off certain partner company holdings during the year ended December 31, 2001. It
is reasonably possible that our accounting estimates with respect to the useful
life and ultimate recoverability of our carrying basis including goodwill in
other partner companies could change in the near
33
term and that the effect of such changes on the financial statements could be
material. At June 30, 2002, the recorded amount of carrying basis including
goodwill is not impaired, although we cannot assure that our future results will
confirm this assessment, that a significant write-down or write-off of partner
company carrying basis including goodwill will not be required in the future, or
that a significant loss will not be recorded in the future upon the sale of a
partner company.
We may compete with some of our stockholders and partner companies, and our
partner companies may compete with each other, which could deter companies from
partnering with us and may limit future business opportunities.
We may compete with some of our stockholders and partner companies for
internet-related opportunities. As of June 30, 2002, Safeguard Scientifics, Inc.
owns 12.9% of our outstanding common stock and may compete with us to acquire
interests in B2B e-commerce companies. The Chairman of Safeguard's Board of
Directors and Safeguard's former Chairman and CEO are currently members of our
board of directors and IBM Corporation may have a right to designate a board
observer. This may give them access to our business plan and knowledge about
potential transactions. 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 B2B e-commerce opportunities. This competition, and
the complications posed by the designated directors, may deter companies from
partnering with us and may limit our business opportunities.
Our partner companies could make business decisions that are not in our best
interests or that we do not agree with, which could impair the value of our
partner company interests.
Although we generally seek a significant equity interest and participation
in the management of our Core partner companies, we may not be able to control
significant business decisions of our Core partner companies. In addition,
although we currently own a controlling interest in many of our Core partner
companies, we may not maintain this controlling interest. Interests in partner
companies in which we lack control or share control involves additional risks
that could cause the performance of our interest and our operating results to
suffer, including the management of a partner company having economic or
business interests or objectives that are different than ours and partner
companies not taking our advice with respect to the financial or operating
difficulties that they may encounter.
Our inability to prevent dilution of our ownership interests in our
partner companies or our inability to otherwise have a controlling influence
over the management and operations of our partner companies could have an
adverse impact on our status under the Investment Company Act. Our ability to
adequately control our partner companies could also prevent us from assisting
them, or could prevent us from liquidating our interest in them at a time or at
a price that is favorable to us. Additionally, our partner companies may not
collaborate with each other or act in ways that are consistent with our business
strategy. These factors could hamper our ability to maximize returns on our
interests, and cause us to recognize losses on our interests in partner
companies.
Our outstanding indebtedness could negatively impact our future prospects.
As of June 30, 2002, we had $23.7 million in long-term debt (including the
current portion thereof) and as of August 8, 2002, $286 million in outstanding
convertible subordinated notes. This indebtedness may:
- make it more difficult to obtain additional financing;
- limit our ability to deploy existing capital resources; and
- constrain our ability to react quickly in an unfavorable economic
climate.
If we are unable to satisfy our debt service requirements, substantial
liquidity problems could result, which would negatively impact our future
prospects.
Our operations and growth could be impaired by limitations on our and our
partner companies' ability to raise money.
We have been dependent on the capital markets for access to funds for
acquisitions, operations and other purposes. While we attempt to operate our
business in such a manner so as to be independent from the capital markets,
there is no assurance that we will be successful in doing so. Our partner
companies are also dependent on
34
the capital markets to raise capital for their own purposes. Since early 2000,
the market for internet-related companies and initial public offerings weakened
dramatically. If this weakness continues for an extended period of time, our
ability and the ability of our partner companies to grow and access the capital
markets, if necessary, will be impaired, which would require us to take other
actions, such as borrowing money on terms that may be unfavorable to us, or
divesting of interests in our partner companies to raise capital.
Our stakes in some partner companies have been and are likely to be diluted,
which could materially reduce the value of our stake in such partner companies.
Since we allocate our financial resource to those partner companies that
we believe have the most potential, our ownership interests in other partner
companies have been and are likely to continue to be diluted due to our decision
not to participate in financings. This dilution results in a reduction in the
value of our stakes in such partner companies.
In the future, we may need to raise additional capital to fund our operations
and this capital may not be available on acceptable terms, if at all.
We may need to raise additional funds in the future, and we cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all.
When we divest partner company interests, we may be unable to obtain maximum
value for such interests.
We focus our capital and human resources on those partner companies that
we believe present the greatest long-term stockholder value. We may divest our
interests in those partner companies that do not fit this criteria or in other
partner companies that we believe are no longer core to our strategy. We may
also divest of our interests in other partner companies to generate cash or
strategic reasons. When we divest all or part of an interest in a partner
company, we may not receive maximum value for this position. For partner
companies with publicly-traded stock, we may be unable to sell our interest at
then-quoted market prices. Furthermore, for those partner companies that do not
have publicly-traded stock, the realizable value of our interests may ultimately
prove to be lower than the carrying value currently reflected in our
consolidated financial statements. We continually evaluate the carrying value of
our ownership interests in and advances to each of our partner companies for
possible impairment based on achievement of business plan objectives and
milestones, the value of each ownership interest in the partner company relative
to carrying value, the financial condition and prospects of the partner company,
and other relevant factors. If we are unable to raise capital from other sources
we may be forced to sell our stakes in partner companies at unfavorable prices
in order to sustain our operations. Additionally, we may be unable to find
buyers for certain of our assets, which could adversely affect our business.
We may have difficulty selling our stakes in our publicly traded partner
companies.
Because we hold significant stakes in thinly-traded public companies, we
may have difficulty selling our interest in such companies and, if we are able
to sell our shares, such sales may be at prices that are below the then-quoted
bid prices.
Our resources and our ability to manage our partner companies may be strained as
a result of our acquisitions.
We have acquired, and may in the future acquire, significant interests in
B2B e-commerce companies or increase our stake in existing partner companies
that complement our business strategy. In the future, we may acquire larger
percentages or larger interests in existing or new partner companies than we
have in the past, or we may seek to acquire 100% ownership of companies. These
acquisitions may place significantly greater strain on our resources, ability to
manage such companies and ability to integrate them into our collaborative
network. Future acquisitions are subject to the following risks:
- Our acquisitions may cause a disruption in our ongoing support of
our partner companies, distract our management and other resources
and make it difficult to maintain our standards, controls and
procedures.
- To fund future acquisitions we may be required to incur debt or
issue equity securities, which may be dilutive to existing
stockholders.
35
- Our acquisitions may limit our ability to provide additional capital
resources to some existing partner companies.
The Companies that we have identified as Core partner companies may not succeed.
We cannot ensure that the companies we have identified as Core partner
companies are those that actually have the greatest value proposition or are
those to which we will continue to allocate capital. Although we have identified
certain of our partner companies as Core partner companies, this categorization
does not necessarily imply that every one of our Core partner companies is a de
facto success at this time or will become successful in the future. There is no
guarantee that a Core partner company will remain categorized as Core or that it
will be able to successfully continue operations.
Due to our decision to allocate the majority of our resources to the partner
companies we believe hold the most promise, our ability to provide support to
our other partner companies will be limited.
We allocated our resources to focus on those partner companies that we
believe present the greatest long-term stockholder value. As a result of our
allocation of resources, we will not allocate capital to all of our existing
partner companies. Our decision to not provide additional capital support to
some of our partner companies could have a material adverse impact on the
operations of such partner companies.
We may have to buy, sell or retain assets when we would otherwise choose not to
in order to avoid registration under the Investment Company Act of 1940, which
would impact our investment strategy.
We believe that we are actively engaged in the business of B2B e-commerce
through our network of majority-owned subsidiaries and companies that we are
considered to "control." Under the Investment Company Act, a company is
considered to control another company if it owns more than 25% of that company's
voting securities and is the largest stockholder of such company. A company may
be required to register as an investment company if more than 45% of its total
assets consist of, and more than 45% of its income/loss and revenue attributable
to it over the last four quarters is derived from, ownership interests in
companies it does not control. Because many of our partner companies are not
majority-owned subsidiaries, and because we own 25% or less of the voting
securities of a number of our partner companies, changes in the value of our
interests in our partner companies and the income/loss and revenue attributable
to our partner companies could subject us to regulation under the Investment
Company Act unless we take precautionary steps. For example, in order to avoid
having excessive income from "non-controlled" interests, we may not sell
minority interests we would otherwise want to sell or we may have to generate
non-investment income by selling interests in partner companies that we are
considered to control. We may also need to ensure that we retain more than 25%
ownership interests in our partner companies after any equity offerings. In
addition, we may have to acquire additional income or loss generating
majority-owned or controlled interests that we might not otherwise have acquired
or may not be able to acquire "non-controlling" interests in companies that we
would otherwise want to acquire. It is not feasible for us to be regulated as an
investment company because the Investment Company Act rules are inconsistent
with our strategy of actively managing, operating and promoting collaboration
among our network of partner companies. On August 23, 1999, the 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. This exemptive order reduces the risk that we may have to take
action to avoid registration as an investment company, but it does not eliminate
the risk.
We have implemented certain anti-takeover provisions that could make it more
difficult for a third party to acquire us.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. Our
certificate of incorporation provides that our board of directors may issue
preferred stock without stockholder approval and also provides for a staggered
board of directors. We are subject to the provisions of Section 203 of the
Delaware General Corporation Law, which restricts certain business combinations
with interested stockholders. Additionally, we have a Rights Agreement which has
the effect of discouraging any person or group from beneficially owning more
that 15% of our outstanding common stock unless our board has amended the plan
or redeemed the rights. The combination of these provisions may inhibit a
non-negotiated merger or other business combination.
36
In August 2003 members of management may sell shares of the Company's common
stock in connection with the vesting of restricted stock grants, which could
have a negative effect on the price of the Company's common stock.
Members of our management have been granted shares of restricted stock,
that vest in August 2003. We believe that individuals are likely to sell shares
of the Company's common stock to cover tax liabilities associated with the
vesting and they may sell additional vested shares. Such sales could have a
negative effect on the stock price.
RISKS PARTICULAR TO OUR PARTNER COMPANIES
Many of our partner companies have a limited operating history and may never be
profitable.
Many of our partner companies are early-stage companies with limited
operating histories, have significant historical losses and may never be
profitable. Many of these companies have incurred substantial costs to develop
and market their products and expand operations, have incurred net losses and
cannot fund their cash needs from operations. We expect that the operating
expenses of these companies will increase substantially in the foreseeable
future as they continue to develop products, increase sales and marketing
efforts and expand operations.
Fluctuation in the price of the common stock of our publicly-traded partner
companies may affect the price of our common stock.
Verticalnet, eMerge Interactive, Onvia.com, and Universal Access are our
publicly-traded partner companies. The price of their common stock has been
highly volatile. On February 16, 1999, Verticalnet completed its initial public
offering at a price of $40.00 per share and its common stock has since traded as
high as $1,483.80 per share and as low as $0.55, adjusted for two subsequent two
for one stock splits and a one for ten reverse stock split. On February 8, 2000,
eMerge Interactive completed its initial public offering at a price of $15.00
per share and its common stock has traded as high as $68.00 per share and as low
as $0.15. On March 1, 2000, Onvia.com completed its initial public offering at a
price of $210.00 per share and its common stock has traded as high as $780.00
per share and as low as $1.70 per share adjusted for a one for ten reverse stock
split. On March 17, 2000, Universal Access completed its initial public offering
at a price of $14.00 per share and its common stock has traded as high as $63.00
per share and as low as $0.12. The market value of our holdings in these partner
companies changes with these fluctuations. Based on the closing price of
Verticalnet's common stock on August 9, 2002 of $1.10, our holdings in
Verticalnet had a market value of $3.2 million. Based on the closing price of
eMerge Interactive's common stock on August 9, 2002 of $0.34, our holdings in
eMerge Interactive had a market value of $2.4 million. Based on the closing
price on Onvia.com's common stock on August 9, 2002 of $1.74, our holdings in
Onvia.com had a market value of $3.0 million. Based on the closing price of
Universal Access' common stock on August 9, 2002 of $0.27, our holdings in
Universal Access had a market value of $5.8 million. Fluctuations in the price
of Verticalnet's, eMerge Interactive's, Onvia.com's, and Universal Access' and
other future publicly-traded partner companies' common stock are likely to
affect the price of our common stock.
Verticalnet's results of operations, and accordingly the price of its
common stock, may be adversely affected by the risk factors disclosed in its SEC
filings, including the following factors:
- inability to generate significant revenues from enterprise, software
licensing and professional services;
- inability to reduce expenses;
- inability to establish brand awareness;
- inability to acquire additional funding;
- inability to maintain listing on the Nasdaq National Market;
- lengthy sales and implementation cycles for products; and
- insufficient cash flow from operations to service debt.
eMerge Interactive's results of operations, and accordingly the price of
its common stock, may be adversely affected by the risk factors disclosed in its
SEC filings, including the following factors:
37
- lack of commercial acceptance of online cattle sales and services;
- failure to expand the number of livestock industry participants in
its network;
- inability to respond to competitive developments;
- failure to achieve brand recognition;
- failure to introduce new products and services; and
- failure to upgrade and enhance its technologies to accommodate
expanded product and service offerings and increased customer
traffic.
Onvia.com's results of operations, and accordingly the price of its common
stock, may be adversely affected by the risk factors disclosed in its SEC
filings, including the following factors:
- government agencies' unwillingness to purchase their business
services and products online;
- a significant number of small businesses, government agencies and
their vendors' unwillingness to use its emarketplace to buy and sell
services and products;
- inability to maintain its listing on the Nasdaq National Market;
- failure of small business customers to provide data about
themselves;
- inability to enhance the features and services of its exchange to
achieve acceptance and scalability;
- negative impact on stock price and future operations resulting from
a declared cash distribution and;
- inability to manage a change in strategy.
Universal Access' results of operations, and accordingly the price of its
common stock, may be adversely affected by the risk factors disclosed in its SEC
filings, including the following factors:
- failure of its services to be sufficiently rapid, reliable and
cost-effective;
- unwillingness of clients to outsource the obtaining of circuits;
- inability to market its services effectively;
- inability to expand its Universal Transport Exchange (UTX)
facilities;
- failure to successfully implement a network operations center;
- inability to implement and maintain its Universal Information
Exchange (UIX) databases;
- failure of the market for UTX services to grow;
- Inability to maintain listing on the Nasdaq SmallCap Market;
- changes in market valuations of telecommunications and
internet-related companies;
- loss of a major client;
- inability to integrate acquisitions;
- potential difficulty in charging a fee to government agencies or
their business suppliers;
- inability of clients' ability to pay their obligations;
- inability to obtain third party financing;
- inability to successfully aggregate circuits;
- dependence on several large clients; and
- risks associated with acquisitions.
Our assets as reflected in our balance sheet dated June 30, 2002, were
$458.3 million, of which $12.9 million related to Verticalnet, eMerge
Interactive, Onvia.com, and Universal Access. However, we believe that
comparisons of the value of our holdings in partner companies to the value of
our total assets are not meaningful because not all of our partner company
ownership interests are marked to market in our balance sheet.
The success of our partner companies depends on the development of the B2B
e-commerce market, which is uncertain.
Our partner companies significantly rely on the internet for the success
of their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the internet does not develop, or if the
internet does not develop as an effective medium for providing products and
services, our partner companies may not succeed.
Our long-term success depends on widespread market acceptance of B2B e-commerce.
38
A number of factors could prevent widespread market acceptance of B2B
e-commerce, including the following:
- the unwillingness of businesses to shift from traditional processes
to B2B e-commerce processes;
- the network necessary for enabling substantial growth in usage of
B2B e-commerce may not be adequately developed;
- increased government regulation or taxation, which may adversely
affect the viability of B2B e-commerce;
- insufficient availability of telecommunication services or changes
in telecommunication services which could result in slower response
times for the users of B2B e-commerce; and
- concern and adverse publicity about the security of B2B e-commerce
transactions.
Our partner companies may fail if their competitors provide superior
internet-related offerings or continue to have greater resources than our
partner companies have.
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
online providers and traditional distribution channels;
- dollars spent on consulting services with many established
information systems and management consulting firms; and
- advertising budget with online 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. Many companies offer competitive solutions
that compete with one or more of our partner companies. We expect that
additional companies will offer competing solutions on a stand-alone or combined
basis in the future. Furthermore, our partner companies' competitors may develop
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 in responding to their
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives.
In the future, our partner companies may need to raise additional capital to
fund their operations and this capital may not be available on acceptable terms,
if at all.
Our partner companies may need to raise additional funds in the future,
and we cannot be certain that they will be able to obtain additional financing
on favorable terms, if at all.
The inability of our partner companies' customers to pay their obligations to
them in a timely manner or at all could have an adverse effect on our partner
companies.
Some of the customers of our partner companies may have inadequate
financial resources to meet all their obligations. If a significant number of
customers are unable to pay amounts owed to a partner company, such partner
company's results of operations and financial condition could be adversely
affected.
Some of our partner companies may be unable to protect their proprietary rights
and may infringe on the proprietary rights of others.
Our partner companies are inventing new ways of doing business. In support
of this innovation, they will develop proprietary techniques, trademarks,
processes and software. Although we believe reasonable efforts will be taken to
protect the rights to this intellectual property, the complexity of
international trade secret, copyright,
39
trademark and patent law, coupled with the limited resources of these young
companies and the demands of quick delivery of products and services to market,
create risk that their efforts will prove inadequate. Further, the nature of
internet business demands that considerable detail about their innovative
processes and techniques be exposed to competitors, because it must be presented
on the websites in order to attract clients. Some of our partner companies also
license content from third parties and it is possible that they could become
subject to infringement actions based upon the content licensed from those third
parties. Our partner companies generally obtain representations as to the origin
and ownership of such licensed content; however, this may not adequately protect
them. Any claims against our partner companies' proprietary rights, with or
without merit, could subject our partner companies to costly litigation and the
diversion of their technical and management personnel. If our partner companies
incur costly litigation and their personnel are not effectively deployed, the
expenses and losses incurred by our partner companies will increase and their
profits, if any, will decrease.
Our partner companies that publish or distribute content over the internet may
be subject to legal liability.
Some of our partner companies may be subject to legal claims relating to
the content on their websites, or the downloading and distribution of this
content. Claims could involve matters such as defamation, invasion of privacy
and copyright infringement. Providers of internet products and services have
been sued in the past, sometimes successfully, based on the content of material.
In addition, some of the content provided by our partner companies on their
websites is drawn from data compiled by other parties, including governmental
and commercial sources. The data may have errors. If any of our partner
companies' website content is improperly used or if any of our partner companies
supply incorrect information, it could result in unexpected liability. Any of
our partner companies that incur this type of unexpected liability may not have
insurance to cover the claim or its insurance may not provide sufficient
coverage. If our partner companies incur substantial cost because of this type
of unexpected liability, the expenses incurred by our partner companies will
increase and their profits, if any, will decrease.
Our partner companies' computer and communications systems may fail, which may
discourage parties from using our partner companies' systems.
Some of our partner companies' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Any system interruptions that cause our partner companies' websites to be
unavailable to web browsers may reduce the attractiveness of our partner
companies' websites to third parties. If third parties are unwilling to use our
partner companies' websites, our business, financial condition and operating
results could be adversely affected. Interruptions could result from natural
disasters as well as power loss, telecommunications failure and similar events.
Our partner companies' businesses may be disrupted if they are unable to upgrade
their systems to meet increased demand.
Capacity limits on some of our partner companies' technology, transaction
processing systems and network hardware and software may be difficult to project
and they may not be able to expand and upgrade their systems to meet increased
use. As traffic on our partner companies' websites continues to increase, they
must expand and upgrade their technology, transaction processing systems and
network hardware and software. Our partner companies may be unable to accurately
project the rate of increase in use of their websites. In addition, our partner
companies may not be able to expand and upgrade their systems and network
hardware and software capabilities to accommodate increased use of their
websites. If our partner companies are unable to appropriately upgrade their
systems and network hardware and software, the operations and processes of our
partner companies may be disrupted.
Our partner companies may be unable to acquire or maintain easily identifiable
website addresses or prevent third parties from acquiring website addresses
similar to theirs.
Some of our partner companies hold various website addresses relating to
their brands. These partner companies may not be able to prevent third parties
from acquiring website addresses that are similar to their addresses, which
could adversely affect the use by businesses of our partner companies' websites.
In these instances, our partner companies may not grow as we expect. The
acquisition and maintenance of website addresses generally is regulated by
governmental agencies and their designees. The regulation of website addresses
in the United States and in foreign countries is subject to change. As a result,
our partner companies may not be able to acquire or
40
maintain relevant website addresses in all countries where they conduct
business. Furthermore, the relationship between regulations governing such
addresses and laws protecting trademarks is unclear.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to equity price risks on the marketable portion of our
equity securities. Our public holdings at June 30, 2002 include equity positions
in companies in the internet industry sector, including: eMerge Interactive;
Universal Access; Onvia.com; and Verticalnet, many of which have experienced
significant historical volatility in their stock prices. A 20% adverse change in
equity prices, based on a sensitivity analysis of our public holdings as of June
30, 2002, would result in an approximate $2.6 million decrease in the fair value
of our public holdings.
Although we typically do not attempt to reduce or eliminate our market
exposure on these securities, particularly with respect to securities of our
partner companies, we did enter into a forward contract on 1.8 million shares of
our holdings in i2. The forward contract limits our exposure to and benefits
from price fluctuations in the underlying equity securities. As of June 30,
2002, 1.8 million shares of i2 remain under these arrangements. In addition, we
held 0.5 million shares of i2 in escrow which have not been hedged. The combined
value of the collar forward contract and the underlying hedged securities at
June 30, 2002 was $10.2 million. The forward contract matures in 2003. We may
enter into similar collar arrangements in the future; particularly with respect
to available-for-sale securities, which do not constitute ownership interests in
our partner companies.
The carrying values of financial instruments, including cash and cash
equivalent, accounts receivable, accounts payable and notes payable, approximate
fair value because of the short maturity of these instruments. At June 30, 2002,
the fair value of convertible subordinated notes is $102.4 million versus a
carrying value of $353.5 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.
We entered into a Loan Agreement that provides for issuances of letters of
credit up to $15 million subject to a cash secured borrowing base. As of June
30, 2002 $1.0 million in letters of credit were outstanding under the Loan
Agreement.
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.
41
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May and June 2001, certain of the Company's present directors, along
with the Company, certain of its former directors and certain of its present and
former officers and underwriters, were named as defendants in nine class action
complaints filed in the United States District Court for the Southern District
of New York. The plaintiffs and the alleged classes they seek to represent
include present and former stockholders of the Company. The complaints generally
allege violations of Sections 11 and 12 of the Securities Act of 1933 and Rule
10b-5 promulgated under the Securities Exchange Act of 1934, based on, among
other things, the dissemination of statements allegedly containing material
misstatements and/or omissions concerning the commissions received by the
underwriters of the initial public offering and follow-on public offering of the
Company as well as failure to disclose the existence of purported agreements by
the underwriters with some of the purchasers in these offerings to buy
additional shares of the Company's stock subsequently in the open market at
pre-determined prices above the initial offering prices. The plaintiffs seek for
themselves and the alleged class members an award of damages and litigation
costs and expenses. The claims in these cases have been consolidated for
pre-trial purposes (together with other issuers and underwriters) before one
judge in the Southern District of New York federal court. In April 2002, a
consolidated, amended complaint was filed against these defendants which
generally allege the same violations and also refer to alleged misstatements or
omissions that relate to the recommendations regarding the Company's stock by
analysts employed by the underwriters. In June and July 2002, defendants,
including the Company defendants, filed motions to dismiss plaintiffs'
complaints on numerous grounds. That motion is expected to be heard by the court
in the Fall of 2002. There have been no other material developments in these
cases to date.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 25, 2002. At
this meeting, the stockholders voted in favor of the following items listed and
described in the Company's Proxy Statement dated April 29, 2002:
(1) ELECTION OF DIRECTORS
FOR WITHHELD
------------------- -------------------
Walter W. Buckley, III 257,781,335 3,143,295
Kenneth A. Fox 257,912,991 3,011,639
Dr. Michael D. Zisman 259,467,118 1,457,512
The following directors terms of office as directors continued after this
meeting:
Dr. Thomas P. Gerrity
David J. Berkman
Robert E. Keith, Jr.
Warren V. Musser
(2) RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
FOR AGAINST ABSTAIN
--- ------- -------
259,152,573 1,390,657 381,400
42
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Document
- ------ --------
11.1 Statement Regarding Computation of Per Share Earnings (included
herein at Note 7 - "Net Loss Per Share" to the Consolidated
Financial Statements on Page 13)
(b) Reports on Form 8-K
On July 26, 2002, the Company filed a Current Report on Form 8-K dated July 26,
2002 to report under Item 9, that the Company posted certain questions and
answers relating to the Company's offer to purchase $143 million in aggregate
principal amount of its outstanding 5 1/2% Convertible Subordinated Notes due
2004 on its website.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNET CAPITAL GROUP, INC.
Date: August 14, 2002 By: /s/ Anthony P. Dolanski
----------------------------------
Name: Anthony P. Dolanski
Title: Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
(Duly Authorized Officer)
44
EXHIBIT INDEX
Number Document
- ------ --------
11.1 Statement Regarding Computation of Per Share Earnings (included
herein at Note 7 "Net Loss Per Share" to the Consolidated
Financial Statements on page 13)
45