Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2003

Commission File Number 000-26929

INTERNET CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

(610) 727-6900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

The approximate aggregate market value of Common Stock held by non-affiliates of the Company was $134.5 million as of June 30, 2003. (For purposes of determining this amount only, the Company has defined affiliates to include, as of June 30, 2003, (a) its executive officers, (b) its directors and (c) each stockholder that the Company is aware is a beneficial owner of 10% or more of the outstanding common stock of the Company.)

The number of shares of the Company’s Common Stock outstanding as of March 9, 2004 was 761,132,009 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission (the “SEC”) relative to the Company’s Annual Meeting of Stockholders for the fiscal year ended December 31, 2003 are incorporated by reference into Part III of this Report.

INTERNET CAPITAL GROUP, INC.

FORM 10-K

DECEMBER 31, 2003

INDEX

2

INTERNET CAPITAL GROUP, INC.

PARTNER COMPANIES AS OF DECEMBER 31, 2003

Agribuys, Inc. (“Agribuys”)

Anthem/CIC Ventures Fund LP (“Anthem”)

Arbinet—thexchange Inc. (“Arbinet”)

Axxis, Inc. (f/k/a FuelSpot.com, Inc.)(“Axxis”)

Blackboard, Inc. (“Blackboard”)

Captive Capital Corporation (f/k/a eMarketCapital, Inc.) (“Captive Capital”)

ClearCommerce Corporation (“ClearCommerce”)

CommerceQuest, Inc. (“CommerceQuest”)

ComputerJobs.com, Inc. (“ComputerJobs.com”)

Co-nect, Inc. (f/k/a Simplexis.com) (“Co-nect”)

CreditTrade Inc. (“CreditTrade”)

eCredit.com, Inc. (“eCredit”)

eMerge Interactive, Inc. (“eMerge Interactive”) (Nasdaq:EMRG)

Emptoris, Inc. (“Emptoris”)

Entegrity Solutions Corporation (“Entegrity Solutions”)

Freeborders, Inc. (“Freeborders”)

GoIndustry AG (“GoIndustry”)

ICG Commerce Holdings, Inc. (“ICG Commerce”)

Investor Force Holdings, Inc. (“Investor Force”)

iSky, Inc. (“iSky”)

Jamcracker, Inc. (“Jamcracker”)

LinkShare Corporation (“LinkShare”)

Marketron International, Inc. (f/k/a BuyMedia, Inc.) (“Marketron”)

Mobility Technologies, Inc. (f/k/a traffic.com Inc.) (“Mobility Technologies”)

Onvia.com, Inc. (“Onvia.com”) (Nasdaq:ONVI)

StarCite, Inc. (“StarCite”)

Syncra Systems, Inc. (“Syncra Systems”)

Tibersoft Corporation (“Tibersoft”)

Universal Access Global Holdings Inc. (“Universal Access”) (Nasdaq:UAXS)

Verticalnet, Inc. (“Verticalnet”) (Nasdaq:VERT)

3

PART I

Although we refer in this report on Form 10-K (“Report”) to companies in which we have acquired a convertible debt or an equity ownership interest as our “partner companies” and indicate that we have a “partnership” with these companies, we do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies, and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.

Business Overview

Internet Capital Group, Inc. (“ICG” or the “Company”) is an information technology company actively engaged in delivering software solutions and services that are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. ICG operates through a network of partner companies that deliver those solutions to customers. To help drive partner company progress, ICG provides operational assistance, capital support, industry expertise, access to operational best practices, and a strategic network of business relationships. ICG was formed on March 4, 1996 and is headquartered in Wayne, Pennsylvania.

In the information technology industry, certain terms are often used to describe the nature of a company’s business, including the following terms: internet company, business to business e-commerce, software company, outsourcing, procurement services, supply chain and customer relationship management. These terms apply, in varying degrees, to most of our partner companies. Our partner companies also typically provide customers with systems integration consulting services or stand alone services. For convenience throughout this Report, we generally refer to our partner companies’ businesses as software and services.

The current market environment creates a substantial opportunity for providers of software and services that improve sales results, reduce costs and increase efficiencies by streamlining business processes both within an enterprise and across the value chain. An increasing number of large enterprises are focusing on their core competencies to drive differentiation and competitive advantage for their firms. This means that these enterprises are looking for ways to outsource non-core or non-strategic processes that cost time and money and distract them from their top priorities of achieving profitability, growing market share and delivering new products or services. Our partner companies deliver software and services to help businesses focus on their core competencies. As of December 31, 2003, our partner company network is made up of 30 companies in which we own interests.

With a sharp focus on those companies that we believe have the greatest potential to generate value for ICG stockholders (our “Core” companies), our operating strategy is to build and develop our partner companies by providing them with both human and financial resources. This support leverages the collective knowledge and best practices both within ICG and across our network of partner companies. We use these collective resources to actively support the business strategies, operations and management teams of our partner companies. Our resources include the experience, industry relationships and specific expertise of our management team, our partner companies’ management teams, our Board of Directors and our Advisory Board.

ICG is a successor to a business originally founded as a Delaware limited liability company under the name Internet Capital Group, L.L.C. As a limited liability company, Internet Capital Group, L.L.C. was treated for income tax purposes as a partnership with taxes on the income generated by Internet Capital Group, L.L.C. paid by its members. Internet Capital Group, L.L.C. merged into Internet Capital Group, Inc. on February 2, 1999 with Internet Capital Group, Inc. surviving (the “Reorganization.”) As required by its limited liability company agreement to satisfy the members’ tax liabilities, Internet Capital Group, L.L.C. declared a $10.7 million distribution to its members. Internet Capital Group, Inc. has assumed all liabilities of Internet Capital Group, L.L.C. including the distribution to members of Internet Capital Group, L.L.C. Also as part of the Reorganization, Internet Capital Group, Inc. issued 164,011,098 shares of common stock to the members of Internet Capital Group, L.L.C. The separate existence of Internet Capital Group, L.L.C. ceased in connection with the Reorganization.

4

Industry Overview

The internet’s growth creates substantial market opportunities for companies that provide software and services to help traditional businesses increase efficiency and cost savings by leveraging the internet and other technologies. Historically, e-commerce has occurred through electronic data interchange over proprietary networks, which are costly and available only to a limited number of participants. The internet provides an open platform with common communication protocols to build efficient, cost-effective networks that facilitate e-commerce.

During 2002 and 2003, the e-commerce market continued a period of development and growth as enterprises of all sizes and across all industries looked for vehicles to help them:

Increase efficiency and reduce cost

Traditional businesses are utilizing the internet to automate their internal operations, including manufacturing, finance, sales and purchasing functions. The internet is also used to increase information flow and access throughout the value chain. This increases operational efficiency by reducing the time, costs and resources required to transact business, lowering inventory levels and procurement costs and improving responsiveness to customers and suppliers. Recently, challenging market conditions only served to increase the need for companies to reduce bottom line costs and increase operational efficiencies to support growth.

Focus on core competencies and outsource non-core, non-strategic processes

There are an increasing number of large enterprises focusing on their core competencies to drive differentiation and competitive advantage for their firms. This means that they are looking for ways to outsource non-core, or non-strategic, processes that cost time and money, and more importantly distract them from their top priorities, which are to grow market share and deliver new products or services.

Expand access to new and existing customers and suppliers

Traditional businesses have relied on their sales forces and purchasing departments to develop and maintain customer and supplier relationships. This model is constrained by the time and cost required to exchange current information regarding requirements, prices and product availability, and the difficulty of cost-effectively locating new customers and suppliers and managing existing relationships. Traditional businesses can leverage the internet to obtain and communicate real-time, accurate information regarding requirements, prices and products to a global audience, including suppliers, customers and business partners. This should make it easier for businesses to attract new customers and suppliers, improve service and increase revenue.

We believe that the benefits of e-commerce are broad and will be realized by businesses in times of economic growth or contraction, because e-commerce can be used to build top line revenues in times of growth and new levels of efficiency in times of contraction.

Our Solution and Strategy

Our goal is to become a leader in information technology by owning significant stakes in leading companies that deliver the savings and efficiency of the internet to businesses of all sizes across all industries.

With a sharp focus on those companies that we believe offer the greatest potential to generate value for ICG stockholders, our operating strategy is to build and develop our partner companies by providing them with both human and financial resources. This support leverages the collective knowledge and best practices both within ICG and across our network of partner companies. We use these collective resources to actively support the business strategies, operations and management teams of our partner companies. Our resources include the experience, industry relationships and specific expertise of our management team, our partner companies’ management teams, our Board of Directors and our Advisory Board.

5

Although ICG’s mission of building leading companies has remained constant since its inception, the Company’s focus and operational tenets have evolved with the growth of the e-commerce market and in response to changes within the overall business environment. This evolution included:

Identifying key markets and owning stakes in potential leaders

Our expertise in the e-commerce market has allowed us to identify companies that we believe are positioned to succeed. In building our partner company network, we applied an analysis that capitalized on this competitive advantage. We were very active in acquiring new companies during 1999 and 2000, bringing the network composition to an all-time high of 80 companies by late 2000. In evaluating whether to enter a market or acquire a stake in a specific company, we weighed each opportunity in terms of several industry and company factors. With regards to industry criteria, we evaluated the inefficiencies within each market, its competitive landscape and the potential each market had in terms of the number and dollar value of transactions it would be able to support. In measuring the potential of each partner company, we looked at market position and share, our ability to own a significant stake and the company’s potential to contribute to the network’s value in terms of operational resources and the quality of its management team.

After we identified an attractive potential partner company, we negotiated the acquisition of a significant interest in the company. As a condition to an acquisition, we generally required representation on the company’s board of directors to ensure our ability to provide active guidance to the partner company. We structured acquisitions to permit the partner company’s management and key personnel to retain an equity stake in the company. During our negotiations with potential partner companies we emphasized the value of our network and resources, which we believe gave us a competitive advantage over other acquirers in successfully consummating transactions.

In late 2000, we reallocated our capital resources as described below to focus on those partner companies that we believed presented the greatest potential for ICG stockholders. Due to this increased focus on certain existing partner companies, we decreased our focus on new acquisitions. Accordingly, our strategy since late 2000 has been to acquire interests in new partner companies only when we believe the strategic value of such companies was extremely compelling.

After acquiring interests in partner companies, we selectively continue to participate in their follow-on financings and selectively increase our ownership positions.

Aggregating companies into a network to promote growth

During 1999 and 2000 we acquired interests in numerous partner companies, and as we made those acquisitions, we immediately took an active role in the partner companies by providing both strategic guidance and operational support:

Strategic Guidance. We provide strategic guidance to our partner companies regarding market positioning, business model development and market trends. Our focus on the e-commerce market and the knowledge base of our partner companies, strategic investors, management and advisory board give us valuable experience that we share with our partner companies.

Operational Support. We provide operational support to our partner companies in the areas of finance, sales and marketing, business development and human resources. The majority of our partner companies have an assigned operations and finance team. This team advises our partner companies’ management on day-to-day management and operational issues.

Exchange of Best Practices and Economies of Scale. One of the principal goals of our network is to promote best practices and economies of scale among our partner companies. We promote and facilitate the information flow among our partner companies and as they follow similar business cycles and challenges, key learnings are leveraged to increase operational efficiencies, accelerate decision-making and promote growth. Importantly, the challenging economic environment has had a significant effect

6

on most of our partner companies. The benefits of a network effect has enabled many of these companies to leverage strategies implemented by some companies to cut costs and evolve business models to quickly respond to common challenges.

Prioritize resources to accelerate development of most promising companies

Although we do and will continue to concentrate on providing the operational and strategic support to promote growth and profitability at our partner companies, the market volatility that began in early 2000 necessitated a prioritization of both our human and capital resources toward partner companies believed to have the greatest potential to generate value for our stockholders. Based on our active involvement in the e-commerce market since 1996, we believe that our expertise allows us to identify companies that are positioned to succeed. This enables the prioritization of our resources to accelerate the development of partner companies which we believe offer the greatest value for our stockholders over the long-term. We believe this prioritization and focus will result in the continued streamlining of our partner company network into a smaller but stronger group of companies. We intend to continue to focus on our private partner companies that we believe have the greatest value potential, which we refer to as our private Core partner companies. We believe these companies are gaining traction in delivering the software and services that we believe have the potential to dramatically increase efficiency and savings for businesses. However, this categorization does not necessarily imply that every one of our private Core partner companies is a de facto success at this time. Rather, it captures those companies that are receiving the majority of management’s time and resources as we consider them our most promising.

At December 31, 2003 our private Core partner companies consisted of:

Blackboard, CommerceQuest, CreditTrade, eCredit, Freeborders, GoIndustry, ICG Commerce, Investor Force, iSky, LinkShare, Marketron, StarCite and Syncra Systems.

These private Core partner companies primarily deliver a wide array of software and services to help customers streamline and automate business processes with the goal of reducing costs and increasing efficiencies both within the four walls of the enterprise and across their individual value chains.

At December 31, 2003, our public Core partner companies consisted of: eMerge Interactive, Universal Access and Verticalnet. During the first quarter of 2004, we sold a majority of our ownership interest in eMerge Interactive.

We believe that additional partner companies may be included in this category in the future and that, conversely, certain partner companies may be removed from this category in the future.

Government Regulations and Legal Uncertainties

Government regulation of the internet and e-commerce is evolving and unfavorable changes could harm our partner companies’ business. Our partner companies are subject to general business regulations and laws, as well as regulations and laws specifically governing the internet and e-commerce. Such existing and future laws and regulations may impede the growth of the internet or other online services. These regulations and laws may cover taxation, user privacy, pricing, content, copyrights, distribution, electronic contracts, consumer protection, the provision of online payment services, broadband residential internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and e-commerce. Unfavorable resolution of these issues may harm our partner companies’ business.

Proprietary Rights

Our partner companies have copyrights with respect to software applications, websites and other materials. These materials may constitute an important part of our partner companies’ assets and competitive strengths. Federal law generally protects such copyrights for 90 years from the creation of the underlying material.

7

Concentration of Customer Base and Credit Risk

Approximately 17%, 13% and 11% of our revenue for the years ended December 31, 2003, 2002 and 2001, respectively, relates to one customer of one of our consolidated partner companies. Accounts receivable from this customer as of December 31, 2003 and December 31, 2002 were not significant. During 2003, this customer notified such consolidated partner company of the exercise of its right to terminate its arrangement to purchase services from such consolidated partner company effective January 1, 2004.

Competition

Competition Facing our Partner Companies

Competition for information technology and internet products and services is intense. As the market for e-commerce grows, we expect that competition will continue to 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:

In addition, some of our partner companies compete to attract and retain a critical mass of buyers and sellers. Several companies offer competitive solutions that compete with one or more of our partner companies. We expect that additional companies will offer competing solutions on a stand-alone or combined basis in the future. Furthermore, our partner companies’ competitors may develop information technology and internet products or services that are superior to, or have greater market acceptance than, the solutions offered by our partner companies. Many of our partner companies’ competitors have greater brand recognition and greater financial, marketing and other resources than our partner companies. This may place our partner companies at a disadvantage in responding to their competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives.

If our partner companies are unable to compete successfully against their competitors, our partner companies may fail.

Competition From Within our Network

We may compete with some of our partner companies for internet-related opportunities. We may compete with our partner companies to acquire interests in e-commerce companies and our partner companies may compete with each other for e-commerce opportunities. This competition may deter companies from partnering with us and may limit our business opportunities.

Employees

We have reduced our corporate headcount from 23, as of March 14, 2003, to 16, as of March 9, 2004, in order to reduce our corporate expenses. Headcount at our consolidated partner companies as of March 9, 2004 is 402. Although we believe our and our consolidated partner companies current staffing levels are adequate to conduct business, we cannot ensure that we and our consolidated partner companies will not need to increase headcount in the future.

Financial Information About Segments and Geographic Areas

Segment and geographic area information is set forth in Note 11 of the Notes to Consolidated Financial Statements included in Item 8 below and incorporated herein by reference.

8

Availability of Reports and Other Information

Our internet website address is www.internetcapital.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed by us with the Securities and Exchange Commission pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are accessible free of charge through our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission.

The location and general description of our properties as of March 9, 2004 are as follows:

Corporate Offices

Our corporate headquarters are located at 690 Lee Road, Suite 310 in an office facility located in Wayne, Pennsylvania, where we lease approximately 7,475 square feet.

Partner Company Properties

Our consolidated partner companies lease approximately 137,955 square feet of office, administrative, sales and marketing, operations and data center space, principally in California, Colorado, Florida, Georgia, Illinois, Missouri, New York and Pennsylvania in the United States, and also in Canada, Germany, Ireland and the United Kingdom.

In May and June 2001, certain of the Company’s present directors, along with the Company, certain of its former directors, certain of its present and former officers and its underwriters, were named as defendants in nine class action complaints filed in the United States District Court for the Southern District of New York. The plaintiffs and the alleged classes they seek to represent include present and former stockholders of the Company. The complaints generally allege violations of Sections 11 and 12 of the Securities Act of 1933 and Rule 10b-5 promulgated under the Securities Exchange Act of 1934, based on, among other things, the dissemination of statements allegedly containing material misstatements and/or omissions concerning the commissions received by the underwriters of the initial public offering and follow-on public offering of the Company as well as failure to disclose the existence of purported agreements by the underwriters with some of the purchasers in these offerings to buy additional shares of the 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 alleges the same violations and also refers 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. The Company’s motion was denied in its entirety in an opinion dated February 19, 2003. In July 2003, a committee of the Company’s Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide for, among other things, a release of the Company and of the individual defendants (who had been previously dismissed without prejudice) for the wrongful conduct alleged in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of the Company’s insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the United States District Court overseeing the litigation.

On December 20, 2002, the Company was named as a defendant in an action filed in the United States District Court for the District of Maine. The plaintiffs include former stockholders of Animated Images, Inc. (“Animated Images”), one of the Company’s former partner companies. In addition to the Company, the defendants include Freeborders, a current partner company, and four individual defendants, including former officers of the Company and former Animated Images and Freeborders directors. The

9

complaint generally alleges violations of Section 10(b) of the Securities Exchange Act of 1934 and Section 5(a) of the Securities Act of 1933, fraud, breach of contract, breach of fiduciary duty and civil conspiracy, among other claims, in connection with the merger of Animated Images into Freeborders. In support of these claims, the plaintiffs allege, among other things, that the defendants misrepresented the value of the stock of Freeborders, resulting in plaintiffs’ having received less consideration in the merger than that to which they believe they were entitled. The litigation currently is in its preliminary stage. The Court granted defendants’ motion to stay the litigation pending arbitration of plaintiffs’ claims against defendants other than the Company.

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal year 2003.

PART II

(a) Our common stock is currently traded on the Nasdaq SmallCap Market under the symbol “ICGE”. We transferred from the Nasdaq National Market to the Nasdaq SmallCap Market effective June 10, 2002. Our initial public offering of stock occurred on August 5, 1999 at $6.00 (post split) per share on the Nasdaq National Market. The price range per share reflected in the table below is the highest and lowest sale price for our stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market during each quarterly period of our two most recent fiscal years.

As of March 9, 2004, the last reported sale price for our common stock on the Nasdaq SmallCap Market was $0.41 per share.

(b) Holders. As of March 1, 2004, there were approximately 1,834 holders of record of our common stock, although there is a much larger number of beneficial owners.

(c) Dividends. We have never declared or paid cash dividends on our capital stock and we do not intend to pay cash dividends in the foreseeable future. We plan to retain any earnings for use in the operation of our business and to fund future growth.

(d) Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding the Company’s equity compensation plans and the securities authorized for issuance thereunder is set forth in Item 12 below.

The following table summarizes certain selected historical consolidated financial information of ICG that has been derived from our audited consolidated financial statements for each of the five years ended December 31, 2003, 2002, 2001, 2000, and 1999. The financial information may not be indicative of our future performance. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included in this Report.

10

11

The Company has not paid a cash dividend since its inception. In December 1999, the Company declared and paid a 100% stock dividend. All share information in this Report reflects this dividend.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth elsewhere in this Report and the risks discussed in our other SEC filings. The following discussion should be read in conjunction with our audited Consolidated Financial Statements and related notes thereto included in Item 8 in this Report.

Although we refer in this Report to companies in which we have acquired a convertible debt or an equity ownership interest as our “partner companies” and indicate that we have a “partnership” with these companies, we do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies, and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.

Because we own significant interests in information technology and e-commerce companies, many of which have generated net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While many of our partner companies have consistently reported losses, we have recorded net income in certain periods and experienced significant volatility from period to period due to one-time or infrequently occurring transactions and other events relating to our ownership interests in partner companies. These transactions and events are described in more detail in Note 3 and Note 19 of our Notes to Consolidated Financial Statements and include dispositions of, and changes to, our partner company ownership interests, dispositions of our holdings of available-for-sale securities and debt extinguishments.

Introduction

The Consolidated Financial Statements include the consolidated accounts of Internet Capital Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly and majority-owned (Internet Capital Group, Inc. and all its subsidiaries, hereafter “we,” “ICG,” the “Company” or “Internet Capital Group”) and have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”).

Internet Capital Group is an information technology company actively engaged in delivering software solutions and services that are designed to enhance business operations by increasing efficiency, reducing costs and improving sales results. The Company operates through a network of partner companies that deliver those solutions to customers. The various interests that we acquire in our partner companies are accounted for under one of three accounting methods: consolidation, equity method or cost method. The applicable accounting method is generally determined based on our voting interest in a partner company. Generally, if we own more than 50% of the outstanding voting securities of a partner company, a partner company’s accounts are reflected within our consolidated financial statements. If we own between 20% and 50% of the outstanding securities, a partner company’s accounts are not reflected within our consolidated financial statements; however, our share of the earnings or losses of the partner company is reflected in the caption “Equity loss” in our consolidated statements of operations. Partner companies not accounted for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, our share of the earnings or losses of these companies is not included in our consolidated statements of operations.

Information for all periods presented below reflects the grouping of ICG partner companies into two segments, consisting of the Core segment and the Emerging segment. The Core operating segment includes those partner companies in which the Company’s management takes a very active role in providing strategic direction and management assistance. The Emerging operating segment includes investments in companies that are, in general, managed to provide the greatest near-term stockholder value (“Emerging”). During fiscal 2003, one of our consolidated Core partner companies, OneCoast Network Holdings, Inc. (“OneCoast”), disposed of substantially all of its assets. The historical results of OneCoast are presented as “Discontinued Operations.” Additionally, during fiscal 2003 seven of our Emerging partner companies ceased operations. The partner companies included within the segments as of December 31, 2003 are consistently the same 30 partner companies for 2003, 2002 and 2001.

12

Loss from continuing operations for 2003 totaled $124.7 million and included net charges totaling $58.3 million consisting of the following: (i) charges in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 84, “Induced Conversions of Convertible Debt”, net of $59.3 million relating to our 2003 convertible debt for equity exchanges and other retirements, (ii) charges for the impairment of partner companies of $5.8 million, (iii) gains on the disposition of partner companies/other of $4.1 million and (iv) net restructuring credits of $2.7 million.

Loss from continuing operations for 2002 totaled $86.9 million and included net benefits totaling $53.0 million consisting of the following: (i) gains on the retirement of debt of $111.4 million, (ii) charges for the impairment of partner companies of $43.5 million, (iii) losses on the disposition of partner companies/other of $4.9 million and (iv) restructuring charges of $10.0 million.

Loss from continuing operations for 2001 totaled $2,295 million and included net charges totaling $1,377.1 million consisting of the following: (i) charges for the impairment of partner companies of $1,276.0 million, (ii) gains on the retirement of debt of $81.0 million, (iii) losses on the disposition of available-for-sale securities/other of $125.9 million and (iv) restructuring charges of $56.2 million.

Liquidity and Capital Resources

The following table summarizes certain balance sheet information for the Parent Company, Internet Capital Group, Inc.:

As a result of the convertible debt for equity exchanges completed from January 1, 2004 through March 9, 2004, our stockholders’ equity has increased $134.8 million.

We believe existing cash, cash equivalents and short-term investments and proceeds from the potential sales of all or a portion of our interests in certain partner companies are expected to be sufficient to fund our cash requirements through at least the first quarter of 2005, including commitments to existing partner companies, debt obligations and general operations requirements.

In February 2004, the Company sold 4,944,445 shares of eMerge Interactive for $10.4 million in cash.

As of March 9, 2004, our available-for-sale securities consist of: 2,000,000 shares of eMerge Interactive common stock, 2,917,794 shares of Verticalnet common stock and 1,083,206 shares of Universal Access common stock. As of March 9, 2004, we also hold 1,559,481 shares of Onvia.com common stock valued at $6.5 million which is not classified as an available-for-sale security, as our ownership interest is accounted for under the equity method of accounting.

From 2001 through March 9, 2004, we have repurchased and extinguished $527.2 million of the original $566.3 million face value of our convertible notes due December 2004 for $89.8 million in cash and 464.8 million shares of our common stock in a series of separate transactions. We intend to satisfy the remaining $39.1 million in convertible notes at or prior to maturity; however, we can provide no assurance that we will be successful in doing so. In connection with the satisfaction of the convertible notes, we may raise additional debt and/or equity financing, which may only be available on terms that result in significant dilution to our stockholders, that restrict the Company’s operations or that are otherwise unfavorable to us. We can provide no assurance that we will raise additional debt and/or equity financing or that we will monetize assets to satisfy our outstanding convertible debt. If we use our existing cash, cash equivalents and short-term investments to satisfy the convertible debt, our financial resources will be significantly reduced which could have a material adverse effect on our business. If we satisfy the outstanding convertible debt through debt for equity exchanges, the interests of the holders of our common stock may be significantly diluted.

13

At December 31, 2003, we were obligated for $2.6 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. One of our executive officers was a limited partner of this venture capital firm. This contingent obligation will expire on the earlier to occur of May 31, 2005 or an unaffiliated company sale, if the valuation milestone is not achieved. Currently, the fair market value of this partner company is well below $1.0 billion. We will continue to evaluate acquisition opportunities and may acquire additional ownership interests in new and existing partner companies in the next twelve months; however, such acquisitions will generally be made at our discretion. If we elect to make additional acquisitions, it may become necessary for us to raise additional funds. We may not be able to raise additional capital and failure to do so could have a material adverse effect on our business. If additional funds are raised through the issuance of equity securities, our existing stockholders may experience significant dilution.

The following table summarizes our and our consolidated subsidiaries’ cash and cash equivalents, restricted cash and short-term investments:

Summary of Liquidity

Consolidated working capital decreased $207.3 million from 2002 to 2003 primarily due to the reclassification to current liabilities of the $173.9 million balance of our outstanding convertible notes as of December 31, 2003 as it matures in December 2004. As of March 9, 2004, the balance of convertible notes was $39.1 million. Our and our consolidated companies’ operating losses in 2003 also contributed to the decrease.

Net cash used in operating activities was approximately $38.6 million for the year ended December 31, 2003 compared to $80.7 million during the same prior year period. The decrease is primarily the result of the decreased losses at our consolidated partner companies.

Net cash provided by investing activities during the year ended December 31, 2003 was $6.6 million versus $12.4 million during the comparable 2002 period. The decrease is primarily due to reduced proceeds from partner company dispositions, offset by reduced acquisitions of ownership interests in 2003 versus 2002.

Net cash used in financing activities was approximately $6.8 million for the year ended December 31, 2003 versus $49.1 million during the same prior year period. The decrease in cash used is principally the result of $48.8 million being used to repurchase $163.0 million of principal amount of our convertible notes in 2002 versus $5.5 million being used to repurchase $12.0 million of principal amount of our convertible notes in 2003.

We and our consolidated subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. We do not expect the ultimate liability with respect to these actions will materially affect our financial position or cash flows.

14

Contractual Cash Obligations and Commercial Commitments

The following table summarizes our contractual cash obligations and commercial commitments as of December 31, 2003:

⁽¹⁾ As of March 9, 2004, the remaining balance of our convertible subordinated notes is $39.1 million. See Note 7 to our Consolidated Financial Statements.

⁽²⁾ As of December 31, 2003, approximately $1.8 million of the $7.0 million of “Other Borrowings” is included in “Funding commitments/guarantees”.

Off-Balance Sheet Arrangements

We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Results of Operations

As of December 31, 2003, we owned interests in 30 partner companies that are categorized below based on segment and method of accounting.

15

The following summarizes the unaudited selected financial information related to our segments. Each segment includes the results of our consolidated partner companies and records our share of the earnings and losses of partner companies accounted for under the equity method of accounting. The partner companies included within the segments are consistently the same 30 partner companies for 2003, 2002 and 2001. The method of accounting for any particular partner company may change based on our ownership interest.

Discontinued operations and dispositions are those partner companies that have been sold or ceased operations and are no longer included in a segment for all periods presented. Corporate expenses represent our general and administrative expenses of supporting the partner companies. The measure of segment net loss reviewed by us does not include items such as impairment related charges, income taxes and accounting changes, which are reflected in other reconciling items in the information that follows.

Segment Information

(in thousands)

For the Year Ended December 31, 2003 vs. 2002 vs. 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 results of our equity method Core partner companies.

16

Revenue

Revenue decreased $9.2 million from $79.0 million in 2002 to $69.8 million in 2003. As a result of a challenging market for enterprise software sales in 2003, CommerceQuest’s revenue declined $6.6 million in 2003 versus 2002. The deconsolidation in 2003 of two Core companies, eCredit and Freeborders reduced revenue $4.3 million versus 2002. These decreases were partially offset by an increase of $1.7 million at ICG Commerce.

Revenue increased $2.4 million from $76.6 million in 2001 to $79.0 million in 2002. As a result of CommerceQuest, eCredit and Freeborders being consolidated for a greater period during 2002 than in 2001 revenue increased $14.8 million. Increases in the customer base, increased activity of existing customers and an acquisition resulted in increased revenues at ICG Commerce of $4.3 million in 2002 versus 2001. These increases were offset by a decrease of $16.7 million as a result of deconsolidating AssetTrade.com, Inc. (“AssetTrade”) during 2001.

During 2003, a customer of one of our consolidated partner companies notified the consolidated partner company of the exercise its right to terminate its arrangement to purchase services from our consolidated partner company effective January 1, 2004. Revenue from this customer totaled $11.9 million, $10.4 million and $11.2 million in 2003, 2002 and 2001, respectively.

Operating Expenses

Operating expenses decreased $39.9 million from $135.8 million in 2002 to $95.9 million in 2003. As a result of a challenging market for enterprise software sales in 2003 and the subsequent reduction in revenues, CommerceQuest reduced operating expenses $5.9 million in 2003 as compared to 2002. The deconsolidation in 2003 of two Core Companies, eCredit and Freeborders reduced operating expenses $13.7 million. The residual $20.3 million decrease is the result of ICG Commerce significantly reducing operating expenses.

Operating expenses decreased $104 million from $239.8 million in 2001 to $135.8 million in 2002. These operating expenses decreased by $61.0 million as ICG Commerce implemented cost reduction programs and by $40.4 million as a result of deconsolidating AssetTrade during 2001. These decreases were partially offset by an increase due to CommerceQuest, eCredit and Freeborders being consolidated for a greater period during 2002 versus 2001.

Equity Loss

The following table reconciles the components of Equity loss for segment reporting purposes to equity loss for consolidated financial statement reporting:

Equity loss—share of loss improved $20.8 million from 2002 to 2003 and $223.0 million from 2001 to 2002. The principal components of the improvements are:

17

The total net losses of our three public Core partner companies, eMerge Interactive, Univeral Access and Verticalnet, improved from $961.8 million in 2001 to $50.7 million in 2002 to $34.7 million in 2003 due to significant restructuring charges in the aggregate in 2001 and 2002. The improved 2003 results are principally due to the restructuring of their operations. Accordingly, our share of the net losses of these companies in the aggregate also improved over these periods. Our share of the net losses in 2002 was also impacted by our basis in Verticalnet being reduced to zero in 2001 and the subsequent recovery of basis and partial recognition of our share of Verticalnet’s 2002 net income. Our share of the net losses in 2003 also improved as Universal Access and Verticalnet’s ownership level fell below 20% during the third quarter of 2003; resulting in these companies no longer being accounted for under the equity method. Subsequent to December 31, 2003, we sold a portion of our ownership interest and terminated a voting agreement relating to eMerge Interactive. Accordingly, as of March 9, 2004, these three public Core companies are no longer accounted for under the equity method of accounting.

The total revenue of our nine private core equity method companies improved from $143.1 million in 2001 to $174.7 million in 2002 to $185.4 million in 2003. The 6% improvement of 2003 versus 2002 is primarily the result of increased revenue at our companies involved with affiliate marketing and online auctions offset by reduced revenue at our companies selling software relating to enterprise applications.

The total net losses of our nine private core equity method companies in the aggregate improved from $148.5 million in 2001 to $42.3 million in 2002 to $29.9 million in 2003. The 29% improvement of 2003 versus 2002 is primarily the result of increased revenues and reduced operating expenses offset by goodwill impairment charges of approximately $5.8 million at one of our companies. Accordingly, our share of the net losses of these companies also improved over these periods. Our share of the net losses was also impacted by changes in the methods of accounting for these partner companies. Additionally, as of December 31, 2003, four of these nine equity method companies have carrying values that have been reduced to zero. While the impact to 2003 was not significant as the carrying values were reduced to zero late in 2003, we may not record our share of these companies’ losses in 2004 until such time as our share of income equals the unrecorded losses or the partner companies’ equity transactions result in an adjustment of our investment. Our share of the net losses of those companies whose carrying value is zero at December 31, 2003 totaled $6.6 million in 2003.

Results of Operations—Emerging Companies

The following presentation of our Results of Operations—Emerging Companies includes the results of our consolidated Emerging partner companies and our share of the results of our equity method emerging partner companies.

Our consolidated emerging companies have generated negligible revenues to date. The period over period decreases in operating expenses is primarily a result of deconsolidating Captive Capital during the second quarter of 2003.

18

The following table reconciles the components of Equity loss for segment reporting purposes to Equity loss for consolidated financial reporting:

The decreases are principally the result of our basis in these companies being reduced to zero, our ownership interest being reduced and reduced losses at these companies.

Discontinued Operations and Dispositions

The following is a summary of the components included in “Discontinued Operations and Dispositions”, a reconciling item for segment reporting purposes:

In 2003 and 2002, three of our Core partner companies sold substantially all of their assets. In accordance with SFAS No. 144, these partner companies have been treated as discontinued operations. Accordingly, the operating results of these three discontinued operations have been presented separately from continuing operations and include the gains or losses recognized on disposition.

In 2003, the sale of the assets of OneCoast occurred. We received no cash proceeds on the transaction and recorded a loss of approximately $10.8 million. Our share of the losses of OneCoast totaled $2.1 million, $6.4 million and $3.1 million for 2003, 2002 and 2001, respectively.

In 2002, the sale of the assets of Logistics.com, Inc. (“Logistics.com”) occurred. We received $10.8 million in proceeds in 2002 and an additional $1.7 million in 2003 and recognized a gain of $1.2 million in 2003 and $0.3 million in 2002. Our share of the losses of Logistics.com totaled $15.0 million and $10.5 million in 2002 and 2001, respectively.

In 2002, the sale of the assets of Delphion, Inc. (“Delphion”) occurred. We received $10.0 million in proceeds in 2002 and an additional $0.5 million in 2003 and recognized a gain of $0.5 million in 2003 and $10.0 million in 2002. Our share of the losses of Delphion totaled $4.2 million and $22.4 million in 2002 and 2001, respectively. We could receive additional proceeds of $2.9 million in 2004 pending the outcome of potential indemnification obligations.

The impact to our consolidated results of other consolidated and equity method partner companies we have disposed of our ownership interest in or have ceased operations during 2003, 2002 and 2001 is also included in the caption “Dispositions” for segment reporting purposes. The most significant individual consolidated partner companies’ revenues and net loss related to these dispositions were RightWorks, Inc. (“RightWorks”) and PaperExchange.com, Inc. (“PaperExchange.com”) in 2001 with revenues of $15.2 million and $4.4 million, respectively, and net losses of $135.8 million and $15.6 million, respectively.

19

The following table reconciles the components of Equity loss for equity method partner companies we disposed of to Equity loss for consolidated financial reporting:

The most significant individual equity method company, Breakaway Solutions, Inc., represented $59.4 million of the equity loss in 2001.

Corporate

General and Administrative

Our general and administrative expenses decreased $18.2 million from 2002 to 2003 primarily due to reduction in stock based compensation from $15.3 million in 2002 to $2.3 million in 2003 as a result of more restricted stock vesting in 2002, as well as changes recorded relating to certain modifications of certain stockholder loans. The residual decrease is the result of our continued restructuring of our operations. (See “Restructuring” below)

Our general and administrative expenses decreased $17.3 million from 2001 to 2002 primarily due to the restructuring of our operations. (See “Restructuring” below) These reductions were partially offset by an increase in stock based compensation from $14.4 million in 2001 to $15.3 million in 2002 primarily as a result of the issuance of restricted stock in 2001.

Restructuring (Impairment Related and Other)

During 2003, 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 a credit of $5.1 million, and charges of $1.5 million and $32.9 million for the years ended December 2003, 2002 and 2001, respectively. The credit in 2003 is primarily due to us settling a lease obligation for $7.1 million less than we had estimated.