Introduction
The Consolidated Financial Statements include the consolidated accounts of Internet Capital Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly-owned and consolidated (Internet Capital Group, Inc. and all such subsidiaries, hereafter "we," "ICG," the "Company" or "Internet Capital Group") and have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP").
Internet Capital Group (the "Company") builds and owns Internet software and services companies that drive business productivity and reduce transaction costs between firms. The Company devotes its expertise and capital to maximizing the success of these platform companies that are delivering software and service applications to customers worldwide. The various interests that we acquire in our partner companies are accounted for under one of three accounting methods:
consolidation, equity method or cost method. The applicable accounting method is generally determined based on our voting interest in a partner company. Generally, if we own more than 50% of the outstanding voting securities of a partner company, and for which other shareholders do not possess the right to affect significant management decisions, a partner company's accounts are reflected within our consolidated financial statements. Generally, if we own between 20% and 50% of the outstanding voting 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 Other Holdings 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 ("Core"). The Other Holdings operating segment includes holdings in companies where, in general, we provide less operational support, we do not have a controlling ownership stake and the partner company is managed to provide the greatest near-term stockholder value ("Other Holdings"). From time to time, partner companies are disposed of by ICG or the partner company ceases operations. For presentational purposes, the partner companies included within the segments as of March 31, 2005, are consistently the same 24 partner companies for the three months ended March 31, 2005 and 2004 periods.
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Net loss for the three months ended March 31, 2005 totaled $3.1 million and included net gains totaling $5.1 million consisting of the following: (i) gains on the disposition of partner companies and marketable securities of $4.6 million, and (ii) gains on partner company warrants/other of $0.5 million.
Net loss for the three months ended March 31, 2004 totaled $123.8 million and included net charges totaling $114.4 million consisting of the following:
(i) charges in accordance with SFAS No. 84, "Induced Conversions of Convertible Debt," net of $132.6 million relating to our 2004 debt-for-equity exchanges and other retirements, (ii) gains on disposition of partner companies and marketable securities of $18.9 million and (iii) net restructuring charges of $0.7 million.
Liquidity and Capital Resources
The following table summarizes certain balance sheet information for the parent
company, Internet Capital Group:
March 31, 2005 December 31, 2004
(in thousands)
Cash, cash equivalents and short-term investments $ 64,687 $ 67,285
Marketable securities $ 53,424 $ 54,082
Senior convertible notes due April 2009 $ (60,000 ) $ (60,000 )
Shares of common stock outstanding 38,388 38,388
In the period from January through March 2004, we repurchased and extinguished $134.8 million of convertible subordinated notes by issuing 15.9 million shares of our common stock. In April 2004, we issued $60.0 million of senior convertible notes due in April 2009. We used the net proceeds to redeem the then outstanding balance of $39.1 million of convertible subordinated notes due December 2004. The residual will be used for general operations requirements and fundings to existing partner companies as well as potential new partner companies.
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 marketable securities and partner companies to be sufficient to fund our cash requirements for the foreseeable future, including future commitments to existing partner companies, debt obligations and general operations requirements.
At March 31, 2005, as well as the date of this filing, we were not obligated for any significant funding and guarantee commitments to existing partner companies. If ICG Commerce 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 ICG Commerce's fair market value in excess of $1.0 billion, up to $70 million, to a venture capital firm. The Company and one of its executive officers were limited partners of this venture capital firm. The Company retains a contingent economic interest in such firm but the executive officer retains no such interest. A member of our Board of Directors also has an interest in this venture capital firm. The Company's 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 ICG Commerce 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 monetize certain assets and/or raise additional funds. We may not be able to monetize certain assets or raise additional capital and failure to do so could have a material adverse effect on our business. If additional funds are raised through the issuance of equity securities, our existing stockholders may experience significant dilution.
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The following table summarizes our and our consolidated subsidiaries' cash and cash equivalents, restricted cash and short-term investments:
Summary of Liquidity
March 31, 2005 December 31, 2004
ICG Parent ICG Parent
Company Consolidated Company Consolidated
Level Subsidiaries Total Level Subsidiaries Total
(in thousands)
Cash and cash equivalents $ 30,279 $ 20,353 $ 50,632 $ 9,345 $ 22,241 $ 31,586
Restricted cash (1) - 1,260 1,260 - 999 999
Short-term investments 34,408 - 34,408 57,940 - 57,940
Total $ 64,687 $ 21,613 $ 86,300 $ 67,285 $ 23,240 $ 90,525
(1) Restricted cash at March 31, 2005 and December 31, 2004 does not include $856 and $893, respectively, of long-term restricted cash included in "Other" assets on the Company's consolidated balance sheets.
Consolidated working capital decreased to $73.9 million at March 31, 2005 from $76.8 million at December 31, 2004 primarily due to operating losses.
Summary of Statements of Cash Flows
Three Months Ended March 31,
2005 2004
(in thousands)
Cash used in operating activities $ (9,147 ) $ (6,965 )
Cash provided by investing activities $ 28,246 $ 9,171
Cash used in financing activities $ (78 ) $ (13 )
Net cash used in operating activities was approximately $9.1 million for the three months ended March 31, 2005 compared to $7.0 million during the comparable 2004 period. The increase in cash used in operating activities is primarily the result of the increased losses due to an additional consolidated partner company in the 2005 period.
Net cash provided by investing activities for the three months ended March 31, 2005 was $28.2 million versus $9.2 million during the comparable 2004 period. The increase in cash provided by investing activities is primarily due to maturities of short-term investments of $28.5 million and sales of marketable securities of $4.4 million offset by purchases of short-term investments of $4.9 million in the 2005 period versus proceeds from sales of partner company ownership interests of $13.1 million offset by $3.8 million of acquisitions of ownership interests in partner companies in the comparable 2004 period.
Net cash used in financing activities increased $0.1 million for the three months ended March 31, 2005. The increase in cash used in financing activities is principally the result of repayments of capital lease obligations.
We and our consolidated subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. We do not expect the ultimate liability with respect to these actions will materially affect our financial position or cash flows.
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Contractual Cash Obligations and Commercial Commitments
We had no material changes to contractual cash obligations and commercial commitments for the three months ended March 31, 2005.
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.
Our Partner Companies
As of March 31, 2005, we owned interests in 24 partner companies that are
categorized below based on segment and method of accounting.
CORE PARTNER COMPANIES (%Voting Interest)
Consolidated Equity Cost
CommerceQuest (87%) CreditTrade (30%)
ICG Commerce (76%) Freeborders (48%)
Investor Force (54%) GoIndustry (54%)
LinkShare (40%)
Marketron (38%)
StarCite (53%)
OTHER HOLDINGS COMPANIES (%Voting Interest)
Consolidated Equity Cost
ComputerJobs.com (46%) Agribuys (19%)
Co-nect (36%) Anthem (9%)
eCredit (31%) Arbinet (1)
Axxis (9%)
Blackboard (2)
Captive Capital (5%)
Emptoris (7%)
Entegrity Solutions (2%)
Jamcracker (2%)
Mobility Technologies (3%)
Verticalnet (3)
(1) As of March 31, 2005, we owned 231,128 shares of Arbinet (see Note 4 "Marketable Securities" to Consolidated Financial Statements.)
(2) As of March 31, 2005, we owned 2,660,777 shares of Blackboard (see Note 4 "Marketable Securities" to Consolidated Financial Statements.)
(3) As of March 31, 2005, we owned 2,917,794 shares of Verticalnet (see Note 4 "Marketable Securities" to Consolidated Financial Statements.)
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Results of Operations
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 24 partner companies for the three months ended March 31, 2005 and 2004. The method of accounting for any particular partner company may change based on our ownership interest.
Dispositions are those partner companies that have been sold or ceased operations and are no longer included in a segment for all periods presented. Corporate expenses represent our general and administrative expenses of supporting the partner companies and operating as a public company. The measure of segment net loss reviewed by us does not include items such as impairment related charges, income taxes and accounting changes, which are reflected in other reconciling items in the information that follows.
Segment Information
(in thousands)
Reconciling Items
Discontinued
Other Total Operations and Consolidated
Core Holdings Segment Dispositions Corporate Other Results
For The Three Months Ended
March 31, 2005
Revenues $ 14,415 $ - $ 14,415 $ - $ - $ - $ 14,415
Net Income (loss) $ (5,074 ) $ (53 ) $ (5,127 ) $ - $ (4,021 ) $ 6,030 $ (3,118 )
For The Three Months Ended
March 31, 2004
Revenues $ 12,146 $ - $ 12,146 $ - $ - $ - $ 12,146
Net loss $ (4,618 ) $ (39 ) $ (4,657 ) $ (780 ) $ (5,157 ) $ (113,201 ) $ (123,795 )
For the Three Months Ended March 31, 2005
Results of Operations -Core Companies
The following presentation of our Results of Operations - Core Companies includes the results of our consolidated Core partner companies and our share of the results of our equity method Core partner companies.
Three Months Ended March 31,
2005 2004
(in thousands)
Selected data:
Revenue $ 14,415 $ 12,146
Cost of revenue (8,037 ) (7,434 )
Selling, general and administrative (7,124 ) (5,533 )
Research and development (3,223 ) (2,495 )
Amortization of intangibles (589 ) (786 )
Impairment related and other (18 ) (107 )
Operating expenses (18,991 ) (16,355 )
Interest and other (76 ) (43 )
Equity loss (422 ) (366 )
Net loss $ (5,074 ) $ (4,618 )
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Revenue
Revenue increased $2.3 million from $12.1 million in the quarter ended March 31, 2004 to $14.4 million in the quarter ended March 31, 2005. The consolidation in 2005 of Investor Force increased revenue $0.9 million versus the 2004 period. The residual increase is primarily due to increased revenue at ICG Commerce offset by reduced revenue at CommerceQuest.
Operating Expenses
Operating Expenses increased $2.6 million from $16.4 million in the quarter ended March 31, 2004 to $19.0 million in the quarter ended March 31, 2005. The consolidation in 2005 of Investor Force increased operating expenses $2.1 million versus the 2004 period. The residual $0.5 million increase is primarily the result of higher operating expenses at ICG Commerce offset by lower operating expenses at CommerceQuest.
Equity Loss
The total revenue of our six Core equity method partner companies improved from $38.9 million in the three months ended March 31, 2004 to $47.9 million in the three months ended March 31, 2005. The improvements are primarily the result of increased revenue at our partner companies involved with affiliate marketing and credit derivatives offset primarily by reduced revenue at our partner companies involved with online auctions.
Our six Core equity companies reported aggregate net loss of less than $0.1 million in the first quarter of 2005 compared to net income of $0.8 million in the comparable 2004 period. Results for the 2005 period were impacted by higher spending levels in the current period to extend product, services and sales versus the 2004 period. Accordingly, our share of the net losses of these partner companies increased in the three months ended March 31, 2005 versus the 2004 period.
Results of Operations - Other Holdings Companies
The following presentation of our Results of Operations - Other Holdings
Companies includes our share of the results of our equity method Other Holdings
partner companies.
Three Months ended March 31,
2005 2004
(in thousands)
Selected data:
Revenue $ - $ -
Operating expenses - -
Interest and other - -
Equity loss (53 ) (39 )
Net loss $ (53 ) $ (39 )
Equity loss decreased period over period primarily as a result of increased losses for these partner companies |
