Form 10-Q for INTERNET CAPITAL GROUP INC
8-Aug-2005
Quarterly Report
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 Quarterly Report on Form 10-Q 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 this Quarterly Report on Form 10-Q.
Although we refer in this Quarterly Report on Form 10-Q to companies in which we have acquired a convertible debt or an equity ownership interest as our "partner companies" and indicate that we have a "partnership" with these companies, we do not act as an agent or legal representative for any of our partner companies, we do not have the power or authority to legally bind any of our partner companies, and we do not have the types of liabilities in relation to our partner companies that a general partner of a partnership would have.
Because we own significant interests in information technology and e-commerce companies, many of which have generated net losses, we have experienced, and expect to continue to experience, significant volatility in our quarterly results. While many of our partner companies have consistently reported losses, we have recorded net income in certain periods and experienced significant volatility from period-to-period due to one-time or infrequently occurring transactions and other events relating to our ownership interests in partner companies. These transactions and events are described in more detail in our Notes to Consolidated Financial Statements and include dispositions of, and changes to, our partner company ownership interests, dispositions of our holdings of available-for-sale securities and debt extinguishments. Introduction
The Consolidated Financial Statements include the consolidated accounts of Internet Capital Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly-owned and consolidated (Internet Capital Group, Inc. and all such subsidiaries, are hereinafter referred to as "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").
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: the consolidation method, the equity method or the 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 cease operations. For presentational purposes, the partner companies included within the segments as of June 30, 2005, are consistently the same 24 partner companies for the three months ended June 30, 2005 and 2004 periods. Income from continuing operations for the three months ended June 30, 2005 totaled $1.1 million and included net benefits totaling $9.8 million principally of gains on the disposition of marketable securities and warrant valuations.
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Loss from continuing operations for the three months ended June 30, 2004 totaled $4.9 million and included net benefits totaling $3.9 million principally of gains on extinguishment of interest on debt at one of our consolidated partner companies, partner company dispositions and warrant valuation offset principally by losses on the write-down of marketable securities. Liquidity and Capital Resources
The following table summarizes certain balance sheet information for the parent company, Internet Capital Group, Inc. and its consolidated subsidiaries:
Summary of Liquidity
June 30, 2005 December 31, 2004
ICG Parent ICG Parent
Company Consolidated Company Consolidated
Level Subsidiaries Total Level Subsidiaries Total
(in thousands)
Cash and cash
equivalents $ 36,138 $ 20,839 $ 56,977 $ 9,345 $ 22,241 $ 31,586
Restricted Cash (1) - 1,616 1,616 - 999 999
Short-term investments 24,536 - 24,536 57,940 - 57,940
$ 60,674 $ 22,455 $ 83,129 $ 67,285 $ 23,240 $ 90,525
Marketable securities $ 56,848 $ - $ 56,848 $ 54,082 $ - $ 54,082
Senior convertible
notes due April 2009 $ (60,000 ) $ - $ (60,000 ) $ (60,000 ) $ - $ (60,000 )
(1) Restricted cash at June 30, 2005 and December 31, 2004 does not include $798 and $893, respectively, of long-term restricted cash included in "Other" assets on the Company's Consolidated balance sheets.
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 June 30, 2005, as well as the date of this filing, we were not obligated for any significant funding and guarantee commitments to existing partner companies.
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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Consolidated working capital decreased to $70.2 million at June 30, 2005 from $76.8 million at December 31, 2004 primarily due to operating losses.
Summary of Statements of Cash Flows
Six Months Ended June 30,
2005 2004
(in thousands)
Net cash used in operating activities $ (18,459 ) $ (16,820 )
Net cash provided by (used in) investing activities $ 43,640 $ (10,393 )
Net cash (used in) provided by financing activities $ (99 ) $ 14,567
Net cash used in operating activities was approximately $18.5 million for the six months ended June 30, 2005, compared to $16.8 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 six months ended June 30, 2005 was $43.6 million versus net cash used in investing activities of $10.4 million during the comparable 2004 period. The increase in cash provided by investing activities is primarily due to maturities of short-term investments, net of $33.4 million and sales of marketable securities of $10.8 million versus purchases of short-term investments of $27.3 million and acquisitions of ownership interests in partner companies of $7.3 million offset by proceeds from sales of partner company ownership interests of $22.6 million in the comparable 2004 period.
Net cash provided by financing activities decreased $14.7 million for the six months ended June 30, 2005 versus 2004. The decrease in cash provided by financing activities is principally due to the issuance of senior convertible notes of $60.0 million offset by the redemption of convertible subordinated notes of $39.5 million and the repayment of other long-term debt and capital lease obligations of $6.3 million in 2004.
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.
Contractual Cash Obligations and Commercial Commitments At June 30, 2005, due to increased ownership at StarCite and Investor Force, we have increased our contractual cash obligations and commercial commitments by $4.2 million as compared to the information that is disclosed in our December 31, 2004 Form 10-K.
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.
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Our Partner Companies
As of June 30, 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 (75%) Freeborders (48%)
Investor Force (54%) GoIndustry (54%)
LinkShare (40%)
Marketron (38%)
StarCite (61%) (1)
OTHER HOLDINGS COMPANIES (%Voting Interest)
Consolidated Equity Cost
ComputerJobs.com (46%) Anthem (9%)
Co-nect (36%) Arbinet (2)
eCredit (31%) Axxis (9%)
Blackboard (3)
Captive Capital (5%)
Emptoris (7%)
Entegrity Solutions (2%)
FoodLink Online (19%)
Jamcracker (2%)
Tibersoft (5%)
Traffic.com (3%)
Verticalnet (4)
(1) We accounted for StarCite under the equity method of accounting for the three months ended June 30, 2005. In June 2005, we increased our ownership in StarCite and consolidated StarCite's balance sheet at June 30, 2005. Effective
July 1,
2005, we
will
consolidate
StarCite's
statements
of
operations
and cash
flows.
(2) As of June 30, 2005, we own 231,128 shares of Arbinet (see "Note 4 - Marketable Securities" to Consolidated Financial Statements.)
(3) As of June 30, 2005, we own 2,223,777 shares of Blackboard (see "Note - 4 Marketable Securities" to Consolidated Financial Statements.)
(4) As of June 30, 2005, we own 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 and six months ended June 30, 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 June 30, 2005
Revenues $ 12,957 $ - $ 12,957 $ - $ - $ - $ 12,957
Net income (loss) $ (5,550 ) $ (40 ) $ (5,590 ) $ - $ (3,482 ) $ 10,148 $ 1,076
For The Three Months
Ended June 30, 2004
Revenues $ 12,519 $ - $ 12,519 $ - $ - $ - $ 12,519
Net income (loss) $ (4,303 ) $ (18 ) $ (4,321 ) $ 2,789 $ (4,237 ) $ 3,916 $ (1,853 )
For The Six Months
Ended June 30, 2005
Revenues $ 27,372 $ - $ 27,372 $ - $ - $ - $ 27,372
Net income (loss) $ (10,624 ) $ (93 ) $ (10,717 ) $ - $ (7,503 ) $ 16,178 $ (2,042 )
For The Six Months
Ended June 30, 2004
Revenues $ 24,665 $ - $ 24,665 $ - $ - $ - $ 24,665
Net income (loss) $ (8,922 ) $ (57 ) $ (8,979 ) $ 2,009 $ (9,394 ) $ (109,284 ) $ (125,648 )
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For the Three and Six Months Ended June 30, 2005 and 2004 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 June 30, Six Months Ended June 30,
2005 2004 2005 2004
(in thousands)
Selected data:
Revenue $ 12,957 $ 12,519 $ 27,372 $ 24,665
Cost of revenue (8,264 ) (6,716 ) (16,301 ) (14,150 )
Selling, general and administrative (6,736 ) (5,515 ) (13,860 ) (11,048 )
Research and development (2,961 ) (2,496 ) (6,184 ) (4,991 )
Amortization of other intangibles (380 ) (708 ) (969 ) (1,494 )
Impairment related and other (48 ) 7 (66 ) (100 )
Operating expenses (18,389 ) (15,428 ) (37,380 ) (31,783 )
Interest and other 319 2 243 (42 )
Equity loss (437 ) (1,396 ) (859 ) (1,762 )
Net loss $ (5,550 ) $ (4,303 ) $ (10,624 ) $ (8,922 )
Revenue
Revenue increased $0.5 million from $12.5 million in the quarter ended June 30, 2004 to $13.0 million in the quarter ended June 30, 2005. The consolidation of Investor Force in 2005 increased revenue $0.9 million versus the corresponding 2004 quarter. CommerceQuest's revenue decreased $1.5 million as the market for enterprise software sales continues to be challenging. ICG Commerce's revenue increased $1.0 million due to increased demand for outsourced procurement services.
Revenue increased $2.7 million from $24.7 million year to date June 30, 2004 to $27.4 million year to date June 30, 2005. The consolidation of Investor Force in 2005 increased revenue $1.8 million versus the corresponding 2004 six month period. CommerceQuest's revenue decreased $2.5 million as the market for enterprise software sales continues to be challenging. ICG Commerce's revenue increased by $3.4 million due to increased demand for outsourced procurement services.
Operating Expenses
Operating expenses increased $3.0 million from $15.4 million in the quarter ended June 30, 2004 to $18.4 million in the quarter ended June 30, 2005. The consolidation of Investor Force in 2005 increased operating expenses $1.8 million versus the corresponding 2004 period. ICG Commerce increased operating expenses by $0.6 million to respond to increased demand for their services. CommerceQuest's operating expenses increased $0.5 million due to an accrual reversal as a result of a liability being settled for less than originally estimated in the 2004 period.
Operating expenses increased $5.6 million from $31.8 million year to date June 30, 2004 to $37.4 million year to date June 30, 2005. The consolidation of Investor Force in 2005 increased operating expenses $3.9 million versus the corresponding 2004 six month period. ICG Commerce increased operating expenses by $1.3 million to respond to increased demand for their services. CommerceQuest's operating expenses increased $0.4 million due to an accrual reversal as a result of a liability being settled for less than originally estimated in the 2004 period.
Equity Loss
The total revenue of our six Core equity method partner companies improved from $39.3 million in the three months ended June 30, 2004 to $55.1 million in the three months ended June 30, 2005. The improvements are primarily the result of increased revenue at our partner companies involved with credit derivatives and affiliate marketing offset primarily by reduced revenue at our partner companies involved with enterprise software sales.
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The total revenue of our six Core equity method partner companies improved from $78.2 million in the six months ended June 30, 2004 to $103.0 million in the six months ended June 30, 2005. The improvements are primarily the result of increased revenue at our partner companies involved with credit derivatives and affiliate marketing offset primarily by reduced revenue at our partner companies involved with online auctions.
Our six Core equity companies reported aggregate net income of $0.8 million in the three months ended June 30, 2005 compared to net loss of $(0.8) million in the corresponding 2004 period. Results for the 2005 period improved over the 2004 period primarily due to higher revenue offset by higher spending levels in the current period to extend product, services and sales. Accordingly, our share of the results of these partner companies improved in the three months ended June 30, 2005 versus the 2004 period.
Our six Core equity companies reported aggregate net income of $0.8 million in the six months ended June 30, 2005 compared to net loss of less than $(0.1) million in the corresponding 2004 period. Results for the 2005 period improved over the 2004 period primarily due to higher revenue offset by higher spending levels in the current period to extend product, services and sales. Accordingly, our share of the results of these partner improved in the six months ended June 30, 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 June 30, Six Months Ended June 30,
2005 2004 2005 2004
(in thousands)
Equity loss $ (40 ) $ (18 ) $ (93 ) $ (57 )
Equity loss increased period over period primarily as a result of increased losses for these partner companies and ownership levels. Discontinued Operations and Dispositions The following is a summary of the components included in "Discontinued Operations and Dispositions," a reconciling item for segment reporting purposes:
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
(in thousands)
Net income attributable to discontinued
operations $ - $ 3,000 $ - $ 3,000
Net loss attributable to equity method
companies disposed of - (211 ) - (991 )
$ - $ 2,789 $ - $ 2,009
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Corporate
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
(in thousands)
General and administrative $ (3,201 ) $ (3,006 ) $ (6,775 ) $ (6,349 )
Impairment related and other - - - (546 )
Interest expense, net (281 ) (1,231 ) (728 ) (2,499 )
Total corporate operating expenses $ (3,482 ) $ (4,237 ) $ (7,503 ) $ (9,394 )
General and Administrative
Our general and administrative expenses increased $0.2 million and $0.4 million for the three and six months ended June 30, 2005 versus 2004 primarily due to an increase in stock-based compensation as a result of more restricted stock amortization and increases in employee expenses due to increased headcount. Restructuring (Impairment Related and Other) During the six months ended June 30, 2004, we settled a lease obligation for more than we had estimated, resulting in a charge of $0.5 million. Interest Income/Expense
The decrease in interest expense, net is primarily attributable to the reduction in average principal amount of convertible notes outstanding.
Other
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
(in thousands)
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