SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
Commission File Number 000-26929
INTERNET CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
| | |
Delaware (State of other jurisdiction of incorporation or organization) | | 23-2996071 (I.R.S. Employer Identification No.) |
| | |
690 Lee Road, Suite 310, Wayne, PA (Address of principal executive offices) | | 19087 (Zip Code) |
(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. Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yesþ Noo
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yeso Noo
The number of shares of the Company’s Common Stock outstanding as of November 1, 2005 was 39,305,253 shares.
INTERNET CAPITAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Although we refer in this Quarterly Report on Form 10-Q to the companies in which we have acquired a convertible debt or an equity ownership interest as our “Partner Companies” and we indicate that we have a “partnership” with these companies, we do not act as an agent or legal representative for any of our Partner Companies, and we do not have the power or authority to legally bind any of our Partner Companies, and we do not have the types of liabilities in relation to our Partner Companies that a general partner of a partnership would have.
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. See the subsection of Part I, Item 2 entitled “Risk Factors” for more information.
Our internet website address iswww.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.
2
INTERNET CAPITAL GROUP, INC.
PARTNER COMPANIES AS OF SEPTEMBER 30, 2005
Core Operating Segment
CommerceQuest, Inc. (“CommerceQuest”)
CommerceQuest is an enterprise software and service provider that enables its customers to turn business strategies into business processes by fully integrating the work that people do with software systems that optimize business performance. CommerceQuest delivers a complete set of scalable business process management solutions that leverage existing IT investments to unite people, processes and technology in a service-based architecture.
CreditTrade Inc. (“CreditTrade”)
CreditTrade provides transaction, data and information services to the credit markets. CreditTrade is a broker specializing in credit default swaps and secondary loans.
Freeborders, Inc. (“Freeborders”)
Freeborders provides product lifecycle management software and services to leading retailers and their suppliers, enabling brands to more effectively manage the increasing complexity of their supply chains. Freeborders solutions help drive profitable revenue growth, speed products to market, improve inventory management, and maintain control, consistency and quality.
GoIndustry AG (“GoIndustry”)
GoIndustry provides corporations, financial institutions, and insolvency practitioners with a comprehensive range of industrial asset services, including disposal, valuation and related consulting. Additionally, for large corporations, GoIndustry provides enterprise asset management solutions for used and under-utilized capital assets.
ICG Commerce Holdings, Inc. (“ICG Commerce”)
ICG Commerce is a procurement services provider delivering total procurement cost savings through a combination of deep expertise and hosted technology. ICG Commerce provides a comprehensive range of solutions to help companies identify savings through sourcing, realize savings through implementation and purchase-to-pay automation and drive continuous improvements through ongoing category management.
Investor Force Holdings, Inc. (“Investor Force”)
Investor Force is a software technology company specializing in the delivery of revenue and efficiency generating business solutions to the institutional investment community. Investor Force serves a broad array of over 500 institutional investment clients, including money managers, consultants, plan sponsors and institutional investors. By eliminating manual, time-consuming tasks and providing greater portfolio insight, Investor Force helps firms serve their institutional clients faster and with greater intelligence and productivity.
Marketron International, Inc. (f/k/a BuyMedia, Inc.) (“Marketron”)
Marketron is a provider of broadcast management solutions for the radio, TV and cable industries. Marketron’s fully integrated suite of sales, traffic, finance and business intelligence solutions automates workflow from proposal to billing, enabling groups to optimize inventory and increase revenues.
3
StarCite, Inc. (“StarCite”)
StarCite provides a comprehensive suite of software applications and services to the meeting and events industry. StarCite helps drive efficiencies and cost savings to both corporate buyers and suppliers. More than 400 corporate, association and third-party meeting buyers rely on StarCite’s Enterprise Meeting Solutions for workflow, procurement, supply chain management, spend analysis and attendee management. Thousands of industry suppliers rely on the StarCite Online Marketplace, supplier marketing programs and enabling technologies to increase meeting revenues. StarCite’s international division represents destination management companies and other premier international travel suppliers using both technology and traditional means.
Other Holdings Operating Segment
Anthem/CIC Ventures Fund LP (“Anthem”)
Anthem is a venture fund providing specialized asset management and investment services to institutional investors and high net-worth individuals.
Arbinet — thexchange Inc. (“Arbinet”) (Nasdaq:ARBX)
Arbinet is an electronic market for trading, routing and settling communications capacity. Members of the exchange, consisting primarily of communications service providers, anonymously buy and sell voice calls and Internet capacity based on route quality and price through its marketplace.
Blackboard, Inc. (“Blackboard”) (Nasdaq:BBBB)
Blackboard is an enterprise software company for e-education, serving the global needs of primary and secondary schools, higher education, corporations and government agencies.
Captive Capital Corporation (f/k/a eMarketCapital, Inc.) (“Captive Capital”)
Captive Capital provides turnkey programs to manufacturers and dealers who want to offer competitive financing to their customers.
ComputerJobs.com, Inc. (“ComputerJobs.com”)
ComputerJobs.com is an information technology employment website.
Co-nect, Inc. (f/k/a Simplexis.com) (“Co-nect”)
Co-nect is a provider of data-driven, K–12 professional development solutions focused on improving the quality of classroom instruction district-wide. Co-nect delivers training, tools, and resources to solve critical issues such as whole school improvement, data-informed decision-making, technology integration, and early reading failure.
eCredit.com, Inc. (“eCredit”)
eCredit delivers credit risk management and collections software and services to Fortune 1000 companies and financial institutions. eCredit improves credit and collections decision-making practices to deliver process efficiencies, optimized risk management, reduced operating costs and increased revenues.
4
Emptoris, Inc. (“Emptoris”)
Emptoris combines collaborative sourcing capabilities with the power of scientific optimization technology that enables purchasing professionals to perform complex bid analysis and select the optimal supply base allocation that produces hard dollar savings on cost of goods sold.
Entegrity Solutions Corporation (“Entegrity Solutions”)
Entegrity Solutions provides secure access management and content delivery solutions, from DCE through single sign-on, eAuthentication and application authorization.
FoodLink Online (f/k/a Agribuys, Inc.) (“FoodLink Online”)
FoodLink Online is a provider of supply chain management software and services targeted specifically to the fresh food industry.
Jamcracker, Inc. (“Jamcracker”)
Jamcracker provides software solutions and expertise to software companies and service providers to efficiently deliver and manage their on demand solutions.
Tibersoft Corporation (“Tibersoft”)
Tibersoft serves the needs of prominent food service operators and distributors by providing products that improve and enhance supply chains for food service operators, distributors and manufacturers to better understand their businesses.
Traffic.com, Inc. (f/k/a Mobility Technologies, Inc.) (“Traffic.com”)
Traffic.com employs a unique data collection, data processing, and data distribution to generate the unique traffic information in the industry.
Verticalnet, Inc. (“Verticalnet”) (Nasdaq:VERT)
Verticalnet provides supply management solutions that offer visibility, insight and control required to identify, realize and sustain value from supply management initiatives.
5
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2005 | | | 2004 | |
| | (unaudited) | | | | | |
| | (in thousands, except per share data) | |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 208,740 | | | $ | 31,586 | |
Restricted cash | | | 1,037 | | | | 999 | |
Short-term investments | | | 5,475 | | | | 57,940 | |
Accounts receivable, net of allowance ($851-2005; $1,129-2004) | | | 15,221 | | | | 17,922 | |
Prepaid expenses and other current assets | | | 11,975 | | | | 6,908 | |
| | | | | | |
Total current assets | | | 242,448 | | | | 115,355 | |
Marketable securities | | | 55,832 | | | | 54,082 | |
Fixed assets, net | | | 2,951 | | | | 2,185 | |
Ownership interests in Partner Companies | | | 39,415 | | | | 49,794 | |
Goodwill | | | 48,613 | | | | 45,196 | |
Intangibles, net | | | 4,947 | | | | 4,705 | |
Other | | | 4,951 | | | | 6,289 | |
| | | | | | |
Total Assets | | $ | 399,157 | | | $ | 277,606 | |
| | | | | | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Current portion of senior convertible notes (Note 8) | | $ | 20,000 | | | $ | — | |
Current maturities of other long-term debt | | | 418 | | | | 37 | |
Accounts payable | | | 8,203 | | | | 10,142 | |
Income taxes payable | | | 20,349 | | | | — | |
Accrued expenses | | | 12,700 | | | | 12,772 | |
Accrued compensation and benefits | | | 7,405 | | | | 7,593 | |
Deferred revenue | | | 13,453 | | | | 7,084 | |
| | | | | | |
Total current liabilities | | | 82,528 | | | | 37,628 | |
Senior convertible notes (Note 8) | | | 40,000 | | | | 60,000 | |
Other long-term debt (Note 8) ) | | | 3,131 | | | | — | |
Long-term deferred revenue | | | 1,924 | | | | 2,243 | |
Other liabilities | | | 7,803 | | | | 8,224 | |
Minority interest | | | 4,055 | | | | 4,404 | |
| | | | | | |
| | | 139,441 | | | | 112,499 | |
| | | | | | |
| | | | | | | | |
Stockholders’ Equity | | | | | | | | |
Preferred stock $0.01 par value; 10,000 shares authorized, none issued or outstanding | | | — | | | | — | |
Common stock, $0.001 par value; 2,000,000 shares authorized, 39,305 (2005) and 38,388 (2004) issued and outstanding | | | 39 | | | | 38 | |
Additional paid in capital | | | 3,535,288 | | | | 3,525,596 | |
Accumulated deficit | | | (3,319,984 | ) | | | (3,405,237 | ) |
Unamortized deferred compensation | | | (7,922 | ) | | | (3,634 | ) |
Notes receivable-stockholders | | | (300 | ) | | | (300 | ) |
Accumulated other comprehensive income | | | 52,595 | | | | 48,644 | |
| | | | | | |
Total stockholders’ equity | | | 259,716 | | | | 165,107 | |
| | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 399,157 | | | $ | 277,606 | |
| | | | | | |
See Accompanying Notes to Consolidated Financial Statements.
6
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | (in thousands, except per share data) | |
Revenue | | $ | 17,799 | | | $ | 12,732 | | | $ | 45,171 | | | $ | 37,397 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Cost of revenue | | | 9,922 | | | | 6,928 | | | | 26,223 | | | | 21,078 | |
Selling, general and administrative | | | 13,253 | | | | 9,521 | | | | 33,888 | | | | 26,918 | |
Research and development | | | 4,146 | | | | 2,351 | | | | 10,330 | | | | 7,342 | |
Amortization of intangibles | | | 618 | | | | 689 | | | | 1,587 | | | | 2,183 | |
Impairment related and other | | | 2,718 | | | | 20 | | | | 2,784 | | | | 666 | |
| | | | | | | | | | | | |
Total operating expenses | | | 30,657 | | | | 19,509 | | | | 74,812 | | | | 58,187 | |
| | | | | | | | | | | | |
| | | (12,858 | ) | | | (6,777 | ) | | | (29,641 | ) | | | (20,790 | ) |
Other income (loss), net | | | 120,694 | | | | 1,792 | | | | 135,800 | | | | (108,604 | ) |
Interest income | | | 763 | | | | 366 | | | | 1,876 | | | | 937 | |
Interest expense | | | (901 | ) | | | (855 | ) | | | (2,668 | ) | | | (4,058 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes, minority interest and equity loss | | | 107,698 | | | | (5,474 | ) | | | 105,367 | | | | (132,515 | ) |
Income Tax (expense) benefit | | | (20,349 | ) | | | — | | | | (20,349 | ) | | | — | |
Minority interest | | | 626 | | | | 210 | | | | 1,867 | | | | 1,413 | |
Equity loss | | | (681 | ) | | | (1,845 | ) | | | (1,633 | ) | | | (4,655 | ) |
| | | | | | | | | | | | |
Income (loss) from continuing operations | | | 87,294 | | | | (7,109 | ) | | | 85,252 | | | | (135,757 | ) |
Gain on discontinued operations | | | — | | | | — | | | | — | | | | 3,000 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 87,294 | | | $ | (7,109 | ) | | $ | 85,252 | | | $ | (132,757 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 2.35 | | | $ | (0.19 | ) | | $ | 2.30 | | | $ | (3.85 | ) |
Discontinued operations | | | — | | | | — | | | | — | | | | 0.09 | |
| | | | | | | | | | | | |
| | $ | 2.35 | | | $ | (0.19 | ) | | $ | 2.30 | | | $ | (3.76 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Shares used in computation of basic income (loss) per share | | | 37,109 | | | | 37,003 | | | | 37,054 | | | | 35,282 | |
| | | | | | | | | | | | |
Diluted income (loss) per share | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.99 | | | $ | (0.19 | ) | | $ | 1.99 | | | $ | (3.85 | ) |
Discontinued operations | | | — | | | | — | | | | — | | | | 0.09 | |
| | | | | | | | | | | | |
| | $ | 1.99 | | | $ | (0.19 | ) | | $ | 1.99 | | | $ | (3.76 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Shares used in computation of diluted income (loss) per share | | | 44,386 | | | | 37,003 | | | | 44,006 | | | | 35,282 | |
| | | | | | | | | | | | |
See Accompanying Notes to Consolidated Financial Statements.
7
INTERNET CAPITAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | |
| | (in thousands) | |
Operating Activities | | | | | | | | |
Net income (loss) | | $ | 85,252 | | | $ | (132,757 | ) |
Adjustments to reconcile net income (loss) to cash used in operating activities | | | | | | | | |
Depreciation and amortization | | | 2,793 | | | | 3,198 | |
Impairment related and other | | | 2,784 | | | | 121 | |
Stock-based compensation | | | 2,966 | | | | 899 | |
Equity loss | | | 1,633 | | | | 4,655 | |
Other (income) loss | | | (135,800 | ) | | | 108,604 | |
Minority interest | | | (1,867 | ) | | | (1,413 | ) |
Changes in assets and liabilities, net of effect of acquisitions: | | | | | | | | |
Restricted cash | | | 526 | | | | 1,441 | |
Accounts receivable, net | | | 6,495 | | | | 6,846 | |
Prepaid expenses and other assets | | | (450 | ) | | | (3,344 | ) |
Accounts payable | | | (4,051 | ) | | | (1,763 | ) |
Income taxes payable | | | 20,349 | | | | — | |
Accrued expenses | | | (3,806 | ) | | | (235 | ) |
Deferred revenue | | | 448 | | | | (2,109 | ) |
Other liabilities | | | (466 | ) | | | (7,519 | ) |
| | | | | | |
Cash used in operating activities | | | (23,194 | ) | | | (23,350 | ) |
| | | | | | |
| | | | | | | | |
Investing Activities | | | | | | | | |
Capital expenditures, net | | | (691 | ) | | | (901 | ) |
Proceeds from sales of Partner Company ownership interests | | | 137,010 | | | | 25,354 | |
Acquisitions of ownership interests in Partner Companies, net | | | (9,504 | ) | | | (8,974 | ) |
Proceeds from sales of marketable securities | | | 16,199 | | | | 3,349 | |
Proceeds from/(purchases of) short-term investments, net | | | 52,465 | | | | (55,733 | ) |
Increase in cash due to consolidation of Partner Companies | | | 4,529 | | | | — | |
| | | | | | |
Cash provided by (used in) investing activities | | | 200,008 | | | | (36,905 | ) |
| | | | | | |
| | | | | | | | |
Financing Activities | | | | | | | | |
Issuance of senior convertible notes | | | — | | | | 60,000 | |
Redemption of convertible subordinated notes | | | — | | | | (39,541 | ) |
Repayment of long-term debt and capital lease obligations, net | | | (355 | ) | | | (6,250 | ) |
Line of credit borrowings | | | 162 | | | | 323 | |
Repayment of loans from employees/stockholders | | | — | | | | 160 | |
| | | | | | |
Cash (used in) provided by financing activities | | | (193 | ) | | | 14,692 | |
Net increase (decrease) in Cash and Cash Equivalents | | | 176,621 | | | | (45,563 | ) |
Effect of exchange rates on Cash | | | 533 | | | | 15 | |
Cash and Cash Equivalents at the beginning of period | | | 31,586 | | | | 77,581 | |
| | | | | | |
Cash and Cash Equivalents at the end of period | | $ | 208,740 | | | $ | 32,003 | |
| | | | | | |
Supplemental non-cash – See Note 8.
See Accompanying Notes to Consolidated Financial Statements.
8
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
1. The Company
Description of the Company
Internet Capital Group, Inc. (the “Company”) owns and builds 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 Company was formed in March 1996 and is headquartered in Wayne, Pennsylvania.
Although the Company refers to companies in which it has acquired a convertible debt or an equity ownership interest as its “Partner Companies” and indicates that it has a “partnership” with these companies, it does not act as an agent or legal representative for any of its Partner Companies, it does not have the power or authority to legally bind any of its Partner Companies and it does not have the types of liabilities in relation to its Partner Companies that a general partner of a partnership would have.
Pension Curtailment
During the three and nine months ended September 30, 2005, a consolidated Partner Company reduced its projected benefit obligation accrual by $0.7 million. The reduction qualified as a curtailment under Statement of Financial Accounting Standards (“SFAS”) No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and accordingly was recorded as a reduction of selling, general and administrative expenses in the Consolidated Statements of Operations.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements also include the following majority-owned subsidiaries for all or a portion of the periods indicated, each of which has been consolidated since the date the Company acquired majority voting control (collectively, the “Consolidated Subsidiaries”):
| | |
Three and Nine Months Ended |
September 30, 2005 | | September 30, 2004 |
CommerceQuest | | CommerceQuest |
ICG Commerce | | ICG Commerce |
Investor Force | | |
StarCite | | |
The Consolidated Balance Sheets include the following majority-owned subsidiaries:
| | |
September 30, 2005 | | December 31, 2004 |
CommerceQuest ICG Commerce Investor Force StarCite | | CommerceQuest ICG Commerce |
Investor Force became a consolidated Partner Company on January 1, 2005.
StarCite became a consolidated Partner Company on June 8, 2005. The results of operations data from StarCite from June 8, 2005 to June 30, 2005 were not material and were not included in the consolidated statements of operations through June 30, 2005. StarCite’s results of operations are included in the consolidated statements of operations beginning July 1, 2005.
In October 2005, CommerceQuest, a consolidated Partner Company, was acquired by Metastorm Inc. (“Metastorm”) in exchange for an equity interest in Metastorm. Beginning October 1, 2005 (see Note 3), Metastorm will be accounted for as an equity method Partner Company.
9
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. Significant Accounting Policies – (Continued)
Principles of Accounting for Ownership Interests in Partner Companies
The various interests that the Company acquires in its Partner Companies are accounted for under three methods: the consolidation method, the equity method and the cost method. The applicable accounting method is generally determined based on the Company’s voting interest in a Partner Company.
Consolidation.Partner Companies in which the Company directly or indirectly owns more than 50% of the outstanding voting securities, and for which other stockholders do not possess the right to affect significant management decisions, are accounted for under the consolidation method of accounting. Under this method, a Partner Company’s balance sheet and results of operations are reflected within the Company’s Consolidated Financial Statements. All significant intercompany accounts and transactions have been eliminated. Participation of other Partner Company stockholders in the net assets and in the earnings or losses of a consolidated Partner Company is reflected in the caption “Minority interest” in the Company’s Consolidated Balance Sheet and Statements of Operations. Minority interest adjusts the Company’s consolidated results of operations to reflect only the Company’s share of the earnings or losses of the consolidated Partner Company. The results of operations and cash flows of a consolidated Partner Company are included through the latest interim period in which the Company owned a greater than 50% direct or indirect voting interest for the entire interim period or otherwise exercised control over the Partner Company. Upon dilution of control below 50%, the accounting method is adjusted to the equity or cost method of accounting, as appropriate, for subsequent periods.
Equity Method.Partner Companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to a Partner Company depends on an evaluation of several factors, including, among others, representation on the Partner Company’s Board of Directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Partner Company, including voting rights associated with the Company’s holdings in common stock, preferred stock and other convertible instruments in the Partner Company. Under the equity method of accounting, a Partner Company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses of the Partner Company is reflected in the caption “Equity loss” in the Consolidated Statements of Operations. The carrying value of equity method Partner Companies is reflected in “Ownership interests in Partner Companies” in the Company’s Consolidated Balance Sheets.
When the Company’s investment in an equity method Partner Company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the Partner Company or has committed additional funding. When the Partner Company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Cost Method.Partner Companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such companies is not included in the Consolidated Balance Sheet or Consolidated Statements of Operations. However, cost method Partner Company impairment charges are recognized in the Consolidated Statements of Operations. If circumstances suggest that the value of the Partner Company has subsequently recovered, such recovery is not recorded.
When a cost method Partner Company qualifies for use of the equity method, the Company’s investment is adjusted retroactively for its share of the past results of its operations. Therefore, prior losses could significantly decrease the Company’s carrying value balance at that time.
The Company records its ownership interest in equity securities of Partner Companies accounted for under the cost method at cost, unless these securities have readily determinable fair values based on quoted market prices, in which case these interests are valued at fair value and classified as marketable securities or some other classification in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
10
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. Significant Accounting Policies – (Continued)
Restricted Cash
The Company considers cash legally restricted and held as a compensating balance for letter of credit arrangements as restricted cash. At September 30, 2005 and December 31, 2004, restricted cash was held primarily in money market accounts. Long-term restricted cash of $1.3 million at September 30, 2005 and $0.9 million at December 31, 2004 is included in “Other” assets on the Company’s Consolidated Balance Sheets.
Short-term Investments
Short-term investments are debt securities, principally commercial paper and certificates of deposit, maturing in less than one year, are classified as available for sale and are recorded at market value using the specific identification method. Short-term investments consisted of $5.0 million in certificates of deposit and $0.5 million in auction rate securities at September 30, 2005 and $53.9 million in commercial paper and $4.0 million in certificates of deposit at December 31, 2004.
Concentration of Customer Base and Credit Risk
Approximately 10% and 12% of the Company’s revenue for the three and nine months ended September 30, 2005, related to one customer of ICG Commerce. Accounts receivable from this customer at September 30, 2005 were $1.4 million.
Accounts Receivable/Accounts Payable
ICG Commerce provides services in which it manages the transaction between its customer and a third party supplier. In these transactions, ICG Commerce is responsible for paying the supplier for the full cost of the goods or services and the customer is responsible for paying ICG Commerce an amount, which is generally ICG Commerce’s cost plus a transaction fee, for the goods or services. ICG Commerce is typically responsible for paying the supplier independent of when and if ICG Commerce receives payment from its customer. ICG Commerce receives payment directly from its customer. ICG Commerce records the gross amount of the associated receivables and payables on the accompanying Consolidated Balance Sheets. However, ICG Commerce records the net amount of the transaction fee as revenue on the accompanying Consolidated Statements of Operations. As of September 30, 2005 and December 31, 2004, accounts receivable included approximately $3.3 million and $8.5 million, respectively, and accounts payable included $0.7 million and $4.6 million, respectively, related to such transactions.
Stock-Based Compensation
As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company measures compensation cost in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense is recorded for stock options issued to employees that are granted at fair market value. Stock options issued to non-employees are recorded at fair value at the date of grant. Fair value is determined using the Black-Scholes model and the expense is amortized over the vesting period.
In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123,” which provides optional transition guidance for those companies electing to voluntarily adopt the accounting provisions of SFAS No. 123. In addition, the statement mandates certain disclosures that are incremental to those required by SFAS No. 123. The Company has continued to account for stock-based compensation in accordance with the APB Opinion No. 25. The Company has adopted the disclosure-only provisions of SFAS No. 148.
11
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. Significant Accounting Policies – (Continued)
The following table illustrates the effect on the Company’s net income (loss) and net income (loss) per share as if the fair value based method had been applied to all outstanding and unvested awards:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (unaudited) | | | | | |
| | | | | | (in thousands) | | | | | |
Net income (loss), as reported | | $ | 87,294 | | | $ | (7,109 | ) | | $ | 85,252 | | | $ | (132,757 | ) |
Add stock-based employee compensation expense included in reported net income (loss) | | | 2,203 | | | | 388 | | | | 2,966 | | | | 1,095 | |
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards | | | (2,942 | ) | | | (2,337 | ) | | | (6,443 | ) | | | (6,938 | ) |
| | | | | | | | | | | | |
Pro forma net income (loss) | | $ | 86,555 | | | $ | (9,058 | ) | | $ | 81,775 | | | $ | (138,600 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net income (loss) per share, as reported | | $ | 2.35 | | | $ | (0.19 | ) | | $ | 2.30 | | | $ | (3.76 | ) |
Diluted net income (loss) per share, as reported | | $ | 1.99 | | | $ | (0.19 | ) | | $ | 1.98 | | | $ | (3.76 | ) |
Pro forma basic net income (loss) per share | | $ | 2.33 | | | $ | (0.24 | ) | | $ | 2.21 | | | $ | (3.93 | ) |
Proforma diluted net income (loss) per share | | $ | 1.95 | | | $ | (0.24 | ) | | $ | 1.84 | | | $ | (3.93 | ) |
The per share weighted-average fair value of options issued by the Company during the three and nine months ended September 30, 2005 and 2004 was $4.79 and $4.32 and $4.14 and $6.44, respectively.
The following assumptions were used to determine the fair value of stock options granted to employees by the Company for the three and nine months ended September 30, 2005 and 2004:
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2005 | | 2004 | | 2005 | | 2004 |
Volatility | | 60% | | 127.77% | | 60-70% | | 127.77-132.99% |
Average expected option life | | 6.25 years | | 3 years | | 6.25 years | | 3 years |
Risk-free interest rate | | 3.84-4.04% | | 2.85% | | 3.84-4.13% | | 2.26-2.85% |
Dividend yield | | 0.0% | | 0.0% | | 0.0% | | 0.0% |
The Company also includes its share of its Partner Companies’ SFAS No. 123 pro forma expense in the Company’s SFAS No. 123 pro forma expense. The methods used by the Partner Companies included the minimum value method for private Partner Companies and the Black-Scholes method for public Partner Companies.
In July 2005, the Company issued 0.8 million shares of restricted stock valued at $6.0 million to be expensed through November 2008. The restricted stock vests 25% in November 2005 and then ratibly 25% per year each November. Compensation expense totaled $1.0 million for the three months ended September 30, 2005 related to this restricted stock.
In July 2005, the Company issued 0.1 million shares of restricted stock to the Company’s non-management directors valued at $0.5 million to be expensed through February 2006. The restricted stock vests in February 2006. Compensation expense totaled $0.2 million for the three months ended September 30, 2005 related to this restricted stock.
In July 2005, the Company issued 3,600,500 stock appreciation rights (“SAR’s”) at a base price of $7.34. The SAR’s vest over four years and will be subject to variable accounting from their grant date in July 2005 through the Company’s adoption of SFAS No. 123R on January 1, 2006. Compensation expense totaled $0.7 million for the three months ended September 30, 2005 related to these SAR’s.
In July 2004, the Company issued 0.4 million shares of restricted stock valued at $2.3 million that vests over four years starting in July 2004. Compensation expense totaled $0.2 million for the three months ended September 30, 2005 related to this restricted stock.
In March 2004, the Company issued 0.3 million shares of restricted stock valued at $2.1 million that generally vests over four years with acceleration provisions based on certain operating metrics. Compensation expense for the three months ended September 30, 2005 was $0.1 million related to this restricted stock.
12
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. Significant Accounting Policies – (Continued)
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. The Company has not yet determined the actual model it will use to calculate fair value and is in the process of evaluating the impact of SFAS No. 123R on the Company's Consolidated Financial Statements. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005 and accordingly, the Company will adopt SFAS No. 123R on January 1, 2006.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The impact of these changes in not material and did not affect net loss.
3. Ownership Interests in Partner Companies, Goodwill and Intangibles, net
The following table summarizes the Company’s goodwill and intangibles, net, ownership interests in Partner Companies and impairments by method of accounting.
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2005 | | | 2004 | |
| | (unaudited) | |
| | (in thousands) | |
Goodwill | | $ | 48,613 | | | $ | 45,196 | |
Other intangibles | | | 4,947 | | | | 4,705 | |
| | | | | | |
| | $ | 53,560 | | | $ | 49,901 | |
| | | | | | |
| | | | | | | | |
Ownership interests in Partner Companies – Equity Method | | $ | 35,579 | | | $ | 45,451 | |
Ownership interests in Partner Companies – Cost Method | | | 3,836 | | | | 4,343 | |
| | | | | | |
| | $ | 39,415 | | | $ | 49,794 | |
| | | | | | |
13
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
3. Ownership Interests in Partner Companies, Goodwill and Intangibles, net – (Continued)
As of September 30, 2005 and December 31, 2004, all of the Company’s goodwill was allocated to the Core segment.
Intangible assets, net are shown in the tables below:
| | | | | | | | | | | | | | | | |
| | | | | | As of September 30, 2005 | |
| | | | | | (in thousands) | |
| | Useful | | | Gross Carrying | | | Accumulated | | | | |
Intangible Assets | | Life | | | Amount | | | Amortization | | | Net Carrying Amount | |
Technology | | 1.5-5 years
| | $ | 20,736 | | | $ | (18,064 | ) | | $ | 2,672 | |
Customer lists | | 5 years
| | | 2,498 | | | | (223 | ) | | | 2,275 | |
| | | | | | | | | | | | | |
| | | | | | $ | 23,234 | | | $ | (18,287 | ) | | $ | 4,947 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | As of December 31, 2004 | |
| | | | | | (in thousands) | |
| | Useful | | | Gross Carrying | | | Accumulated | | | Net Carrying | |
Intangible Assets | | Life | | | Amount | | | Amortization | | | Amount | |
Technology | | 2-5 years | | $ | 23,190 | | | $ | (19,231 | ) | | $ | 3,959 | |
Tradename | | Indefinite | | | 746 | | | | — | | | | 746 | |
| | | | | | | | | | | | | |
| | | | | | $ | 23,936 | | | $ | (19,231 | ) | | $ | 4,705 | |
| | | | | | | | | | | | | |
Amortization expense for intangible assets during the three and nine months ended September 30, 2005 and 2004 was $0.6 million and $1.6 million and $0.7 million and $2.2 million, respectively. Estimated amortization expense for the fiscal year ending December 31, 2005 and succeeding fiscal years is as follows (in thousands):
| | | | |
2005 (remainder) | | $ | 773 | |
2006 | | | 1,726 | |
2007 | | | 1,655 | |
2008 | | | 793 | |
| | | |
| | $ | 4,947 | |
| | | |
Acquisitions
During 2005, the Company acquired majority ownership positions in two Partner Companies, Investor Force and StarCite, which were accounted for under the purchase method of accounting. The purchase price, including the carrying value of the ownership interest for Partner Companies previously accounted for under the equity method, has been allocated to the assets and the liabilities based upon their fair values at the date of the acquisition. The increase in goodwill and other intangibles is due to the consolidation of Investor Force and StarCite. As the Company has not yet completed the allocation of purchase price for Investor Force and StarCite, the allocation could be adjusted. The Company expects to complete the allocation by December 31, 2005. The assets and liabilities for these acquisitions were allocated as follows:
| | | | | | | | |
| | Investor Force | | | StarCite | |
| | (in thousands) | |
Net Assets Acquired: | | | | | | | | |
Goodwill | | $ | 2,022 | | | $ | 3,121 | |
Other intangible assets | | | 11 | | | | 1,200 | |
Other net assets (liabilities) | | | (103 | ) | | | (1,111 | ) |
| | | | | | |
| | $ | 1,930 | | | $ | 3,210 | |
| | | | | | |
14
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
3. Ownership Interests in Partner Companies, Goodwill and Intangibles, net – (Continued)
Presented here is unaudited selected pro forma financial information had the Company consolidated StarCite for the nine months ended September 30, 2005. Revenue, net income (loss) and net income (loss) per diluted share would have been $52.8 million, $87.6 million and $1.99 per diluted share, respectively. Had the Company consolidated Investor Force and StarCite for the nine months September 30, 2004, revenue, net income (loss) and net income (loss) per diluted share would have been $49.7 million, $(134.8) million and $(3.82) per share, respectively.
Dispositions/Impairments
In October 2005, CommerceQuest, a consolidated Partner Company, was acquired by Metastorm. In exchange for an interest in CommerceQuest and as a result of a concurrent financing, the Company now owns 42% of Metastorm. Based on the estimated fair value of the Company’s ownership interest in Metastorm, the Company recorded an impairment charge of approximately $2.7 million during the three months ended September 30, 2005 related to $1.8 million of goodwill and $0.9 million of intangibles. Beginning October 1, 2005, Metastorm will be accounted for under the equity method of accounting.
The Company recorded impairments of $0.5 million for the three and nine months ended September 30, 2004 related to cost method Partner Companies.
Equity Method Companies
In September 2005, the Company sold its ownership interest in LinkShare Corporation (“LinkShare”) for approximately $150.2 million. The Company received $135.9 million in cash in September 2005 and recorded a gain of $119.7 million included in Other income (loss) (Note 12) for the three months ended September 30, 2005. The residual $14.3 million is being held in escrow until September 2006 and will result in additional gain to the extent received.
The following unaudited summarized financial information relates to the seven Partner Companies accounted for under the equity method of accounting at September 30, 2005 (voting ownership %):
Core– CreditTrade (30%), Freeborders (33%), GoIndustry (54%), Marketron (38%). Although the Company’s ownership percentage in GoIndustry exceeds 50% at September 30, 2005, the Company has not consolidated their financial statements due to the existence of certain minority voting rights in accordance with Emerging Issues Task Force (“EITF”) No. 96-16, “Investor’s Accounting for an Investee When an Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.”
Other Holdings– ComputerJobs.com (46%), Co-nect (36%) and eCredit (31%).
15
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
3. Ownership Interests in Partner Companies, Goodwill and Intangibles, net – (Continued)
Balance Sheets
| | | | | | | | | | | | |
| | As of September 30, 2005 | |
| | Core | | | Other Holdings | | | Total | |
| | | | | | (unaudited) | | | | | |
| | | | | | (in thousands) | | | | | |
Cash, cash equivalents and short-term investments | | $ | 35,194 | | | $ | 6,649 | | | $ | 41,843 | |
Other current assets | | | 37,396 | | | | 2,807 | | | | 40,203 | |
Non-current assets | | | 85,122 | | | | 5,442 | | | | 90,564 | |
| | | | | | | | | |
Total assets | | $ | 157,712 | | | $ | 14,898 | | | $ | 172,610 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 2,831 | | | $ | 1,588 | | | $ | 4,419 | |
Other current liabilities | | | 52,369 | | | | 9,666 | | | | 62,035 | |
Long-term debt | | | 6,935 | | | | 4,669 | | | | 11,604 | |
Other non-current liabilities | | | 3,592 | | | | 58 | | | | 3,650 | |
Stockholders’ equity (deficit) | | | 91,985 | | | | (1,083 | ) | | | 90,902 | |
| | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 157,712 | | | $ | 14,898 | | | $ | 172,610 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Total carrying value of current equity Partner Companies | | $ | 34,848 | | | $ | 731 | | | $ | 35,579 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | As of December 31, 2004 | |
| | Core | | | Other Holdings | | | Total | |
| | | | | | (in thousands) | | | | | |
Cash and cash equivalents | | $ | 24,868 | | | $ | 12,139 | | | $ | 37,007 | |
Other current assets | | | 30,253 | | | | 3,745 | | | | 33,998 | |
Other non-current assets | | | 92,068 | | | | 2,202 | | | | 94,270 | |
| | | | | | | | | |
Total assets | | $ | 147,189 | | | $ | 18,086 | | | $ | 165,275 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 5,407 | | | $ | 1,592 | | | $ | 6,999 | |
Current liabilities | | | 42,627 | | | | 8,851 | | | | 51,478 | |
Long-term debt | | | 8,920 | | | | 3,452 | | | | 12,372 | |
Non-current liabilities | | | 5,107 | | | | — | | | | 5,107 | |
Stockholders’ equity | | | 85,128 | | | | 4,191 | | | | 89,319 | |
| | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 147,189 | | | $ | 18,086 | | | $ | 165,275 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Total carrying value of current equity Partner Companies | | $ | 29,441 | | | $ | 871 | | | $ | 30,312 | |
Total carrying value of Partner Companies sold or no longer under the equity method | | | 15,139 | | | | — | | | | 15,139 | |
| | | | | | | | | |
Total carrying value | | $ | 44,580 | | | $ | 871 | | | $ | 45,451 | |
| | | | | | | | | |
16
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
3. Ownership interests in Partner Companies, Goodwill and Intangibles, net – (Continued)
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2005 | | | Nine Months Ended September 30, 2005 | |
| | | | | | Other | | | | | | | | | | | Other | | | | |
| | Core | | | Holdings | | | Total | | | Core | | | Holdings | | | Total | |
| | | | | | | | | | (unaudited) | | | | | | | | | |
| | | | | | | | | | (in thousands) | | | | | | | | | |
Revenue | | $ | 35,271 | | | $ | 4,801 | | | $ | 40,072 | | | $ | 105,657 | | | $ | 15,894 | | | $ | 121,551 | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (2,745 | ) | | $ | (2,043 | ) | | $ | (4,788 | ) | | $ | (2,915 | ) | | $ | (5,239 | ) | | $ | (8,154 | ) |
| | | | | | | | | | | | | | | | | | |
Components of equity loss: | | | | | | | | | | | | | | | | | | | | | | | | |
Core/Other Holdings | | $ | (1,360 | ) | | $ | (47 | ) | | $ | (1,407 | ) | | $ | (2,836 | ) | | $ | (140 | ) | | $ | (2,976 | ) |
| | | | | | | | | | | | | | | | | | | | |
Disposed/Other Partner Companies | | | | | | | | | | | 726 | | | | | | | | | | | | 1,343 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total equity loss | | | | | | | | | | $ | (681 | ) | | | | | | | | | | $ | (1,633 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2004 | | | Nine Months Ended September 30, 2004 | |
| | | | | | Other | | | | | | | | | | | Other | | | | |
| | Core | | | Holdings | | | Total | | | Core | | | Holdings | | | Total | |
| | | | | | | | | | (unaudited) | | | | | | | | | |
| | | | | | | | | | (in thousands) | | | | | | | | | |
Revenue | | $ | 27,973 | | | $ | 5,077 | | | $ | 33,050 | | | $ | 83,691 | | | $ | 16,135 | | | $ | 99,826 | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (2,953 | ) | | $ | (2,204 | ) | | $ | (5,157 | ) | | $ | (5,215 | ) | | $ | (4,989 | ) | | $ | (10,204 | ) |
| | | | | | | | | | | | | | | | | | |
Components of equity loss: | | | | | | | | | | | | | | | | | | | | | | | | |
Core/Other Holdings | | $ | (1,434 | ) | | $ | (478 | ) | | $ | (1,912 | ) | | $ | (2,754 | ) | | $ | (1,239 | ) | | $ | (3,993 | ) |
| | | | | | | | | | | | | | | | | | | | |
Public Partner Companies | | | | | | | | | | | — | | | | | | | | | | | | (436 | ) |
Disposed/Other Partner Companies | | | | | | | | | | | 67 | | | | | | | | | | | | (226 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total equity loss | | | | | | | | | | $ | (1,845 | ) | | | | | | | | | | $ | (4,655 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Warrants
The estimated fair value of warrants held in Partner Companies was approximately $2.9 million and $1.8 million at September 30, 2005 and December 31, 2004, respectively. At September 30, 2005, the majority of the value of the Company’s warrants is included in “Prepaid expenses and other current assets” in the Company’s Consolidated Balance Sheets as these warrants will expire in the next twelve months. At December 31, 2004, the value of the Company’s warrants is $0.9 million in “Prepaid expenses and other current assets” and $0.8 million in “Other” assets in the Company’s Consolidated Balance Sheet. Changes in the fair value of all outstanding warrants was a loss of $0.3 million and a gain of $1.2 million for the three and nine months ended September 30, 2005, respectively. During the three and nine months ended September 30, 2004, the fair value of all outstanding warrants decreased $0.3 million and increased $1.5 million, principally as the result of the initial public offering of Blackboard, and the Company exercised warrants with a value of $0.2 million. These gains are included in “Other income (loss), net” on the Company’s Consolidated Statements of Operations.
17
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
4. Marketable Securities
Marketable securities represent the Company’s holdings in equity securities. The cost, unrealized holding gains/(losses), and fair value of marketable securities at September 30, 2005 and December 31, 2004 were as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Unrealized | | | | |
| | Common Shares | | | | | | | Holding | | | | |
| | Owned | | | Cost | | | Gains/(Losses) | | | Fair Value | |
| | | | | | (in thousands, except shares) | | | | | |
September 30, 2005 | | | | | | | | | | | | | | | | |
Blackboard | | | 2,098,777 | | | $ | 557 | | | $ | 51,934 | | | $ | 52,491 | |
Arbinet | | | 231,128 | | | | 1,175 | | | | 489 | | | | 1,664 | |
Verticalnet | | | 2,664,294 | | | | 1,598 | | | | — | | | | 1,598 | |
Other | | | | | | | 28 | | | | 51 | | | | 79 | |
| | | | | | | | | | | | | |
| | | | | | $ | 3,358 | | | $ | 52,474 | | | $ | 55,832 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
December 31, 2004 | | | | | | | | | | | | | | | | |
Blackboard | | | 2,923,777 | | | $ | 775 | | | $ | 42,526 | | | $ | 43,301 | |
Arbinet | | | 231,128 | | | | 1,175 | | | | 4,564 | | | | 5,739 | |
Verticalnet | | | 2,917,794 | | | | 3,135 | | | | 1,563 | | | | 4,698 | |
Other | | | | | | | 107 | | | | 237 | | | | 344 | |
| | | | | | | | | | | | | |
| | | | | | $ | 5,192 | | | $ | 48,890 | | | $ | 54,082 | |
| | | | | | | | | | | | | |
The amounts reflected as the Company’s cost for Blackboard, Arbinet and Verticalnet was the carrying value on the date these Partner Companies converted to marketable securities. During the three and nine months ended September 30, 2005, the Company sold 125,000 shares and 825,000 shares of Blackboard and received proceeds of $5.3 million and $16.1 million, respectively. Proceeds include $2.3 million for a June 2005 trade that settled in July 2005. The gains on the Blackboard sales for the three and nine months ended September 30, 2005, of $3.0 million and $15.9 million, respectively, are reflected in “Other income (loss), net” in the Company’s Consolidated Statements of Operations.
During the three and nine months ended September 30, 2005, the Company recorded a $1.3 million impairment charge for the other than temporary decline in the fair market value of Verticalnet which is included in “Other Income (loss), net” in the Company’s Consolidated Statements of Operations. During the three months ended September 30, 2005, the Company sold 253,500 shares of Verticalnet and received proceeds of $0.1 million.
During the three and nine months ended September 30, 2004, the Company recorded $1.3 million and $2.9 million, respectively, in impairment charges for the other than temporary decline in the fair market value of Universal Access Global Holdings Inc. which is included in “Other Income (loss), net” in the Company’s Consolidated Statements of Operations.
5. Income Taxes
The 19% effective tax rate for the third quarter differs from the 35% statutory rate primarily due to the utilization of losses for which a valuation allowance had previously been provided. The amount of carryforward losses that the Company was permitted to utilize was limited due to the change in ownership experienced by the Company in 2004.
At September 30, 2005, the Company had net operating loss carry forwards of approximately $398 million that may be used to offset future taxable income, all of which are subject to significant limitations on their utilization due to ownership changes experienced by the Company and certain consolidated Partner Companies. The annual limitation on the utilization of net operating loss carry forwards is approximately $13 million. If the Company does not have sufficient taxable income to use the $13 million annual limitation, the difference is available to the Company for utilization in subsequent years. These carry forwards expire between 2008 and 2024. Additional limitations on the utilization of these carry forwards may be imposed if the Company experiences another change in ownership.
A valuation allowance has been provided for in the Company’s net deferred tax asset as the Company believes, after evaluating all positive and negative evidence, historical and prospective, that it is more likely than not that these benefits will not be realized.
18
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
6. Net Income (Loss) per Share
The calculations of Net Income (Loss) per Share were:
The calculations of net income (loss) per share were:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (unaudited) | | | | | |
| | | | | | (in thousands, except per share data) | | | | | |
Basic and Diluted: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 87,294 | | | $ | (7,109 | ) | | $ | 85,252 | | | $ | (135,757 | ) |
Income on discontinued operations | | | — | | | | — | | | | — | | | | 3,000 | |
| | | | | | | | | | | | |
Net income (loss) — Basic | | $ | 87,294 | | | $ | (7,109 | ) | | $ | 85,252 | | | $ | (132,757 | ) |
| | | | | | | | | | | | |
Interest expense — convertible debt | | | 846 | | | | — | | | | 2,483 | | | | — | |
| | | | | | | | | | | | |
Net income (loss) — Diluted | | $ | 88,140 | | | $ | (7,109 | ) | | $ | 87,735 | | | $ | (132,757 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations per share | | $ | 2.35 | | | $ | (0.19 | ) | | $ | 2.30 | | | $ | (3.85 | ) |
Income (loss) on discontinued operations per share | | | — | | | | — | | | | — | | | | 0.09 | |
| | | | | | | | | | | | |
Net income (loss) per share | | $ | 2.35 | | | $ | (0.19 | ) | | $ | 2.30 | | | $ | (3.76 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations per share | | $ | 1.99 | | | $ | (0.19 | ) | | $ | 1.99 | | | $ | (3.85 | ) |
Income (loss) on discontinued operations per share | | | — | | | | — | | | | — | | | | 0.09 | |
| | | | | | | | | | | | |
Net income (loss) per share | | $ | 1.99 | | | $ | (0.19 | ) | | $ | 1.99 | | | $ | (3.76 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic weighted average common shares outstanding | | | 37,108,958 | | | | 37,002,623 | | | | 37,053,895 | | | | 35,282,065 | |
| | | | | | | | | | | | |
Stock options | | | 45,249 | | | | — | | | | 39,094 | | | | — | |
Restricted stock | | | 607,976 | | | | — | | | | 311,892 | | | | — | |
Warrants | | | 2,897 | | | | — | | | | 2,108 | | | | — | |
SARs | | | 33,516 | | | | — | | | | 11,172 | | | | — | |
Convertible debt | | | 6,587,621 | | | | — | | | | 6,587,621 | | | | — | |
| | | | | | | | | | | | |
Diluted weighted average common shares outstanding | | | 44,386,217 | | | | 37,002,623 | | | | 44,005,782 | | | | 35,282,065 | |
| | | | | | | | | | | | |
The following dilutive securities were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive:
| | | | | | | | |
| | | | | | Weighted Average |
| | Shares | | price per share |
Three and nine months ended September 30, 2005 | | | | | | | | |
Stock options (for the three months ended September 30, 2005) | | | 590,245 | | | $ | 44.67 | |
Stock options (for the nine months ended September 30, 2005) | | | 605,295 | | | $ | 43.75 | |
Stock options (exercised with partial recourse loans) | | | 756,128 | | | $ | 41.70 | |
Warrants | | | 9,450 | | | $ | 100.00 | |
| | | | | | | | |
Three and nine months ended September 30, 2004 | | | | | | | | |
Stock options | | | 784,164 | | | $ | 37.68 | |
Stock options (exercised with partial recourse loans) | | | 766,128 | | | $ | 41.70 | |
Restricted stock | | | 627,828 | | | $ | — | |
Senior convertible notes | | | 6,587,621 | | | $ | 9.11 | |
Warrants | | | 26,521 | | | $ | 189.27 | |
19
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
7. Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from non-owner sources. Excluding net loss, the Company’s primary source of comprehensive income (loss) is net unrealized holding gains (losses) related to its marketable securities. The following summarizes the components of comprehensive loss:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (unaudited) | | | | | |
| | | | | | (in thousands) | | | | | |
Net income (loss) | | $ | 87,294 | | | $ | (7,109 | ) | | $ | 85,252 | | | $ | (132,757 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Unrealized holding gains (losses) in marketable securities | | | 2,185 | | | | (10,785 | ) | | | 18,004 | | | | 48,460 | |
Reclassification adjustments/realized net gains on marketable securities | | | (1,554 | ) | | | 1,257 | | | | (14,421 | ) | | | 630 | |
Other accumulated other comprehensive income | | | 167 | | | | — | | | | 368 | | | | — | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 88,092 | | | $ | (16,637 | ) | | $ | 89,203 | | | $ | (83,667 | ) |
| | | | | | | | | | | | |
8. Debt
Senior Convertible Notes
In April 2004, the Company issued $60.0 million of senior convertible notes. The notes bear interest at an annual rate of 5%, are payable semi-annually, and mature in April 2009. The notes are convertible at the option of the holder, at any time on or before maturity, into shares of the Company’s common stock at a conversion price of $9.108 per share. Additionally, subsequent to October 8, 2004, provided that at the time of redemption the Company is in compliance with certain other requirements, the notes may be redeemed by the Company if the Company’s closing stock price exceeds $15.94 per share for at least 20 out of 30 consecutive trading days. The Company recorded interest expense of $0.8 million and $2.2 million for the three and nine months ended September 30, 2005 and $0.7 million and $1.4 million for the three and nine months ended September 30, 2004, respectively related to these notes. Deferred financing fees related to the senior convertible notes of $1.6 million are being amortized over the life of the notes. Included in “Other assets” in the accompanying Consolidated Balance Sheets at September 30, 2005 and December 31, 2004 were $1.2 million and $1.5 million, respectively, of deferred financing fees. The Company expensed $0.1 million and $0.3 million, respectively, relating to these fees in the three and nine months ended September 30, 2005 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2004, respectively.
In October 2005, the Company repurchased $20.0 million of principal amount of the April 2009 senior convertible notes for $24.7 million in cash. The Company will record an approximate $5.1 million loss on the repurchase during the three months ended December 31, 2005 including approximately $0.4 million relating to the acceleration of deferred financing fees. The principal amount outstanding of the notes at November 4, 2005 is $40.0 million.
Convertible Subordinated Notes
In December 1999, the Company issued $566.3 million of convertible subordinated notes. The notes bore interest at an annual rate of 5.5% and were scheduled to mature in December 2004. From 2001 through March 31, 2004, the Company repurchased and extinguished $527.2 million of the original $566.3 million face value of convertible notes for $89.8 million in cash and 23.2 million shares of the Company’s common stock in a series of separate transactions. As of March 31, 2004, the remaining balance of the convertible notes was $39.1 million. In June 2004, the Company redeemed for cash the remaining $39.1 million face value of convertible notes for $39.5 million, recognizing a $0.4 million loss on the early redemption included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations.
20
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
8. Debt – (Continued)
The following tables summarize the Company’s debt-for-equity exchanges:
| | | | |
| | Three Months Ended | |
| | March 31, 2004 | |
Debt-for-equity exchanges | | | | |
Face value of convertible subordinated notes exchanged | | $ | 134,808 | |
| | | |
Shares of common stock issued for debt exchange | | | 15,887 | |
| | | |
Fair value of common stock issued | | $ | (133,264 | ) |
Fair value of common stock issued-original terms | | | 449 | |
Accrued interest | | | 790 | |
Other expenses | | | (534 | ) |
| | | |
Expense recorded | | $ | (132,559 | ) |
| | | |
The expense recorded above is included in “Other income (loss), net” in the Company’s Consolidated Statements of Operations.
The debt-for-equity exchanges were accounted for in accordance with SFAS No. 84, “Induced Conversions of Convertible Debt,” and accordingly the Company recorded expense equal to the fair value of the shares issued in excess of the fair value of the shares issuable pursuant to the original conversion terms, less accrued interest. Also, additional paid-in capital increased by the face value of the convertible notes exchanged and the fair value of the shares issued in excess of the shares issuable pursuant to the original terms.
The Company recorded interest expense of $1.6 million, during the nine months ended September 30, 2004, related to these notes. Additionally, the Company recorded an expense of $0.6 million related to deferred financing fees for the nine months ended September 30, 2004.
Loan and Credit Agreements
On September 30, 2002, the Company entered into a loan agreement with Comerica Bank to provide for the issuance of letters of credit (the “Loan Agreement”). The Loan Agreement provided for issuances of letters of credit up to $20 million subject to a cash-secured borrowing base as defined by the Loan Agreement. The Loan Agreement was extended to December 14, 2005, and the maximum amount of letters of credit authorized to be issued was reduced to $10 million. Issuance fees of 0.50% per annum of the face amount of each letter of credit will be paid to Comerica Bank subsequent to issuance. The Loan Agreement also is subject to a 0.25% per annum unused commitment fee payable to the bank quarterly. No amounts were outstanding at September 30, 2005 or December 31, 2004.
Other Debt
At September 30, 2005, StarCite has other debt of $3.3 million which principally consists of notes payable of $3.0 million that bear interest at an annual rate of 6.0% and mature in May 2009.
During the nine months ended September 30, 2004, the Company settled $6.2 million of principal and $2.3 million of accrued interest relating to secured notes of a consolidated Partner Company for a total of $6.9 million in cash. The resulting $1.6 million gain is reflected in “Other income (loss), net” on the Company’s Consolidated Statements of Operations.
21
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
9. Discontinued Operations
During June 2004, the Company received additional proceeds from the sale of the assets of Delphion, Inc. of $3.0 million after expiration of an indemnification period. The gain is reflected in “Gain on discontinued operations” in the Company’s Consolidated Statements of Operations.
10. Segment Information
The Company’s reportable segments using the “management approach” under SFAS No. 131, “Disclosure About Segments of a Business Enterprise and Related Information,” consist of two operating segments, the core (“Core”) operating segment and the other holdings (“Other Holdings”) operating segment. Each segment includes the results of the Company’s Consolidated Partner Companies and records the Company’s share of earnings and losses of Partner Companies accounted for under the equity method of accounting and captures the Company’s basis in the assets of all of its partner companies. Any marketable securities are considered “Corporate” assets whereas, prior to becoming marketable securities, the Partner Company would have been included in the Core or Other Holdings category.
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 Other Holdings operating segment includes holdings in companies where, in general, the Company provides less operational support, does not have a controlling ownership stake and the partner company is managed to provide the greatest near-term stockholder value.
Approximately 14% and 16% of the Company’s consolidated revenue for the three and nine months ended September 30, 2005, and 25% and 22% for the three and nine months ended September 30, 2004, respectively, relates to sales generated in Germany. Approximately 6% and 5% of the Company’s consolidated revenue for the three and nine months ended September 30, 2005, and 11% and 12% for the three and nine months ended September 30, 2004, respectively, relates to sales generated in the United Kingdom. The remainder of the Company’s consolidated revenue for the three and nine months ended September 30, 2005 and 2004, relates to sales generated in the United States. As of September 30, 2005 and December 31, 2004, the Company’s assets were primarily located in the United States.
22
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
10. Segment Information – (Continued)
The following summarizes the selected information related to the Company’s segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment Information |
(in thousands) |
| | | | | | | | | | | | | | Reconciling Items | | |
| | | | | | | | | | | | | | Discontinued | | | | | | | | | | |
| | | | | | | | | | Total | | Operations and | | | | | | | | | | Consolidated |
| | Core | | Other Holdings | | Segment | | Dispositions | | Corporate | | Other | | Results |
Three Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 17,799 | | | $ | — | | | $ | 17,799 | | | $ | — | | | $ | — | | | $ | — | | | $ | 17,799 | |
Net income (loss) | | $ | (6,252 | ) | | $ | (47 | ) | | $ | (6,299 | ) | | $ | 726 | | | $ | (5,708 | ) | | $ | 98,575 | * | | $ | 87,294 | |
Assets | | $ | 132,467 | | | $ | 4,567 | | | $ | 137,034 | | | $ | — | | | $ | 262,123 | | | $ | — | | | $ | 399,157 | |
Capital expenditures | | $ | (229 | ) | | $ | — | | | $ | (229 | ) | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | (232 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 12,732 | | | $ | — | | | $ | 12,732 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,732 | |
Net loss | | $ | (4,324 | ) | | $ | (478 | ) | | $ | (4,802 | ) | | $ | 152 | | | $ | (4,422 | ) | | $ | 1,963 | * | | $ | (7,109 | ) |
Assets | | $ | 130,030 | | | $ | 7,512 | | | $ | 137,542 | | | $ | 14,006 | | | $ | 130,088 | | | $ | — | | | $ | 281,636 | |
Capital expenditures | | $ | (134 | ) | | $ | — | | | $ | (134 | ) | | $ | — | | | $ | (4 | ) | | $ | — | | | $ | (138 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 45,171 | | | $ | — | | | $ | 45,171 | | | $ | — | | | $ | — | | | $ | — | | | $ | 45,171 | |
Net income (loss) | | $ | (18,294 | ) | | $ | (140 | ) | | $ | (18,434 | ) | | $ | 2,144 | | | $ | (13,211 | ) | | $ | 114,753 | * | | $ | 85,252 | |
Assets | | $ | 132,467 | | | $ | 4,567 | | | $ | 137,034 | | | $ | — | | | $ | 262,123 | | | $ | — | | | $ | 399,157 | |
Capital expenditures | | $ | (565 | ) | | $ | — | | | $ | (565 | ) | | $ | — | | | $ | (126 | ) | | $ | — | | | $ | (691 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 37,397 | | | $ | — | | | $ | 37,397 | | | $ | — | | | $ | — | | | $ | — | | | $ | 37,397 | |
Net income (loss) | | $ | (13,502 | ) | | $ | (1,239 | ) | | $ | (14,741 | ) | | $ | 3,121 | | | $ | (13,816 | ) | | $ | (107,321) | * | | $ | (132,757 | ) |
Assets | | $ | 130,030 | | | $ | 7,512 | | | $ | 137,542 | | | $ | 14,006 | | | $ | 130,088 | | | $ | — | | | $ | 281,636 | |
Capital expenditures | | $ | (760 | ) | | $ | — | | | $ | (760 | ) | | $ | — | | | $ | (141 | ) | | $ | — | | | $ | (901 | ) |
| | |
* | | Other reconciling items to net income (loss) are as follows: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
Minority interest | | $ | 626 | | | $ | 210 | | | $ | 1,867 | | | $ | 1,413 | |
Impairments (Note 3) | | | (2,697 | ) | | | (457 | ) | | | (2,697 | ) | | | (457 | ) |
Other income (loss) (Note 12) | | | 120,995 | | | | 2,210 | | | | 135,932 | | | | (108,277 | ) |
Income tax expense | | | (20,349 | ) | | | — | | | | (20,349 | ) | | | — | |
| | | | | | | | | | | | |
| | $ | 98,575 | | | $ | 1,963 | | | $ | 114,753 | | | $ | (107,321 | ) |
| | | | | | | | | | | | |
23
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
11. Parent Company Financial Information
Parent company financial information is provided to present the financial position and results of operations of the Company and its wholly-owned subsidiaries as if the Partner Companies accounted for under the consolidation method of accounting were accounted for under the equity method of accounting for all applicable periods presented. The Company’s share of the consolidated Partner Companies’ losses is included in “Equity loss” in the Parent Company Statements of Operations for all periods presented based on the Company’s ownership percentage in each period. The carrying value of the consolidated companies as of September 30, 2005 and December 31, 2004 is included in “Ownership interests in Partner Companies” in the Parent Company Balance Sheets.
Parent Company Balance Sheets
| | | | | | | | |
| | As of September 30, 2005 | | | As of December 31, 2004 | |
| | (unaudited) | | | | | |
| | (in thousands) | |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 193,794 | | | $ | 9,345 | |
Short-term investments | | | — | | | | 57,940 | |
Other current assets | | | 6,635 | | | | 2,746 | |
| | | | | | |
Current assets | | | 200,429 | | | | 70,031 | |
Ownership interests in Partner Companies | | | 90,130 | | | | 105,428 | |
Marketable securities | | | 55,832 | | | | 54,082 | |
Other | | | 2,933 | | | | 5,498 | |
| | | | | | |
Total assets | | $ | 349,324 | | | $ | 235,039 | |
| | | | | | |
| | | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | |
Current portion of senior convertible notes | | $ | 20,000 | | | $ | — | |
Current liabilities | | | 29,608 | | | | 9,932 | |
Senior convertible notes | | | 40,000 | | | | 60,000 | |
Stockholders’ equity | | | 259,716 | | | | 165,107 | |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 349,324 | | | $ | 235,039 | |
| | | | | | |
Parent Company Statements of Operations
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (unaudited) | | | | | |
| | | | | | (in thousands) | | | | | |
Revenue | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Operating expenses | | | | | | | | | | | | | | | | |
General and administrative | | | 5,474 | | | | 3,892 | | | | 12,249 | | | | 10,241 | |
Impairment related and other | | | — | | | | — | | | | — | | | | 546 | |
| | | | | | | | | | | | |
Total operating expenses | | | 5,474 | | | | 3,892 | | | | 12,249 | | | | 10,787 | |
| | | | | | | | | | | | |
| | | (5,474 | ) | | | (3,892 | ) | | | (12,249 | ) | | | (10,787 | ) |
Other income (loss), net | | | 118,298 | | | | 1,753 | | | | 133,235 | | | | (105,734) | * |
Interest expense, net | | | (234 | ) | | | (559 | ) | | | (962 | ) | | | (3,058 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes and equity loss | | | 112,590 | | | | (2,698 | ) | | | 120,024 | | | | (119,579 | ) |
| | | | | | | | | | | | |
Income tax (expense) benefit | | | (20,349 | ) | | | — | | | | (20,349 | ) | | | — | |
Equity loss | | | (4,947 | ) | | | (4,411 | ) | | | (14,423 | ) | | | (13,178 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | 87,294 | | | $ | (7,109 | ) | | $ | 85,252 | | | $ | (132,757 | ) |
| | | | | | | | | | | | |
| | |
* | | For purposes of Parent Company reporting, the $3.0 million gain from discontinued operations (See Note 9) is included in “Other income (loss), net.” |
24
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
11. Parent Company Financial Information – (Continued)
Parent Company Statements of Cash Flows
| | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | |
| | (unaudited) | |
| | (in thousands) | |
Operating Activities | | | | | | | | |
Net income (loss) | | $ | 85,252 | | | $ | (132,757 | ) |
Adjustments to reconcile net income (loss) to cash used in operating activities | | | | | | | | |
Depreciation and amortization | | | 103 | | | | 49 | |
Stock-based compensation | | | 2,958 | | | | 899 | |
Equity loss | | | 14,423 | | | | 13,178 | |
Other (income) loss | | | (133,235 | ) | | | 108,734 | |
Changes in assets and liabilities, net of effect of acquisitions: | | | | | | | | |
Restricted cash | | | — | | | | 850 | |
Prepaid expenses and other assets | | | 335 | | | | (2,709 | ) |
Accounts payable | | | 53 | | | | (110 | ) |
Income taxes payable | | | 20,349 | | | | — | |
Accrued expenses | | | (778 | ) | | | 1,187 | |
Other liabilities | | | — | | | | (1,088 | ) |
| | | | | | |
Net cash used in operating activities | | | (10,540 | ) | | | (11,767 | ) |
| | | | | | | | |
Investing Activities | | | | | | | | |
Capital expenditures, net | | | (126 | ) | | | (141 | ) |
Proceeds from sales of ownership interests in Partner Companies | | | 137,010 | | | | 25,354 | |
Acquisitions of ownership interests in Partner Companies | | | (16,034 | ) | | | (20,002 | ) |
Proceeds from sales of marketable securities | | | 16,199 | | | | 3,349 | |
Proceeds from / (purchases of) short-term investments, net | | | 57,940 | | | | (55,733 | ) |
| | | | | | |
Net cash provided by (used in) investing activities | | | 194,989 | | | | (47,173 | ) |
| | | | | | | | |
Financing Activities | | | | | | | | |
Issuance of senior convertible notes | | | — | | | | 60,000 | |
Redemption of convertible subordinated notes | | | — | | | | (39,541 | ) |
Repayment of loans from employees/stockholders | | | — | | | | 160 | |
| | | | | | |
Net cash provided by financing activities | | | — | | | | 20,619 | |
| | | | | | |
Net increase (decrease) in Cash and Cash Equivalents | | | 184,449 | | | | (38,321 | ) |
Cash and cash equivalents at beginning of period | | | 9,345 | | | | 49,771 | |
| | | | | | |
Cash and Cash Equivalents at end of period | | $ | 193,794 | | | $ | 11,450 | |
| | | | | | |
25
INTERNET CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
12. Other Income (Loss), Net
Other income (loss), net consists of the effect of transactions and other events incidental to the Company’s ownership interests in its Partner Companies and its operations in general.
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (unaudited) | | | | | |
| | | | | | (in thousands) | | | | | |
Income (loss) arising from: | | | | | | | | | | | | | | | | |
Gain on LinkShare sale – Note 3 | | $ | 119,753 | | | $ | — | | | $ | 119,753 | | | $ | — | |
Debt extinguishments – Note 8 | | | — | | | | — | | | | — | | | | (133,158 | ) |
Sales of Marketable securities – Note 4 | | | 2,895 | | | | 3,349 | | | | 15,763 | | | | 3,349 | |
Warrants – Note 3 | | | (338 | ) | | | (307 | ) | | | 1,191 | | | | 1,479 | |
Sales of Partner Companies | | | 27 | | | | 412 | | | | 567 | | | | 22,289 | |
Impairments of SFAS 115 securities – Note 4 | | | (1,342 | ) | | | (1,257 | ) | | | (1,342 | ) | | | (2,869 | ) |
Settlement of Consolidated Partner Company debt -Note 8 | | | — | | | | — | | | | — | | | | 1,593 | |
Other | | | — | | | | (444 | ) | | | — | | | | (1,417 | ) |
| | | | | | | | | | | | |
| | | 120,995 | | | | 1,753 | | | | 135,932 | | | | (108,734 | ) |
Total other income (expense) for Consolidated Partner Companies | | | (301 | ) | | | 39 | | | | (132 | ) | | | 130 | |
| | | | | | | | | | | | |
| | $ | 120,694 | | | $ | 1,792 | | | $ | 135,800 | | | $ | (108,604 | ) |
| | | | | | | | | | | | |
During the three and nine months ended September 30, 2005 and 2004, the Company sold its ownership interests in various Partner Companies in exchange for cash and contingent consideration. The gain of $0.6 million in the nine months ended September 30, 2005 primarily relates to the sale of ClearCommerce Corporation, iSky, Inc. and Syncra Systems, Inc. The gain of $22.3 million in 2004 primarily relates to the sale of the Company’s ownership interests in eMerge Interactive, Inc., Onvia.com, Inc. and iSky, Inc.
26
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 owns and builds 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 September 30, 2005, are consistently the same 22 partner companies for the three months ended September 30, 2005 and 2004 periods.
27
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
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2005 | | | December 31, 2004 | |
| | ICG Parent | | | Consolidated | | | | | | | ICG Parent | | | Consolidated | | | | |
| | Company Level | | | Subsidiaries | | | Total | | | Company Level | | | Subsidiaries | | | Total | |
| | | | | | | | | | (in thousands) | | | | | | | | | |
Cash and cash equivalents | | $ | 193,794 | | | $ | 14,946 | | | $ | 208,740 | | | $ | 9,345 | | | $ | 22,241 | | | $ | 31,586 | |
Restricted Cash(1) | | | — | | | | 1,037 | | | | 1,037 | | | | — | | | | 999 | | | | 999 | |
Short-term investments | | | — | | | | 5,475 | | | | 5,475 | | | | 57,940 | | | | — | | | | 57,940 | |
| | | | | | | | | | | | | | | | | | |
| | $ | 193,794 | | | $ | 21,458 | | | $ | 215,252 | | | $ | 67,285 | | | $ | 23,240 | | | $ | 90,525 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Marketable securities | | $ | 55,832 | | | $ | — | | | $ | 55,832 | | | $ | 54,082 | | | $ | — | | | $ | 54,082 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Senior convertible notes due April 2009(2) | | $ | (60,000 | ) | | $ | — | | | $ | (60,000 | ) | | $ | (60,000 | ) | | $ | — | | | $ | (60,000 | ) |
| | |
(1) | | Restricted cash at September 30, 2005 and December 31, 2004 does not include $1,297 and $893, respectively, of long-term restricted cash included in “Other” assets on the Company’s Consolidated balance sheets. |
|
(2) | | In October 2005, we repurchased $20.0 million of principal amount of the senior convertible notes due April 2009 for $24.7 million in cash. The remaining principal balance at November 4, 2005 totals $40.0 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 marketable securities and partner companies to be sufficient to fund our cash requirements for the foreseeable future, including future commitments to partner companies, debt obligations and general operations requirements. At September 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.
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Consolidated working capital increased to $159.9 million at September 30, 2005 from $77.7 million at December 31, 2004 primarily due to cash proceeds from the LinkShare sale.
Summary of Statements of Cash Flows
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2005 | | 2004 |
| | (in thousands) |
Net cash used in operating activities | | $ | (23,194 | ) | | $ | (23,350 | ) |
Net cash provided by (used in) investing activities | | $ | 200,008 | | | $ | (36,905 | ) |
Net cash (used in) provided by financing activities | | $ | (193 | ) | | $ | 14,692 | |
Net cash used in operating activities was approximately $23.2 million for the nine months ended September 30, 2005, compared to $23.4 million during the comparable 2004 period. The decrease in cash used in operating activities is primarily the result of the reduced operating losses in the 2005 period.
Net cash provided by investing activities for the nine months ended September 30, 2005 was $200.0 million versus net cash used in investing activities of $36.9 million during the comparable 2004 period. The increase in cash provided by investing activities is primarily due to an increase in cash proceeds related to partner company dispositions, sales of marketable securities and sales of short-term investments in the 2005 period over the 2004 period.
Net cash provided by financing activities decreased $14.9 million for the nine months ended September 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 that the ultimate liability with respect to these actions will materially affect our financial position or cash flows.
Contractual Cash Obligations and Commercial Commitments
At September 30, 2005, due to increased ownership at StarCite and Investor Force, we have increased our contractual cash obligations and commercial commitments as compared to the information that is disclosed in our Form 10-K for the fiscal year ended December 31, 2004.
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 September 30, 2005, we owned interests in 22 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 (33%) | | |
Investor Force (75%) | | GoIndustry (54%) | | |
StarCite (61%) | | Marketron (38%) | | |
| | |
* | | CommerceQuest sold its assets to Metastorm on October 5, 2005. As of October 5, 2005, we have a 42% ownership interest in Metastorm. |
| | | | |
OTHER HOLDINGS COMPANIES (%Voting Interest) |
Consolidated | | Equity | | Cost |
| | ComputerJobs.com (46%) | | Anthem (9%) |
| | Co-nect (36%) | | Arbinet(1) |
| | eCredit (31%) | | Blackboard(2) |
| | | | Captive Capital (5%) |
| | | | Emptoris (7%) |
| | | | Entegrity Solutions (2%) |
| | | | FoodLink Online (13%) |
| | | | Jamcracker (2%) |
| | | | Tibersoft (5%) |
| | | | Traffic.com (4%) |
| | | | Verticalnet(3) |
| | |
(1) | | As of September 30, 2005, we own 231,128 shares of Arbinet (see “Note 4 — Marketable Securities” to Consolidated Financial Statements.) |
|
(2) | | As of September 30, 2005, we own 2,098,777 shares of Blackboard (see “Note 4 — Marketable Securities” to Consolidated Financial Statements.) |
|
(3) | | As of September 30, 2005, we own 2,664,294 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 22 partner companies for the three and nine months ended September 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 | | | | | | | | | | |
| | | | | | | | | | Total | | Operations and | | | | | | | | | | Consolidated |
| | Core | | Other Holdings | | Segment | | Dispositions | | Corporate | | Other | | Results |
For The Three Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 17,799 | | | $ | — | | | $ | 17,799 | | | $ | — | | | $ | — | | | $ | — | | | $ | 17,799 | |
Net income (loss) | | $ | (6,252 | ) | | $ | (47 | ) | | $ | (6,299 | ) | | $ | 726 | | | $ | (5,708 | ) | | $ | 98,575 | | | $ | 87,294 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For The Three Months Ended September 30, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 12,732 | | | $ | — | | | $ | 12,732 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,732 | |
Net income (loss) | | $ | (4,324 | ) | | $ | (478 | ) | | $ | (4,802 | ) | | $ | 152 | | | $ | (4,422 | ) | | $ | 1,963 | | | $ | (7,109 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For The Nine Months Ended September 30, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 45,171 | | | $ | — | | | $ | 45,171 | | | $ | — | | | $ | — | | | $ | — | | | $ | 45,171 | |
Net income (loss) | | $ | (18,294 | ) | | $ | (140 | ) | | $ | (18,434 | ) | | $ | 2,144 | | | $ | (13,211 | ) | | $ | 114,753 | | | $ | 85,252 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For The Nine Months Ended September 30, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 37,397 | | | $ | — | | | $ | 37,397 | | | $ | — | | | $ | — | | | $ | — | | | $ | 37,397 | |
Net income (loss) | | $ | (13,502 | ) | | $ | (1,239 | ) | | $ | (14,741 | ) | | $ | 3,121 | | | $ | (13,816 | ) | | $ | (107,321 | ) | | $ | (132,757 | ) |
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For the Three and Nine Months Ended September 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 | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
Selected data: | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (in thousands) | | | | | |
Revenue | | $ | 17,799 | | | $ | 12,732 | | | $ | 45,171 | | | $ | 37,397 | |
| | | | | | | | | | | | |
Cost of revenue | | | (9,922 | ) | | | (6,928 | ) | | | (26,223 | ) | | | (21,078 | ) |
Selling, general and administrative | | | (7,779 | ) | | | (5,658 | ) | | | (21,639 | ) | | | (16,706 | ) |
Research and development | | | (4,146 | ) | | | (2,351 | ) | | | (10,330 | ) | | | (7,342 | ) |
Amortization of other intangibles | | | (618 | ) | | | (689 | ) | | | (1,587 | ) | | | (2,183 | ) |
Impairment related and other | | | (21 | ) | | | (20 | ) | | | (87 | ) | | | (120 | ) |
| | | | | | | | | | | | |
Operating expenses | | | (22,486 | ) | | | (15,646 | ) | | | (59,866 | ) | | | (47,429 | ) |
| | | | | | | | | | | | |
Interest and other | | | (205 | ) | | | 109 | | | | 38 | | | | 67 | |
Equity loss | | | (1,360 | ) | | | (1,519 | ) | | | (3,637 | ) | | | (3,537 | ) |
| | | | | | | | | | | | |
Net loss | | $ | (6,252 | ) | | $ | (4,324 | ) | | $ | (18,294 | ) | | $ | (13,502 | ) |
| | | | | | | | | | | | |
Revenue
Revenue increased $5.1 million from $12.7 million in the quarter ended September 30, 2004 to $17.8 million in the quarter ended September 30, 2005. The consolidation of Investor Force and StarCite in 2005 increased revenue $4.5 million, versus the corresponding 2004 quarter. ICG Commerce’s revenue increased $0.7 million due to increased demand for outsourced procurement services in the United States market offset by continued weakness in the European market. The residual decrease is due to reduced software sales at CommerceQuest.
Revenue increased $7.8 million from $37.4 million year to date September 30, 2004 to $45.2 million year to date September 30, 2005. The consolidation of Investor Force and StarCite in 2005 increased revenue $6.3 million versus the corresponding 2004 nine month period. ICG Commerce’s revenue increased by $4.1 million due to increased demand for outsourced procurement services in the United States market offset by continued weakness in the European market. The residual decrease is due to reduced software sales at CommerceQuest.
Operating Expenses
Operating expenses increased $6.9 million from $15.6 million in the quarter ended September 30, 2004 to $22.5 million in the quarter ended September 30, 2005. The consolidation of Investor Force and StarCite in 2005 increased operating expenses $7.0 million, versus the corresponding 2004 period. ICG Commerce increased operating expenses by $0.4 million to respond to increased demand for their services. The residual decrease is due to CommerceQuest as they reacted to the challenging environment for enterprise software sales.
Operating expenses increased $12.5 million from $47.4 million year to date September 30, 2004 to $59.9 million year to date September 30, 2005. The consolidation of Investor Force and StarCite in 2005 increased operating expenses $11.0 million, versus the corresponding 2004 nine month period. ICG Commerce increased operating expenses by $1.7 million to respond to increased demand for their services. The residual decrease is due to CommerceQuest as they reacted to the challenging environment for enterprise software sales.
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Equity Loss
The total revenue of our four Core equity method partner companies improved from $28.0 million in the three months ended September 30, 2004 to $35.3 million in the three months ended September 30, 2005. The improvements are primarily the result of increased revenue at our partner companies involved with credit derivatives, online auctions and offshore IT outsourcing offset by reduced revenue at our partner companies involved with enterprise software sales.
The total revenue of our four Core equity method partner companies improved from $83.7 million in the nine months ended September 30, 2004 to $105.7 million in the nine months ended September 30, 2005. The improvements are primarily the result of increased revenue at our partner companies involved with credit derivatives and offshore IT outsourcing offset by reduced revenue at our partner companies involved with online auctions and enterprise software sales.
Our four Core equity companies reported aggregate net loss of $(2.7) million in the three months ended September 30, 2005 compared to net loss of $(3.0) 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. Our share of the results of these partner companies increased in the three months ended September 30, 2005 versus the 2004 period primarily due to increased operating losses at those partner companies where our ownership level is higher.
Our four Core equity companies reported aggregate net loss of $(2.9) million in the nine months ended September 30, 2005 compared to net loss of less than $(5.2) 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 nine months ended September 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 September 30, | | | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (in thousands) | | | | | |
Equity loss | | $ | (47 | ) | | $ | (478 | ) | | $ | (140 | ) | | $ | (1,239 | ) |
| | | | | | | | | | | | |
Equity loss decreased period over period primarily as a result of our carrying value being reduced to zero in one of these partner companies in the 2005 periods versus 2004.
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 | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (in thousands) | | | | | |
Net income attributable to discontinued operations | | $ | — | | | $ | — | | | $ | — | | | $ | 3,000 | |
Net income (loss) attributable to equity method companies disposed of | | | 726 | | | | 152 | | | | 2,144 | | | | 121 | |
| | | | | | | | | | | | |
| | $ | 726 | | | $ | 152 | | | $ | 2,144 | | | $ | 3,121 | |
| | | | | | | | | | | | |
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Corporate
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (in thousands) | | | | | |
General and administrative | | $ | (5,474 | ) | | $ | (3,863 | ) | | $ | (12,249 | ) | | $ | (10,212 | ) |
Impairment related and other | | | — | | | | — | | | | — | | | | (546 | ) |
Interest expense, net | | | (234 | ) | | | (559 | ) | | | (962 | ) | | | (3,058 | ) |
| | | | | | | | | | | | |
Total corporate operating expenses | | $ | (5,708 | ) | | $ | (4,422 | ) | | $ | (13,211 | ) | | $ | (13,816 | ) |
| | | | | | | | | | | | |
General and Administrative
Our general and administrative expenses increased $1.6 million for the three months ended September 30, 2005 versus 2004 primarily due to an increase in stock-based compensation of $1.8 million as a result of more restricted stock and stock appreciation rights amortization offset by lower other operating expenses. Our general and administrative expenses increased $1.6 million for the nine months ended September 30, 2005 versus 2004 primarily due to an increase in stock-based compensation as a result of more restricted stock and stock appreciation rights amortization in 2005.
Restructuring (Impairment Related and Other)
During the nine months ended September 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 and an increase in interest income in 2005.
Other
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | (in thousands) | | | | | |
Other income (loss) (Note 12) | | $ | 120,995 | | | $ | 2,210 | | | $ | 135,932 | | | $ | (108,277 | ) |
Impairment related and other | | | (2,697 | ) | | | (457 | ) | | | (2,697 | ) | | | (457 | ) |
Income taxes | | | (20,349 | ) | | | — | | | | (20,349 | ) | | | — | |
Minority interest | | | 626 | | | | 210 | | | | 1,867 | | | | 1,413 | |
| | | | | | | | | | | | |
| | $ | 98,575 | | | $ | 1,963 | | | $ | 114,753 | | | $ | (107,321 | ) |
| | | | | | | | | | | | |
Other Income (Loss), Net
The increase in other income (loss) for the three months ended September 30, 2005 is primarily attributable to gains on sales of marketable securities in 2005 of $3.0 million and the sale of our ownership interest in LinkShare in 2005 of $119.8 million.
The change in other income (loss) for the nine months ended September 30, 2005 is primarily attributable to the 2004 loss of $133.2 million on our debt-for-equity exchanges versus the 2005 gains on sales of marketable securities and LinkShare.
Impairment Related and Other
For the three and nine months ended September 30, 2005, we impaired $1.8 million of goodwill and $0.9 million of intangibles related to a consolidated partner company.
34
Income Taxes
The 19% effective tax rate for the third quarter differs from the 35% statutory rate primarily due to the utilization of losses for which a valuation allowance had previously been provided. The amount of carryforward losses that we were permitted to utilize was limited due to the change in ownership experienced by us in 2004.
Our net deferred tax asset of $606 million at September 30, 2005 consists of deferred tax assets of $625 million, relating primarily to partner company basis differences, capital and net operating loss carry forwards, offset by deferred tax liabilities of $19 million primarily related to unrealized appreciation in available for sale securities. During 2001, we recorded a full valuation allowance against our net assets that has been maintained through September 30, 2005. (See Note 5 to our Consolidated Financial Statements).
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U. S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to our investments in our partner companies, marketable securities, revenues, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are important to the presentation of our financial statements and require the most difficult, subjective and complex judgments.
Valuation of Goodwill, Intangible Assets and Ownership Interests in Partner Companies
We perform ongoing business reviews and perform annual goodwill impairment tests in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” and other impairments tests in accordance with APB Opinion No. 18 “Equity Method Investments” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and, based on quantitative and qualitative measures, assess the need to record impairment losses on goodwill, intangible assets and our ownership interests in our partner companies when impairment indicators are present. Where impairment indicators are present, we determine the amount of the impairment charge as the excess of the carrying value over the fair value. We determine fair value based on a combination of the discounted cash flow methodology, which is based upon converting expected future cash flows to present value, and the market approach, which includes analysis of market price multiples of companies engaged in lines of business similar to the company being evaluated. The market price multiples are selected and applied to the company based on relative performance, future prospects and risk profile of the company in comparison to the guideline companies. Significant assumptions relating to future operating results must be made when estimating the future cash flows associated with these companies. Significant assumptions relating to achievement of business plan objectives and milestones must be made when evaluating whether impairment indicators are present. Should unforeseen events occur or should operating trends change significantly, additional impairment losses could occur.
Revenue
ICG Commerce may assume all or a part of a customer’s procurement function as part of sourcing arrangements. Typically, in these engagements, ICG Commerce is paid a fee based on a percentage of the amount spent by its customer’s purchasing department in the specified areas ICG Commerce manages, a fixed fee agreed upon in advance, and in many cases ICG Commerce has the opportunity to earn additional fees based on the level of savings achieved for customers. ICG Commerce recognizes fee income as earned and any additional fees as ICG Commerce becomes entitled to them. In these arrangements, ICG Commerce does not assume inventory, warranty or credit risk for the goods or services a customer purchases, but ICG Commerce does negotiate the arrangements between a customer and supplier.
CommerceQuest recognizes license revenue when a signed contract or purchase order exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is probable. CommerceQuest sells its software directly to end users, as well as through resellers. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, CommerceQuest accounts for the delivered elements in accordance with the “Residual Method” prescribed by the American Institute of Certified Public Accountants
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Statement of Position (“SOP”) No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.”
CommerceQuest assesses whether the fee is fixed or determinable and collection is probable at the time of the transaction. In determining whether the fee is fixed or determinable, CommerceQuest compares the payment terms of the transaction to its normal payment terms. If a significant portion of a fee is due after its normal payment terms, CommerceQuest accounts for the fee as not being fixed or determinable and recognizes revenue as the fees become due. CommerceQuest assesses whether collection is probable based on a number of factors, including the customer’s past transaction history and credit-worthiness. CommerceQuest does not request collateral from its customers. If CommerceQuest determines that collection of a fee is not probable, CommerceQuest defers the fee and recognizes revenue at the time collection becomes probable, which is generally upon receipt of cash.
First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. For such arrangements with multiple obligations, CommerceQuest allocates revenue to each component of the arrangement based on the fair value of the undelivered elements. Fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts. Maintenance revenue is deferred and recognized ratably over the term of the maintenance and support period. Fair value of services, such as consulting or training, is based upon separate sales of these services. Consulting and training services are generally billed based on hourly rates and revenues are generally recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of our products and generally do not include significant customization to or development of the underlying software code.
Investor Force’s revenues are primarily derived from sales of subscriptions to Investor Force’s proprietary manager database and analytical tools. Subscriptions are generally one year in length, and revenue is recognized ratably over the subscription period.
StarCities revenues are primarily derived from hotel media marketing packages, attendee management software, site selection and various enabling technologies. Package revenues are typically recognized over the life of the contract, typically twelve months. Attendee management software and enabling technology revenues are recognized over the terms of the contract. Site selection revenues are recognized at the time the meeting occurs, which assumes no significant performance obligation remains.
Deferred Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets is charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.
Commitments and Contingencies
From time to time, we are a defendant or plaintiff in various legal actions that arise in the normal course of business. From time to time, we are also a guarantor of various third-party obligations and commitments. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful analysis of each individual matter. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005.
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We have not yet determined the actual model we will use to calculate fair value and are in the process of evaluating the impact of SFAS No. 123R on our Consolidated Financial Statements. This statement is effective as of the beginning of the first annual reporting period that begins after June 15, 2005 and accordingly, the Company will adopt SFAS No. 123R on January 1, 2006.
Risk Factors
Forward-looking statements made with respect to our financial condition and results of operations and business in this Quarterly Report on Form 10-Q and those made from time to time by us through our senior management are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and projections about future events but are subject to known and unknown risks, uncertainties and assumptions about us and our partner companies that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.
Factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those anticipated in forward-looking statements include, but are not limited to, factors discussed elsewhere in this Report and include among other things:
| • | | development of the e-commerce and information technology markets; |
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| • | | capital spending by enterprises and customers; |
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| • | | our partner companies’ collective ability to compete successfully against their respective competitors; |
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| • | | rapid technological developments in the respective markets in which our partner companies operate and our partner companies’ collective ability to respond to such changes in a timely and effective manner; |
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| • | | our ability to maximize value in connection with divestitures; |
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| • | | our ability to retain key personnel; |
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| • | | our ability to effectively manage existing capital resources; |
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| • | | our ability and our partner companies’ ability to access the capital markets; and |
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| • | | our outstanding indebtedness. |
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue” or the negative of such terms or other similar expressions. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.
Our business involves a number of risks, some of which are beyond our control. You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this Quarterly Report on Form 10-Q before deciding to invest in our shares. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties that we do not currently know or that we currently believe to be immaterial may also adversely affect our business.
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Risks Particular to Internet Capital Group
If general economic conditions are unfavorable our partner companies may be unable to attract or retain customers and our ability to grow our business may be adversely affected.
Numerous external forces, including fear of terrorism, hostilities in the Middle East involving United States armed forces, lack of consumer confidence and interest rate or currency rate fluctuations, could affect the economy. If the economy is unfavorable, our partner companies’ customers and potential customers may be unwilling to spend money on technology-related goods or services. If our partner companies are unable to attract new customers or retain existing customers, our ability to grow our business will be adversely affected.
Our stock price has been volatile in the past and may continue to be volatile in the future.
Our stock price has historically been volatile. Stock prices of technology companies have generally been volatile as well. This volatility may continue in the future.
The following factors, among others, may add to our common stock price’s volatility:
| • | | general economic conditions, such as a recession or interest rate or currency rate fluctuations, and the reluctance of enterprises to increase spending on new technologies; |
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| • | | actual or anticipated variations in our quarterly results and those of our partner companies; |
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| • | | changes in the market valuations of our partner companies and other technology and internet companies; |
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| • | | conditions or trends in the information technology and e-commerce industries; |
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| • | | negative public perception of the prospects of information technology companies; |
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| • | | changes in our financial estimates and those of our partner companies by securities analysts; |
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| • | | new products or services offered by us, our partner companies and their competitors; |
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| • | | announcements by our partner companies and their competitors of technological innovations; |
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| • | | announcements by us or our partner companies or our competitors of significant acquisitions, strategic partnerships or joint ventures; |
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| • | | additional sales of our securities; |
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| • | | additions to or departures of our key personnel or key personnel of our partner companies; and |
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| • | | our debt obligations. |
Many of these factors are beyond our control. These factors may decrease the market price of our common stock, regardless of our operating performance.
Fluctuations in our quarterly results may adversely affect our stock price.
We expect that our quarterly results will fluctuate significantly due to many factors, including:
| • | | the operating results of our partner companies; |
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| • | | significant fluctuations in the financial results of information technology and e-commerce companies generally; |
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| • | | changes in equity losses or income; |
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| • | | the acquisition or divestiture of interests in partner companies; |
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| • | | changes in our methods of accounting for our partner company interests, which may result from changes in our ownership percentages of our partner companies; |
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| • | | sales of equity securities by our partner companies, which could cause us to recognize gains or losses under applicable accounting rules; |
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| • | | the pace of development or a decline in growth of the information technology and e-commerce markets; |
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| • | | competition for the goods and services offered by our partner companies; and |
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| • | | our ability to effectively manage our growth and the growth of our partner companies. |
If our operating results in one or more quarters do not meet securities analysts’ or investors’ expectations, the price of our common stock could decrease.
A large number of shares of our common stock could be sold in the public market in connection with the conversion of our senior convertible debt, and future sales of our common stock, or the perception that such future sales may occur, may cause our stock price to decline.
A large number of shares of our common stock could be sold into the public market if the holders of our senior convertible notes due April 2009 elect to convert such notes. The notes are convertible at the option of the holder at any time on or before maturity into shares of our common stock at a conversion price of $9.108 per share. The sale of a large number of shares of our common stock, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our ability to obtain capital through an offering of equity securities.
Fluctuation in the price of the common stock of our publicly-traded partner companies may affect the price of our common stock.
Arbinet, Blackboard and Verticalnet are our publicly-traded partner companies. Fluctuations in the price of Arbinet’s, Blackboard’s and Verticalnet’s and other future publicly-traded partner companies’ common stock are likely to affect the price of our common stock. The price of our publicly-traded partner companies common stock has been highly volatile. As of September 30, 2005, the market value of the Company’s interest in these publicly-traded partner companies was $55.8 million. The results of operations, and accordingly the price of the common stock, of each of Blackboard, Arbinet and Verticalnet may be adversely affected by the risk factors in its SEC filings, which are publicly available at www.sec.gov.
Our business depends upon the performance of our partner companies, which is uncertain.
If our partner companies do not succeed, the value of our assets and the price of our common stock may decline. Economic, governmental, industry and company factors outside our control affect each of our partner companies. The material risks relating to our partner companies include:
| • | | fluctuations in the market price of the common stock of Blackboard, Arbinet and Verticalnet, our publicly-traded partner companies, which are likely to affect the price of our common stock; |
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| • | | many of our partner companies have limited operating histories, have not yet attained significant revenues and are operating at or near break-even and may not achieve profitability in the future; |
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| • | | lack of the widespread commercial use of the internet, decreased spending on information technology software and services and elongated sales cycles which may prevent our partner companies from succeeding; |
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| • | | intensifying competition for the products and services our partner companies offer, which could lead to the failure of some of our partner companies; and |
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| • | | the inability of our partner companies to secure additional financing, which may force some of our partner companies to cease or scale back operations. |
Of our $399.2 million in total assets as of September 30, 2005, $39.4 million, or 9.9%, consisted of ownership interests in our private partner companies accounted for under the equity and cost methods of accounting. The carrying value of our partner company ownership interests includes our original acquisition cost, the effect of accounting for certain of our partner companies under the equity method of accounting and the effect of impairment charges recorded for the decrease in value of certain partner companies. The carrying value of our partner companies will be impaired and decrease if one or more of our partner companies do not succeed. This decline would likely affect the price of our common stock. As of September 30,
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2005, the value of our publicly-traded partner companies (Blackboard, Arbinet and Verticalnet) was $55.8 million and reflected as “Marketable Securities” in our consolidated financial statements. A decline in the market value of our publicly-traded partner companies will likely cause a decline in the price of our common stock.
The success of our partner companies depends on the development of the e-commerce market, which is uncertain.
Most of our partner companies rely on e-commerce markets for the success of their businesses. If widespread commercial use of the internet does not develop, or if the internet does not develop as an effective medium for providing products and services, our partner companies may not succeed.
A number of factors could prevent widespread market acceptance of e-commerce, including the following:
| • | | the unwillingness of businesses to shift from traditional processes to e-commerce processes; |
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| • | | the network necessary for enabling substantial growth in usage of e-commerce may not be adequately developed; |
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| • | | increased government regulation or taxation, which may adversely affect the viability of e-commerce; |
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| • | | insufficient availability of telecommunication services or changes in telecommunication services which could result in slower response times for the users of e-commerce; and |
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| • | | concern and adverse publicity about the security of e-commerce transactions. |
The companies that we have identified as Core partner companies may not succeed.
We have identified certain partner companies that we believe offer the greatest value proposition as Core partner companies. We cannot ensure that the companies we have identified as Core partner companies are those that actually have the greatest value proposition or are those to which we will continue to allocate capital. Although we have identified certain of our partner companies as Core partner companies, this categorization does not necessarily imply that every one of our Core partner companies is a success at this time or will become successful in the future. There is no guarantee that a Core partner company will remain categorized as Core or that it will be able to successfully continue operations.
We have had a general history of losses and expect continued losses in the foreseeable future.
We have had significant operating losses and, excluding the effect of any future non-operating gains, such as from the sale of partner companies, we expect to continue incurring operating losses in the future. As a result, we may not have sufficient resources to expand or maintain our operations in the future. We can give no assurances as to when or whether we will achieve profitability, and if we ever have profits, we may not be able to sustain them.
Certain of our partner companies have a limited operating history and may never be profitable.
Certain of our partner companies are early-stage companies with limited operating histories, have significant historical losses and may never be profitable. Many of these companies have incurred substantial costs to develop and market their products and expand operations, have incurred net losses and cannot fund their cash needs from operations. Operating expenses of these companies could increase in the foreseeable future as they continue to develop products, increase sales and marketing efforts and expand operations.
Even if a number of our partner companies achieve profitability, we may not be able to extract cash from such companies, which could have a negative impact on our operations.
One of our goals is to help our partner companies achieve profitability. Even if a number of our partner companies do meet such goal, we may not be able to access cash generated by such partner companies to fund our own operations, which could have a negative impact on our operations.
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Our partner companies may not be able to successfully compete.
If our partner companies are unable to compete successfully against their competitors, our partner companies may fail. Competition for information technology and e-commerce products and services is intense. As the markets for information technology and e-commerce grow, we expect that competition will intensify. Barriers to entry are minimal and competitors can offer products and services at a relatively low cost. Our partner companies compete for a share of a customer’s:
| • | | purchasing budget for information technology and services, materials and supplies with other online providers and traditional distribution channels; and |
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| • | | dollars spent on consulting services with many established information systems and management consulting firms. |
In addition, some of our partner companies compete to attract and retain a critical mass of buyers and sellers. Many companies offer competitive solutions that compete with one or more of our partner companies. We expect that additional companies will offer competing solutions on a stand-alone or combined basis in the future. Furthermore, our partner companies’ competitors may develop 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.
Our partner companies may fail to retain significant customers.
During the three and nine months ended September 30, 2005, approximately 10% and 12% of our consolidated revenue relates to one customer. If our partner companies are not able to retain significant customers, such partner companies and our results of operation and financial position could be adversely affected.
The inability of our partner companies’ customers to pay their obligations to them in a timely manner, if at all, could have an adverse affect on our partner companies.
Some of the customers of our partner companies may have inadequate financial resources to meet all their obligations. If one or more significant customers are unable to pay amounts owed to a partner company, such partner company’s results of operations and financial condition could be adversely affected.
If public and private capital markets are not favorable for the information technology and e-commerce sectors, we may not be able to execute on our strategy.
Our success depends on the acceptance by the public and private capital markets of information technology and e-commerce companies in general, including initial public offerings of those companies. The information technology and e-commerce markets have experienced significant volatility recently and the market for initial public offerings of information technology and e-commerce companies has experienced weakness since 2000. If these markets are weak, we may not be able to create stockholder value by taking our partner companies public. In addition, reduced market interest in our industry may reduce the market value of our publicly-traded partner companies.
Our operations and growth could be impaired by limitations on our and our partner companies’ ability to raise money.
If the capital markets’ interest in our industry is depressed, our ability and the ability of our partner companies to grow and access the capital markets will be impaired. This may require us or our partner companies to take other actions, such as borrowing money on terms that may be unfavorable, or divesting of assets prematurely to raise capital. While we attempt to operate our business in such a manner so as to be independent from the capital markets, there is no assurance that we will be successful in doing so. Our partner companies are also dependent on the capital markets to raise capital for their own purposes.
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Because we have limited resources to dedicate to our partner companies, some of our partner companies may not be able to raise sufficient capital to sustain their operations.
If our partner companies are not able to raise capital from other outside sources, then they may need to cease operations. Our allocation of resources to our partner companies is mostly discretionary. Because our resources and our ability to raise capital are limited, we may not commit to provide our partner companies with sufficient capital resources to allow them to reach a cash flow positive position. We allocate our resources to focus on those partner companies that we believe present the greatest potential to increase stockholder value. We cannot ensure that the companies we identified in this process are those that actually have the greatest value proposition. As a result of our limited resources, we will not allocate capital to all of our existing partner companies. Our decision to not provide additional capital support to some of our partner companies could have a material adverse impact on the operations of such partner companies.
When we divest partner company interests, we may be unable to obtain maximum value for such interests.
When we divest all or part of an interest in a partner company, we may not receive maximum value for our position. We may divest our interests in partner companies to generate cash or for strategic reasons. For partner companies with publicly-traded stock, we may be unable to sell our interest at then-quoted market prices. Because we hold significant stakes of restricted securities in thinly-traded public companies, we may have difficulty selling our interest in such companies and, if we are able to sell our shares, such sales may be subject to volume limitations. Furthermore, for those partner companies that do not have publicly-traded stock, the realizable value of our interests may ultimately prove to be lower than the carrying value currently reflected in our consolidated financial statements. We continually evaluate the carrying value of our ownership interests in and advances to each of our partner companies for possible impairment based on achievement of business plan objectives and milestones, the value of each ownership interest in the partner company relative to carrying value, the financial condition and prospects of the partner company and other relevant factors. We cannot guarantee that we will receive maximum value in connection with the disposition of our stakes in partner companies. Additionally, we may be unable to find buyers for certain of our assets, which could adversely affect our business.
We may not be able to increase our ownership stakes in select partner companies.
One of our goals is to increase our ownership in a small group of companies that we believe have major growth opportunities. We may not be able to achieve this goal because of limited resources and/or the unwillingness of other stockholders of such companies to enter into a transaction that would result in an increase in our ownership stake.
We may not be able to deploy capital on acceptable terms.
We may not be able to identify attractive acquisition candidates that fit our strategy and, even if we are able to identify such candidates, we may not be able to reach agreement with potential acquisition candidates to acquire an interest in such companies on acceptable terms.
We may have to buy, sell or retain assets when we would otherwise choose not to in order to avoid registration under the Investment Company Act, which would impact our investment strategy.
We believe that we are actively engaged in the businesses of information technology and e-commerce through our network of subsidiaries and companies that we are considered to “control.” Under the Investment Company Act of 1940, as amended (the “Investment Company Act”), a company is considered to control another company if it owns more than 25% of that company’s voting securities and is the largest stockholder of such company. A company may be required to register as an investment company if more than 45% of its total assets consist of, and more than 45% of its income/loss and revenue attributable to it over the last four quarters is derived from, ownership interests in companies that it does not control. Because many of our partner companies are not majority-owned subsidiaries, and because we own 25% or less of the voting securities of a number of our partner companies, changes in the value of our interests in our partner companies and the income/loss and revenue attributable to our partner companies could subject us to regulation under the Investment Company Act unless we take precautionary steps. For example, in order to avoid having excessive income from “non-controlled” interests, we may not sell minority interests we would otherwise want to sell or we may have to generate non-investment income by selling interests in partner companies that we are considered to control. We may also need to ensure that we retain more than 25% ownership interests in our partner companies after any equity offerings. In addition, we may have to acquire additional
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income or loss generating majority-owned or controlled interests that we might not otherwise have acquired or may not be able to acquire “non-controlling” interests in companies that we would otherwise want to acquire. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively managing, operating and promoting collaboration among our network of partner companies. On August 23, 1999, the SEC granted our request for an exemption under Section 3(b)(2) of the Investment Company Act declaring us to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. This exemptive order reduces the risk that we may have to take action to avoid registration as an investment company, but it does not eliminate the risk.
Our accounting estimates with respect to the ultimate recoverability of our basis in our partner companies could change materially in the near term.
Our accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis, including goodwill, in our partner companies could change in the near term and the effect of such changes on the financial statements could be significant. In the first quarter of 2000, we announced several significant acquisitions that were financed principally with shares of our stock and based on the price of our stock at that time, were valued in excess of $1.0 billion. Based on our periodic review of our partner company holdings, we have recorded cumulative impairment charges of $1.3 billion to write off certain partner company holdings. As of September 30, 2005, our recorded amount of carrying basis including goodwill is not impaired, although we cannot assure that our future results will confirm this assessment. We performed our latest annual impairment test during the fourth quarter of 2004 and we will perform our next annual impairment test in the fourth quarter of 2005. However, in October 2005, in conjunction with the Commerce Quest and Metastorm merger, we reevaluated our carrying value of Commerce Quest goodwill as of September 30, 2005 and recorded an impairment charge of $1.9 million for the three months ended September 30, 2005. It is possible that a significant write-down or write-off of partner company carrying basis, including goodwill, may be required in the future, or that a significant loss will be recorded in the future upon the sale of a partner company. A write-down or write-off of this type could cause a decline in the price of our common stock.
The loss of any of our or our partner companies’ executive officers or other key personnel or our or our partner companies’ inability to attract additional key personnel could disrupt our business and operations.
If one or more of our executive officers or key personnel, or our partner companies’ executive officers or key personnel were unable or unwilling to continue in their present positions, or if we or our partner companies were unable to hire qualified personnel, our business and operations could be disrupted and our operating results and financial condition could be seriously harmed. The success of some of our partner companies also depends on their having highly trained technical and marketing personnel. A shortage in the number of trained technical and marketing personnel could limit the ability of our partner companies to increase sales of their existing products and services and launch new product offerings.
Our partner companies could make business decisions that are not in our best interests or that we do not agree with, which could impair the value of our partner company interests.
Although we generally seek a significant equity interest and participation in the management of our partner companies, we may not be able to control significant business decisions of our partner companies. In addition, although we currently own a controlling interest in several of our partner companies, we may not maintain this controlling interest. Equity interests in partner companies in which we lack control or share control involve additional risks that could cause the performance of our interest and our operating results to suffer, including the management of a partner company having economic or business interests or objectives that are different from ours and partner companies not taking our advice with respect to the financial or operating difficulties that they may encounter.
Our inability to prevent dilution of our ownership interests in our partner companies or our inability to otherwise have a controlling influence over the management and operations of our partner companies could have an adverse impact on our status under the Investment Company Act. Our ability to adequately control our partner companies could also prevent us from assisting them, or could prevent us from liquidating our interest in them at a time or at a price that is favorable to us. Additionally, our partner companies may not collaborate with each other or act in ways that are consistent with our business strategy. These factors could hamper our ability to maximize returns on our interests and cause us to recognize losses on our interests in partner companies.
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Our stakes in some partner companies have been and are likely to be diluted, which could materially reduce the value of our stake in such partner companies.
Since we allocate our financial resources to certain partner companies, our ownership interests in other partner companies have been and are likely to continue to be diluted due to our decision not to participate in financings. Additionally, in connection with new rounds of financing, our partner companies may create liquidation preferences that are senior to existing preferences. If we do not participate in these rounds, our rights to receive preferences upon a sale of the Company may be diminished at certain valuations. This dilution and the creation of senior liquidation preferences could result in a reduction in the value of our stakes in such partner companies.
Our outstanding indebtedness could negatively impact our future prospects.
In April 2004, we issued $60.0 million of senior convertible notes due in April 2009, $40.0 million of which is currently outstanding. This indebtedness may make it more difficult to obtain additional financing and may inhibit our ability to pursue needed or favorable opportunities.
We may be unable to maintain our listing on the Nasdaq National Market, which could cause our stock price to fall and decrease the liquidity of our common stock.
Our common stock is currently listed on the Nasdaq National Market, which has requirements for the continued listing of stock. One of the requirements is that our common stock maintain a minimum bid price of $1.00 per share. If our common stock trades below $1.00 per share or we fail to meet any of the other requirements of the Nasdaq National Market, our common stock may be delisted from the Nasdaq National Market. If our common stock is delisted from the Nasdaq National Market, the trading market for our common stock could decline which could depress our stock price and adversely affect the liquidity of our common stock.
We may compete with some of our partner companies, and our partner companies may compete with each other, which could deter companies from partnering with us and may limit future business opportunities.
We may compete with our partner companies to acquire interests in information technology and e-commerce companies and our partner companies may compete with each other for information technology e-commerce opportunities. This competition may deter companies from partnering with us and may limit our business opportunities.
We have implemented certain anti-takeover provisions that could make it more difficult for a third party to acquire us.
Provisions of our amended certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Our amended certificate of incorporation provides that our board of directors may issue preferred stock without stockholder approval and also provides for a staggered board of directors. We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders. Additionally, we have a Rights Agreement which has the effect of discouraging any person or group from beneficially owning more than 15% of our outstanding common stock unless our board has amended the plan or redeemed the rights. The combination of these provisions may inhibit a non-negotiated merger or other business combination.
Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.
The complexity of international trade secret, copyright, trademark and patent law, coupled with the limited resources of our partner companies and the demands of quick delivery of products and services to market, create the risk that our partner companies will be unable to protect their proprietary rights. Further, the nature of internet business demands that considerable detail about their innovative processes and techniques be exposed to competitors, because it must be presented on the websites in order to attract clients. Some of our partner companies also license content from third parties, and it is possible that they could become subject to infringement actions based upon the content licensed from those third parties. Our partner companies generally obtain representations as to the origin and ownership of such licensed content. However, these
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representations may not adequately protect them. Any claims against our partner companies’ proprietary rights, with or without merit, could subject our partner companies to costly litigation and the diversion of their technical and management personnel. If our partner companies incur costly litigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase and their profits, if any, will decrease.
Government regulation of the internet and e-commerce may harm our partner companies’ businesses.
Government regulation of the internet and e-commerce is evolving and unfavorable changes could harm our partner companies’ respective businesses. Our partner companies are subject to general business 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.
Our partner companies that publish or distribute content over the internet may be subject to legal liability.
Some of our partner companies may be subject to legal claims relating to the content on their websites, or the downloading and distribution of this content. Claims could involve matters such as defamation, invasion of privacy and copyright infringement. Providers of internet products and services have been sued in the past, sometimes successfully, based on the content of material. In addition, some of the content provided by our partner companies on their websites is drawn from data compiled by other parties, including governmental and commercial sources. The data may have errors. If any of our partner companies’ website content is improperly used or if any of our partner companies supply incorrect information, it could result in unexpected liability. Any of our partner companies that incur this type of unexpected liability may not have insurance to cover the claim or its insurance may not provide sufficient coverage. If our partner companies incur substantial cost because of this type of unexpected liability, the expenses incurred by our partner companies will increase and their profits, if any, will decrease.
Our partner companies’ computer and communications systems may fail, which may discourage parties from using our partner companies’ systems.
Some of our partner companies’ businesses depend on the efficient and uninterrupted operation of their computer and communications hardware systems. Any system interruptions that cause our partner companies’ websites to be unavailable to web browsers may reduce the attractiveness of our partner companies’ websites to third parties. If third parties are unwilling to use our partner companies’ websites, our business, financial condition and operating results could be adversely affected. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events.
Our partner companies’ businesses may be disrupted if they are unable to upgrade their systems to meet increased demand.
Capacity limits on some of our partner companies’ technology, transaction processing systems and network hardware and software may be difficult to project and they may not be able to expand and upgrade their systems to meet increased use. As traffic on our partner companies’ websites continues to increase, they must expand and upgrade their technology, transaction processing systems and network hardware and software. Our partner companies may be unable to accurately project the rate of increase in use of their websites. In addition, our partner companies may not be able to expand and upgrade their systems and network hardware and software capabilities to accommodate increased use of their websites. If our partner companies are unable to appropriately upgrade their systems and network hardware and software, the operations and processes of our partner companies may be disrupted.
Our partner companies may be unable to acquire or maintain easily identifiable website addresses or prevent third parties from acquiring website addresses similar to theirs.
Some of our partner companies hold various website addresses relating to their brands. These partner companies may not be able to prevent third parties from acquiring website addresses that are similar to their addresses, which could adversely affect
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the use by businesses of our partner companies’ websites. In these instances, our partner companies may not grow as we expect. The acquisition and maintenance of website addresses generally is regulated by governmental agencies and their designees. The regulation of website addresses in the United States and in foreign countries is subject to change. As a result, our partner companies may not be able to acquire or maintain relevant website addresses in all countries where they conduct business. Furthermore, the relationship between regulations governing such addresses and laws protecting trademarks is unclear.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to equity price risks on the marketable portion of our equity securities. Our public holdings at September 30, 2005 include equity positions in companies in the technology industry sector, including Blackboard, Arbinet and Verticalnet, many of which have experienced significant historical volatility in their stock prices. A 20% adverse change in equity prices, based on a sensitivity analysis of our public holdings as of September 30, 2005, would result in an approximate $11.2 million decrease in the fair value of our public holdings.
Cash and cash equivalents, accounts receivable and accounts payable are carried at cost which approximates fair value due to the short-term maturity of these instruments. Short-term investments and marketable securities are carried at fair value. Our senior convertible notes had a fair value of approximately $69.6 million at September 30, 2005 versus a carrying value of $60.0 million. Fair value of our senior convertible notes is determined by obtaining thinly traded market quotes. As of November 4, 2005, our senior convertible notes had a fair value of approximately $49.4 million versus a carrying value of $40.0 million.
We have historically had very low exposure to changes in foreign currency exchange rates and, as such, have not used derivative financial instruments to manage foreign currency fluctuation risk.
ITEM 4. Controls and Procedures
Controls and Procedures; Limitations on Effectiveness
Internal controls and procedures for financial reporting are procedures that are designed with the objective of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Evaluation of Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that, as of September 30, 2005, our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors during the period covered by this Quarterly Report on Form 10-Q that could significantly affect internal controls subsequent to their evaluation.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
In May and June 2001, certain of the Company’s present directors, along with the Company, certain of its former directors, 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 claims against 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 approved a proposed 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 complete terms of the proposed settlement is on file with the Court. The Court overseeing the litigation granted preliminary approval of the settlement in February 2005 subject to a change in the terms to bar cross-claims by defendant underwriters for contribution, but not for indemnification or otherwise. The parties to the settlement have agreed on revised language to effectuate the changes regarding contribution/indemnification claims requested by the Court and such language has been accepted by the Court. A final fairness hearing on the settlement is tentatively set for January 9, 2006.
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 complaint also named Freeborders, a current partner company, as a defendant, as well as four individual defendants, including former officers of the Company and former Animated Images and Freeborders directors. The 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. In July 2003, the Court granted defendants’ motion to stay the litigation pending arbitration in California of plaintiffs’ claims against Freeborders. In an effort to avoid such arbitration, plaintiffs moved to dismiss Freeborders from the litigation in March 2004. The Court granted this motion and thereafter, plaintiffs filed a motion to compel arbitration of their claims against the Company and certain other defendants. The Court granted plaintiffs’ motion on October 1, 2004, and further ordered a stay of the plaintiffs’ non-arbitrable claims against two individual defendants. Plaintiffs dismissed their claims against one of the individual defendants, who is a former Animated Images director. The Company and one of the remaining individual defendants have asserted counterclaims in the arbitration. The parties to the arbitration are engaged in pre-hearing discovery. The Company intends to defend vigorously itself against plaintiffs’ claims and to prosecute its counterclaims against plaintiffs.
On September 30, 2004, Verticalnet and several of its former officers and directors, including an employee of the Company, were named as defendants in a complaint filed in the U.S. District Court for the Eastern District of Pennsylvania. The
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complaint alleges that in connection with the issuance of Verticalnet stock to plaintiff’s predecessors in interest pursuant to an acquisition, the plaintiff was damaged by the defendants’ delays in registering stock, updating the registration of stock, releasing stock from lock-ups and releasing stock from escrows. The defendants have filed a motion to dismiss the case. The Court has not yet ruled on this motion.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
| | |
Number | | Document |
11.1 | | Statement Regarding Computation of Per Share Earnings (included herein at Note 6 — “Net Income (Loss) per Share” to the Consolidated Financial Statements on Page 19) |
| | |
31.1 | | Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002, as amended. |
| | |
31.2 | | Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002, as amended. |
| | |
32.1 | | Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002, as amended. |
| | |
32.2 | | Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002, as amended. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | |
| | INTERNET CAPITAL GROUP, INC. | | |
| | | | | | |
Date: November 8, 2005 | | | | | | |
| | By: | | /s/Anthony P. Dolanski Name: Anthony P. Dolanski | | |
| | | | Title: Chief Financial Officer | | |
| | | | (Principal Financial and Principal Accounting Officer) | | |
| | | | (Duly Authorized Officer) | | |
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Exhibit Index
| | |
Number | | Document |
11.1 | | Statement Regarding Computation of Per Share Earnings (included herein at Note 6 “Net Income (Loss) per Share” to the Consolidated Financial Statements on page 19) |
| | |
31.1 | | Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002, as amended. |
| | |
31.2 | | Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002, as amended. |
| | |
32.1 | | Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002, as amended. |
| | |
32.2 | | Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002, as amended. |