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ICGE > SEC Filings for ICGE > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for ICG GROUP, INC.

Form 10-K for ICG GROUP, INC.


17-Mar-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

The Consolidated Financial Statements include the consolidated accounts of ICG Group, Inc., a company incorporated in Delaware, and its subsidiaries, both wholly-owned and consolidated (ICG Group, Inc. and all such subsidiaries are collectively hereafter referred to as "ICG," "the Company," "we," "our," or "us"), and have been prepared in accordance with U.S. generally accepted principles (GAAP).

Overview

ICG is a multi-vertical cloud technology company with offerings that create unique and compelling value for our customers and provide transformative efficiency to vertical markets worldwide. We manage our consolidated vertical cloud-based businesses, which operate in the government, compliance and insurance markets, respectively, with a uniform set of industry-standard recurring revenue metrics and specifically look to drive growth at those businesses by:

- continuously creating compelling, differentiated cloud-based products and services through investment in research and development;

- driving efficient long-term growth in recurring revenue through aggressive reinvestment in lead generation, marketing and sales;

- identifying, structuring and executing accretive acquisitions that accelerate strategic plans, increase revenue growth and, over time, improve margins;

- investing in and cultivating deep, vertical-expert management teams; and

- implementing strategies to obtain operational leverage and increased profitability while maintaining high revenue growth, particularly as a company scales.

We believe that, through those and other measures, we are developing a set of leading businesses that possess unique assets which are hard to replicate and which provide competitive differentiation in the sizable vertical markets in which they operate. We believe further that our vertical cloud business model focus, which drives the compelling value proposition of our businesses, well-positions us to generate sustained, meaningful long-term returns for our stockholders, through, among other things:

- high revenue visibility and predictability (and lower revenue volatility than traditional software companies);

- strong gross margins;

- low customer acquisition costs and attractive lifetime customer values, which allow for efficient growth through investment in sales and marketing;

- economies of scale inherent in multi-tenancy software architecture, which allow a focus on innovation; and

- ultimately, long-term profitability and free cash flow.

The results of operations of our businesses are reported in two segments: the "vertical cloud" reporting segment and the "vertical cloud (venture)" reporting segment. Our vertical cloud reporting segment reflects the aggregate financial results of our businesses (1) that share the economic and other characteristics described above, (2) in which our management takes a very active role in providing strategic direction and operational support and (3) towards which we devote relatively large proportions of our personnel, financial capital and other resources. As of the date of this Report, we own majority controlling equity positions in (and therefore consolidate the financial results of) each of the three businesses in our vertical cloud segment. Our vertical cloud (venture) reporting segment includes businesses with many characteristics similar to those of the businesses in our vertical cloud segment, but in which we take a less active role in terms of strategic direction and operational support, and, accordingly, towards which we devote relatively small amounts of personnel, financial capital and other resources.

We have achieved significant growth over the last three years. A substantial majority of our growth has come from acquisitions. We believe that an active acquisition program will continue to be an important element of our growth strategy as it expands our customer base, grows our revenues and increases our stockholder value. Additionally, we have experienced significant organic growth at our businesses through new customers and expansion at existing customers.


We intend to continue investing for long-term growth. We have invested, and expect to continue to invest heavily in sales and marketing. In addition, we expect to continue to invest in technology development efforts to deliver additional compelling applications to address customers' evolving need. These investments will increase our costs on an absolute basis in the near term. Many of these investments will occur in advance of experiencing any direct benefit from them.

Our Businesses

As of December 31, 2013, the three businesses that are included in our vertical cloud segment are: Bolt, GovDelivery and MSDSonline. As of December 31, 2013, the three businesses that are included in our vertical cloud (venture) segment are: CIML, InstaMed and Parchment.

Channel Intelligence, InvestorForce and Procurian were sold during the year ended December 31, 2013, and are included in "Dispositions" in our segment disclosures. Those companies were presented as discontinued operations in our Consolidated Financial Statements. Freeborders and WhiteFence were also sold during the year ended December 31, 2013; our results of those operations are also included in "Dispositions" in our segment disclosures.

We own 70%, 94% and 96% Bolt, GovDelivery and MSDSonline, respectively, as of December 31, 2013, and, accordingly, consolidate the results of those businesses. We own 38% of, and exert significant influence over, CIML; we account for that business under the equity method of accounting. We own less than 20% of InstaMed and Parchment, and account for those businesses under the cost method of accounting.

Results of Operations

The following table contains selected financial information related to our reportable segments. The segments, as applicable, include the results of our consolidated businesses and record our share of the earnings and losses of businesses accounted for under the equity method of accounting. The businesses included in each segment are consistent between periods, with the exception of certain businesses that ICG acquired or disposed of in a given period, as noted below. The method of accounting for any particular company may change based upon, among other things, a change in our ownership interest.

"Dispositions" includes the results of those businesses that have been sold or ceased operations and are no longer included in our segments for the periods presented. A disposition could be the sale of a division, subsidiary or asset group of one of our consolidated businesses, typically classified as discontinued operations for accounting purposes, or the disposition of our ownership interest in a business accounted for under the equity method of accounting. "Other" expenses represent (1) the corporate general and administrative expenses of ICG's business operations, which primarily include employee costs and costs associated with operating as a public company, (2) gains or losses on the dispositions of businesses and marketable securities holdings, (3) income taxes, (4) impairment charges associated with our businesses, and (5) the results of operations attributable to the respective noncontrolling interests of these businesses.

                                                         Segment Information
                                                           (in thousands)
                                                                                          Reconciling Items
                                  Vertical       Vertical Cloud         Total
                                    Cloud           (Venture)         Segments        Dispositions        Other         Consolidated
For the Year Ended December 31,
2013
Revenue                           $  58,772      $           429      $  59,201      $            -     $       -      $       59,201
Net income (loss) attributable
to ICG Group, Inc.                $ (18,026 )    $        (2,320 )    $ (20,346 )    $      230,773     $  (1,368 )    $      209,059

For the Year Ended December 31,
2012
Revenue                           $  26,026      $           614      $  26,640      $            -     $       -      $       26,640
Net income (loss) attributable
to ICG Group, Inc.                $ (18,244 )    $        (2,835 )    $ (21,079 )    $       10,440     $  33,628      $       22,989

For the Year Ended December 31,
2011
Revenue                           $  12,885      $             -      $  12,885      $            -     $       -      $       12,885
Net income (loss) attributable
to ICG Group, Inc.                $  (7,490 )    $             -      $  (7,490 )    $       11,031     $  24,025      $       27,566


Results of Operations - Vertical Cloud Businesses

Year Ended December 31, 2013 compared to Year Ended December 31, 2012

The following presentation includes the consolidated results of Bolt,
GovDelivery and MSDSonline, as well as the equity loss associated with Bolt for
the period prior to that company's consolidation beginning on December 27, 2012.



                                         Year Ended December 31,                   Annual Change
                                           2013             2012         (in thousands)       (percentage)
                                                                  (in thousands)
Selected data:
Revenue                                $     58,772       $  26,026     $         32,746                126 %
Cost of revenue                             (17,687 )        (9,203 )             (8,484 )              (92 )%
Sales and marketing                         (28,071 )       (12,291 )            (15,780 )             (128 )%
General and administrative                  (10,804 )        (4,402 )             (6,402 )             (145 )%
Research and development                     (9,032 )        (7,892 )             (1,140 )              (14 )%
Amortization of intangible assets            (8,398 )        (4,837 )             (3,561 )              (74 )%
Impairment related and other                 (1,212 )          (265 )               (947 )               NM
Operating expenses                          (75,204 )       (38,890 )            (36,314 )              (93 )%
Operating loss                              (16,432 )       (12,864 )             (3,568 )              (28 )%
Interest and other                           (1,535 )             2               (1,537 )               NM
Income tax benefit (expense)                    (59 )          (109 )                 50                 46 %
Equity income (loss)                              -          (5,273 )              5,273                100 %
Net loss                               $    (18,026 )     $ (18,244 )   $            218                  1 %

Revenue

Revenue increased $32.7 million from the year ended December 31, 2012 to the year ended December 31, 2013, primarily due to strong organic revenue growth at MSDSonline and GovDelivery. Revenue at GovDelivery and MSDSonline increased $14.4 million in the aggregate in the 2013 period compared to the 2012 period as a result of new customer contracts and services. The residual increase is due to the consolidation of Bolt on December 27, 2012, resulting in revenue being recognized in the 2013 period, compared to no revenue from Bolt being included in our consolidated results in 2012 when Bolt was accounted for under the equity method of accounting.

Operating expenses

Operating expenses increased $36.3 million from the year ended December 31, 2012 to the corresponding 2013 period. The consolidation of Bolt on December 27, 2012 increased 2013 operating expenses $22.8 million compared to 2012. Cost of revenue increased from 2012 to 2013, primarily as a result of the Bolt consolidation but improved as a percentage of revenue. Sales and marketing expenses increased and the percentage of those expenses to revenue also increased in the 2013 period compared to the 2012 period due to the Bolt consolidation and the increase in the number of sales employees for all of our businesses. General and administrative and research and development expenses increased from 2012 to 2013 primarily as a result of the Bolt consolidation. Amortization expense increased due to the intangible amortization associated with acquisition accounting for the consolidation of Bolt. We expect sales and marketing expenses to increase in 2014, as compared to 2013, as we aggressively build out teams at our businesses to drive revenue growth.

Interest and other

The increase in interest and other from the year ended December 31, 2012 to the year ended December 31, 2013 is primarily due to interest expense at Bolt associated with debt obligations at that business. As a result of the consolidation of Bolt on December 27, 2012, Bolt's interest expense is included in our consolidated results in 2013 but ICG's share of Bolt's interest expense related to 2012 is reflected in equity loss. Given our strong balance sheet, we plan to reduce third-party debt and, accordingly, reduce interest expense in future periods. However, we may also incur prepayment penalties by acting on this strategy.

Income tax benefit (expense)

Income tax benefit (expense) in the years ended December 31, 2013 and 2012 primarily relates to state income taxes at MSDSonline.


Equity loss

                                             Year Ended December 31,                       Annual Change
                                          2013                  2012             (in thousands)       (percentage)
                                                                      (in thousands)
Selected data:
Our share of total net loss            $        -         $          (4,287 )   $           4,287               100 %
Amortization of intangible assets               -                      (986 )                 986               100 %
Equity loss                            $        -         $          (5,273 )   $           5,273               100 %

Equity loss related to our vertical cloud segment for the year ended December 31, 2012 reflects our share of the results of Bolt, which was accounted for using the equity method of accounting in that period. On December 27, 2012, we increased our ownership in Bolt and consolidated the results of Bolt from that point forward.

Year Ended December 31, 2012 compared to Year Ended December 31, 2011

                                             Year Ended December 31,                   Annual Change
                                               2012             2011         (in thousands)        (percentage)
                                                                      (in thousands)
Selected data:
Revenue                                    $     26,026       $  12,885     $         13,141                 102 %
Cost of revenue                                  (9,203 )        (4,589 )             (4,614 )              (101 )%
Sales and marketing                             (12,291 )        (5,306 )             (6,985 )              (132 )%
General and administrative                       (4,402 )        (3,033 )             (1,369 )               (45 )%
Research and development                         (7,892 )        (2,934 )             (4,958 )              (169 )%
Amortization of intangible assets                (4,837 )        (1,373 )             (3,464 )                NM
Impairment related and other                       (265 )          (135 )               (130 )               (96 )%
Operating expenses                              (38,890 )       (17,370 )            (21,520 )              (124 )%
Operating loss                                  (12,864 )        (4,485 )             (8,379 )              (187 )%
Interest and other                                    2             (22 )                (24 )              (109 )%
Income tax benefit (expense)                       (109 )             -                 (109 )              (100 )%
Equity income (loss)                             (5,273 )        (2,983 )             (2,290 )               (77 )%
Net loss                                   $    (18,244 )     $  (7,490 )   $        (10,754 )              (144 )%

Revenue

Revenue increased $13.1 million from the year ended December 31, 2011 to the corresponding 2012 period primarily, due to strong organic revenue growth at GovDelivery resulting from new customers at that company. The residual increase in revenue is due to the acquisition of MSDSonline on March 30, 2012, whereby MSDSonline's revenues are reflected in most of the 2012 period but not in the 2011 period.

Operating expenses

Operating expenses increased $21.5 million from the year ended December 31, 2011 to the corresponding 2012 period. The increase in operating expenses in 2012 is primarily related to the acquisition of MSDSonline on March 30, 2012, since MSDSonline's operating expenses are reflected in most of the 2012 period but not in the 2011 period. In addition, the increase in sales and marketing expenses relates to our focus on sales and marketing initiatives at our businesses. Amortization expense increased due to the intangible amortization associated with our acquisition accounting for the acquisition of MSDSonline.

Equity loss

                                         Year Ended December 31,                  Annual Change
                                           2012             2011        (in thousands)      (percentage)
                                                                 (in thousands)
Selected data:
Our share of total net loss            $     (4,287 )     $  (2,383 )   $        (1,904 )             (80 )%
Amortization of intangible assets              (986 )          (600 )              (386 )             (64 )%
Equity loss                            $     (5,273 )     $  (2,983 )   $        (2,290 )              77 %


Equity loss for our vertical cloud segment for the year ended December 31, 2012 and 2011 relates to our share of the results of Bolt. Net loss at Bolt increased in the 2012 period compared to the 2011 period primarily due to the timing of expenses associated with a large multi-year contract signing as well as sales and marketing initiatives at Bolt aimed at generating revenue growth.

Income tax benefit (expense)

Income tax benefit (expense) in the year ended December 31, 2012 primarily relates to state income taxes at MSDSonline.

Results of Operations - Vertical Cloud (Venture) Businesses

The following presentation includes the consolidated results of CIML for the period from July 11, 2012 (the date on which we acquired additional ownership interests in CIML from noncontrolling shareholders) to February 20, 2013 (the date on which options and warrants were exercised, in connection with the sale of Channel Intelligence to Google, and we no longer controlled CIML) when CIML was consolidated in our results, as well as the equity loss associated with CIML for the period prior to July 11, 2012 and after February 20, 2013, when CIML was accounted for as an equity method company.

                                         Year Ended December 31,                   Annual Change
                                           2013             2012         (in thousands)       (percentage)
                                                                  (in thousands)
Selected data:
Revenue                                $        429       $     614     $           (185 )              (30 )%
Cost of revenue                                 (70 )          (256 )                186                 73 %
Sales and marketing                             (58 )           (64 )                  6                  9 %
General and administrative                   (1,024 )          (894 )               (130 )              (15 )%
Research and development                          -            (915 )                915                100 %
Amortization of intangible assets               (72 )             -                  (72 )             (100 )%
Impairment related and other                   (127 )             -                 (127 )             (100 )%
Operating expenses                           (1,351 )        (2,129 )                778                 37 %
Operating loss                                 (922 )        (1,515 )                593                 39 %
Interest and other                               (1 )            34                  (35 )             (103 )%
Income tax benefit (expense)                      -               -                    -                  -
Equity income (loss)                         (1,397 )        (1,354 )                (43 )               (3 )%
Net loss                               $     (2,320 )     $  (2,835 )   $            515                 18 %

Equity loss

                                         Year Ended December 31,                   Annual Change
                                           2013             2012         (in thousands)        (percentage)
                                                                  (in thousands)
Selected data:
Our share of total net loss            $     (1,232 )     $  (1,254 )   $              22                  2 %
Amortization of intangible assets              (165 )          (100 )                 (65 )              (65 )%
Equity loss                            $     (1,397 )     $  (1,354 )   $             (43 )               (3 )%

Equity loss for our vertical cloud venture segment for the year ended December 31, 2013 and 2012 relates to our share of the results of CIML. CIML's operating results were generally consistent between periods and were primarily due to costs associated with start-up activities at mylist and the build-out of mylist's technology platform that were incurred during those periods. CIML did not have any operating results for 2011.

Results of Operations - Reconciling Items

Dispositions

Discontinued operations as of December 31, 2013 include the following:
(1) Procurian, which was sold to Accenture on December 4, 2013, (2) the Channel Intelligence subsidiary of CIML that was sold to Google on February 20, 2013, and (3) InvestorForce, which was sold to MSCI on January 29, 2013. The following businesses that had been accounted for under the equity method of accounting were disposed during one of the years ended December 31, 2013, 2012 and 2011:
(1) WhiteFence, substantially all of the assets of which were acquired by Allconnect, Inc. ("Allconnect") on October 28, 2013, (2) Freeborders, which was merged with Symbio S.A. ("Symbio") on October 18, 2013, (3) GoIndustry-DoveBid plc ("GoIndustry"), which was sold to Liquidity Services, Inc. ("Liquidity


Services") on July 5, 2012, (4) StarCite, Inc. ("StarCite"), which was sold to The Active Network, Inc. ("Active") on December 30, 2011, (5) ClickEquations, Inc. ("ClickEquations"), substantially all of the assets of which were acquired by Channel Intelligence on June 14, 2011, and (6) Metastorm Inc. ("Metastorm"), which was sold to Open Text Corporation ("Open Text") on February 17, 2011. The results of these businesses (or our share of the results in the case of the equity-method businesses, including any related intangible amortization) were removed from our segments and are included in "Dispositions" in the "Results of Operations" segment information table above for all periods presented. The net impact of those discontinued operations and our share of the results of the disposed equity-method businesses are detailed below.

Equity loss and Discontinued operations

                                         Year Ended December 31,                  Annual Change
                                           2013              2012        (in thousands)      (percentage)
                                                                 (in thousands)
Selected data:
Equity loss                            $      (1,566 )     $ (2,044 )   $            478                23 %
Discontinued operations, including
gain on sale                                 232,339         12,484              219,855                NM
Equity income (loss) and
discontinued operations                $     230,773       $ 10,440     $        220,333                NM




                                         Year Ended December 31,                  Annual Change
                                           2012             2011        (in thousands)      (percentage)
                                                                 (in thousands)
Selected data:
Equity loss                            $     (2,044 )     $  (8,282 )   $         6,238                75 %
Discontinued operations, including           12,484
gain on sale                                                 19,313              (6,829 )             (35 )%
Equity income (loss) and                     10,440
discontinued operations                $                  $  11,031     $          (591 )              (5 )%

On December 4, 2013, Procurian was acquired by Accenture. Procurian's revenue for the years ended December 31, 2013, 2012 and 2011 was $127.1 million, $140.0 million and $120.6 million, respectively, and our share of Procurian's net income was less than $0.1 million, $8.4 million and $12.9 million, respectively, in those periods. Procurian's results (and the gain on sale of Procurian) are the primary driver of the income reflected in the line item "Discontinued operations, including gain on sale" in the tables above. Procurian's revenue was higher in 2012 than 2013 mainly due to recognition of revenue under an interim contract associated with a large long-term contract that was awarded to Procurian in 2012. In addition, changes in net income in each of those periods was primarily impacted by increased staffing needs to facilitate the large long-term contract noted, including subcontractor fees, and the re-allocation of income tax benefit/(expense) between discontinued operations and continuing operations for Procurian on a standalone basis. In connection with the Procurian sale, we recorded a gain of $224.9 million during the year ended December 31, 2013.

On February 20, 2013, Channel Intelligence was sold to Google. From June 11, 2012 through February 20, 2013, Channel Intelligence was included in our consolidated results; prior to June 11, 2012, Channel Intelligence was accounted for under the equity method of accounting. Channel Intelligence's revenue for the period from January 1, 2013 through February 20, 2013 was $3.1 million, and . . .

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