SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended April 30, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-23262
CMGI, INC.
----------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 BRICKSTONE SQUARE 01810
ANDOVER, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(978) 684-3600
(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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----------
Number of shares outstanding of the issuer's common stock, as of June 12, 2001
Common Stock, par value $.01 per share 346,160,895
--------------------------------------- -----------
Class Number of shares outstanding
EXPLANATORY NOTE
This Amendment No. 1 to Quarterly Report on Form 10-Q/A amends and restates
Items 1 and 2 of Part I of the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 2001, as filed by the Registrant on June 14,
2001, to correct the results of inadvertent errors made in the calculation of
certain non-cash charges included therein.
In the process of finalizing the Registrant's financial statements for the
quarter ended October 31, 2001, the Registrant discovered that inadvertent
errors had been made in the calculation of certain amounts included in the
Registrant's financial statements for the three and nine months ended April 30,
2001 included in the Form 10-Q. These errors related to the recording of
impairment and amortization charges in consolidation of intangible assets
associated with AltaVista, a subsidiary of the Registrant. Accordingly, the
Registrant has restated its financial statements to reflect the correction of
these inadvertent errors and has taken remedial action over the consolidation
process that the Registrant believes will prevent or detect future such errors.
Conforming changes reflecting these corrections have been made in the
Registrant's Management's Discussion and Analysis of Financial Condition and
Results of Operations, and Consolidated Financial Statements and Notes thereto.
The effects of this restatement on previously reported consolidated
financial statements as of and for the three and nine months ended April 30,
2001 include the following changes (in thousands, except per share amounts):
Consolidated Statements of Operations:
Three Months Ended Nine Months Ended
April 30, 2001 April 30, 2001
-------------- --------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
Amortization of intangible assets and stock-based
compensation $ 213,714 $ 247,439 $ 1,345,731 $ 1,379,456
Impairment of long-lived assets 609,491 609,491 2,701,922 2,678,063
Operating loss (995,953) (1,029,678) (4,781,225) (4,791,091)
Minority interest, net 43,202 53,564 382,961 393,323
Loss before income taxes (1,005,406) (1,028,769) (4,238,133) (4,237,637)
Net loss (963,276) (986,639) (4,161,373) (4,160,877)
Net loss available to common stockholders (965,105) (988,468) (4,166,982) (4,166,486)
Basic and diluted loss per share (2.80) (2.87) (12.82) (12.82)
Consolidated Balance Sheets:
April 30, 2001
--------------
As Reported Restated
----------- --------
Goodwill and other intangible assets, net of accumulated
amortization $ 1,355,347 $ 1,345,481
Total assets 3,572,876 3,563,010
Minority interest 384,631 374,269
Accumulated deficit (5,024,797) (5,024,301)
Total stockholders' equity 2,049,912 2,050,408
PART 1
ITEM 1. Consolidated Financial Statements
CMGI, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
April 30, July 31,
2001 2000
-------------- -----------
(Restated)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 845,830 $ 639,666
Available-for-sale securities 121,435 1,595,011
Accounts receivable, trade, less allowance for doubtful accounts 130,548 232,104
Prepaid expenses and other current assets 118,660 105,094
----------- ----------
Total current assets 1,216,473 2,571,875
----------- ----------
Property and equipment, net 243,481 259,270
Investments in affiliates 556,085 583,648
Goodwill and other intangible assets, net of accumulated amortization 1,345,481 4,955,076
Other assets 201,490 187,238
----------- ----------
$ 3,563,010 $8,557,107
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 33,594 $ 523,022
Current installments of long-term debt 7,187 6,649
Accounts payable 96,769 128,627
Accrued income taxes 39,501 36,318
Accrued expenses 204,774 246,289
Deferred income taxes 70,389 392,340
Deferred revenues 21,962 27,898
Other current liabilities 21,866 100,627
----------- ----------
Total current liabilities 496,042 1,461,770
----------- ----------
Long-term debt, less current installments 224,003 228,023
Deferred income taxes 10,443 61,365
Other long-term liabilities 19,095 50,945
Minority interest 374,269 586,062
Commitments and contingencies
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; issued 375,000 Series C
convertible, redeemable preferred stock at April 30, 2001 and July 31, 2000, dividend
at 2% per annum; carried at liquidation value 388,750 383,140
Stockholders' equity:
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; issued and
outstanding 345,491,900 shares at April 30, 2001 and 296,487,502 shares at July 31, 2000 3,455 2,965
Additional paid-in capital 7,149,773 6,190,182
Deferred compensation (17) (45,202)
Accumulated deficit (5,024,301) (857,814)
----------- ----------
2,128,910 5,290,131
Accumulated other comprehensive income (loss) (78,502) 495,671
----------- ----------
Total stockholders' equity 2,050,408 5,785,802
----------- ----------
$ 3,563,010 $8,557,107
=========== ==========
see accompanying notes to interim unaudited consolidated financial statements
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended April 30, Nine months ended April 30,
------------------------------ -----------------------------
2001 2000 2001 2000
----------- --------- ----------- -----------
(Restated) (Restated)
Net revenue $ 300,963 $ 233,144 $ 1,009,818 $ 520,802
Operating expenses:
Cost of revenue 271,874 190,618 923,322 433,598
Research and development 35,621 49,671 133,383 101,283
In-process research and development -- 41,220 1,462 45,937
Selling 82,691 126,612 333,334 309,250
General and administrative 64,999 61,314 224,491 134,931
Amortization of intangible assets and stock-based
compensation 247,439 465,287 1,379,456 889,157
Impairment of intangible assets 609,491 16,700 2,678,063 16,700
Restructuring charges 18,526 -- 127,398 --
----------- --------- ----------- -----------
Total operating expenses 1,330,641 951,422 5,800,909 1,930,856
----------- --------- ----------- -----------
Operating loss (1,029,678) (718,278) (4,791,091) (1,410,054)
----------- --------- ----------- -----------
Other income (deductions):
Interest income 12,517 14,430 44,432 30,950
Interest expense (6,637) (12,987) (39,634) (26,517)
Other gains (losses), net (48,155) 213,537 72,271 428,035
Gain (loss) on issuance of stock by subsidiaries and affiliates (432) 19,988 122,438 71,927
Equity in losses of affiliates (9,948) (10,290) (39,376) (15,719)
Minority interest, net 53,564 55,980 393,323 110,844
----------- --------- ----------- -----------
909 280,658 553,454 599,520
----------- --------- ----------- -----------
Loss before income taxes (1,028,769) (437,620) (4,237,637) (810,534)
Income tax benefit (42,130) (9,581) (76,760) (79,508)
----------- --------- ----------- -----------
Net loss (986,639) (428,039) (4,160,877) (731,026)
Preferred stock accretion and amortization of discount (1,829) (2,170) (5,609) (9,333)
----------- --------- ----------- -----------
Net loss available to common stockholders $ (988,468) $(430,209) $(4,166,486) $ (740,359)
=========== ========= =========== ===========
Basic and diluted loss per share $(2.87) $(1.53) $(12.82) $(2.94)
=========== ========= =========== ===========
Shares used in computing basic and diluted loss per share: 344,186 281,936 324,999 251,560
=========== ========= =========== ===========
see accompanying notes to interim unaudited consolidated financial statements
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended April 30,
------------------------------------------
2001 2000
----------- ----------
(Restated)
Cash flows from operating activities:
Net loss $(4,160,877) $ (731,026)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation, amortization and impairment charges 4,158,361 944,253
Deferred income taxes (77,537) (289,685)
Non-operating gains, net (194,709) (499,962)
Equity in losses of affiliates 39,376 15,719
Minority interest (393,323) (110,844)
In-process research and development 1,462 45,937
Changes in operating assets and liabilities, excluding effects from acquired
and divested subsidiaries:
Trade accounts receivable 98,580 (73,902)
Prepaid expenses and other current assets (30,777) (37,791)
Accounts payable and accrued expenses (37,459) 35,025
Deferred revenues (10,138) 11,426
Refundable and accrued income taxes, net (6,094) 29,858
Tax benefit from exercise of stock options -- 170,627
Other assets and liabilities 6,532 (9,779)
----------- ----------
Net cash used for operating activities (606,603) (500,144)
----------- ----------
Cash flows from investing activities:
Additions to property and equipment (91,347) (130,176)
Proceeds from sale of property and equipment 35,779 --
Net proceeds from maturities of (purchases of) available-for-sale securities 20,971 (31,632)
Proceeds from liquidation of stock investments 954,453 1,007,883
Investments in affiliates (64,941) (232,565)
Cash impact of acquisitions and divestitures of subsidiaries (14,432) (182,426)
Other (240) (4,597)
----------- ----------
Net cash provided by investing activities 840,243 426,487
----------- ----------
Cash flows from financing activities:
Net proceeds from (repayments of) obligations under capital leases (40,476) 4,073
Net proceeds from (repayments of) notes payable (2,082) 86,444
Repayments of long-term debt (3,482) (4,608)
Net proceeds from issuance of common stock 16,955 29,591
Net proceeds from issuance of stock by subsidiaries 6,535 163,533
Other (4,926) --
----------- ----------
Net cash provided by (used for) financing activities (27,476) 279,033
----------- ----------
Net increase (decrease) in cash and cash equivalents 206,164 205,376
Cash and cash equivalents at beginning of period 639,666 468,912
----------- ----------
Cash and cash equivalents at end of period $ 845,830 $ 674,288
=========== ==========
see accompanying notes to interim unaudited consolidated financial statements
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
CMGI, Inc. ("CMGI" or "the Company") in accordance with accounting principles
generally accepted in the United States of America ("US GAAP"). In the opinion
of management, the accompanying consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 2000 which are contained in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission ("the SEC") on
October 30, 2000 (as amended on December 8, 2000). The results for the three-
and nine-month periods ended April 30, 2001 are not necessarily indicative of
the results to be expected for the full fiscal year. Certain prior year amounts
in the consolidated financial statements have been reclassified in accordance
with US GAAP to conform to current year presentation.
Certain costs related to the purchase price of products sold, inbound and
outbound shipping charges, packing supplies and other costs associated with
marketplace business of the Company's eBusiness and Fulfillment segment are
classified as cost of revenue. Certain costs related to fulfillment, including
distribution and customer service center expenses for activities such as
receiving goods and picking of goods for shipment within the Company's eBusiness
and Fulfillment segment are classified as selling expenses.
A 1. RESTATEMENT
In the process of finalizing the Company's financial statements for the
quarter ended October 31, 2001, the Company discovered that inadvertent errors
had been made in the calculation of certain amounts included in the Company's
financial statements for the three and nine months ended April 30, 2001 included
in the Form 10-Q. These errors related to the recording of impairment and
amortization charges in consolidation of intangible assets associated with
AltaVista, a subsidiary of the Company. Accordingly, the Company has restated
its financial statements to reflect the correction of these inadvertent errors
and has taken remedial action over the consolidation process that the Company
believes will prevent or detect future such errors. Conforming changes
reflecting these corrections have been made in the Company's Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Consolidated Financial Statements and Notes thereto. See Notes E, F, H and K.
The effects of this restatement on previously reported consolidated
financial statements as of and for the three and nine months ended April 30,
2001 include the following changes (in thousands, except per share amounts):
Consolidated Statements of Operations:
Three Months Ended Nine Months Ended
April 30, 2001 April 30, 2001
-------------- --------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
Amortization of intangible assets and stock-based
compensation $ 213,714 $ 247,439 $ 1,345,731 $ 1,379,456
Impairment of long-lived assets 609,491 609,491 2,701,922 2,678,063
Operating loss (995,953) (1,029,678) (4,781,225) (4,791,091)
Minority interest, net 43,202 53,564 382,961 393,323
Loss before income taxes (1,005,406) (1,028,769) (4,238,133) (4,237,637)
Net loss (963,276) (986,639) (4,161,373) (4,160,877)
Net loss available to common stockholders (965,105) (988,468) (4,166,982) (4,166,486)
Basic and diluted loss per share (2.80) (2.87) (12.82) (12.82)
Consolidated Balance Sheets:
April 30, 2001
---------------
As Reported Restated
----------- -----------
Goodwill and other intangible assets, net of accumulated
amortization $ 1,355,347 $ 1,345,481
Total assets 3,572,876 3,563,010
Minority interest 384,631 374,269
Accumulated deficit (5,024,797) (5,024,301)
Total stockholders' equity 2,049,912 2,050,408
B. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting
for Derivative Instruments and Hedging Activities, which was later amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 and by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133 (as amended, SFAS No. 133). SFAS No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS No. 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statements of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. If the derivative is determined to be a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are offset against the change in fair value of the hedged assets, liabilities,
or firm commitments through the statements of operations or recognized in other
comprehensive income until the hedged item is recognized in the statements of
operations. The ineffective portion of a derivative's change in fair value is
immediately recognized in earnings. The Company currently holds derivative
instruments and engages in certain hedging activities, which have been accounted
for as described in Note N. The Company adopted SFAS No. 133 on August 1, 2000
and recorded a transition gain, net of tax, of approximately $3.2 million during
the first quarter of fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 expresses the views of
the SEC staff in applying generally accepted accounting principles to certain
revenue recognition issues. The Company is continuing to evaluate SAB 101. It
is possible that the Company may recognize an adjustment for approximately $34.9
million in the fourth quarter of fiscal year 2001 upon adoption of SAB 101 to
reflect a change in the recognition of certain revenues within the eBusiness and
Fulfillment segment from a gross basis to a net basis. This potential
adjustment would have no impact on operating loss.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
C. OTHER GAINS (LOSSES), NET
The following schedule reflects the components of "Other gains (losses),
net":
Three Months Ended April 30, Nine Months Ended April 30,
----------------------------- ----------------------------
2001 2000 2001 2000
-------- -------- --------- --------
(in thousands)
Gain on sale of Terra Networks S.A. stock $ -- $ -- $ 64,217 $ --
Gain on sale of Lycos common stock -- -- 357,356 --
Gain (loss) on sale of Open Market common
stock -- -- (1,182) 5,832
Gain on sale of Kana Communications
common stock -- -- 135,289 --
Gain (loss) on sale of Yahoo! common stock -- 209,348 (3,245) 417,414
Gain (loss) on derivative and sale of hedged
Yahoo! common stock (1,493) -- 88,409 --
Gain on sale of Amazon.com common stock -- 4,189 -- 4,189
Gain on sale of Critical Path common stock -- -- 70,900 --
Gain on sale of real estate -- -- 19,801 --
Loss on sale of PCCW stock -- -- (358,855) --
Loss on impairment of available-for-sale
securities (322) -- (149,108) --
Loss on sale of Raging Bull -- -- (95,896) --
Loss on impairment of investments in affiliates, net (25,333) -- (25,333) --
Loss on sale of a majority interest in Signatures
SNI, Inc. (18,499) -- (18,499) --
Other (2,508) -- (11,583) 600
-------- -------- --------- --------
$(48,155) $213,537 $ 72,271 $428,035
======== ======== ========= ========
During the nine months ended April 30, 2001, the Company sold marketable
securities for total proceeds of approximately $947.1 million and recorded a net
pre-tax gain of approximately $348.3 million on these sales. These sales
primarily consisted of approximately 8.4 million shares of Lycos, Inc. common
stock for proceeds of approximately $394.7 million, approximately 241.0 million
shares of Pacific Century CyberWorks Limited (PCCW) stock for proceeds of
approximately $190.2 million, approximately 3.7 million shares of Kana
Communications, Inc. common stock for proceeds of approximately $137.6 million,
approximately 6.8 million shares of Terra Lycos, S.A. (Terra Networks) stock for
proceeds of approximately $78.3 million and approximately 1.3 million shares of
Critical Path, Inc. common stock for proceeds of approximately $72.8 million.
During the nine months ended April 30, 2001, the Company recorded
impairment charges related to its available-for-sale securities under the
provisions of FASB No. 115, Accounting for Certain Investments in Debt and
Equity Securities. These charges primarily consisted of approximately $49.3
million, $38.7 million, $29.6 million and $25.4 million of impairment charges
related to the Company's holdings of Hollywood Entertainment, Inc., Marketing
Services Group, Inc., Netcentives, Inc., and divine, inc. (formerly divine
interVentures Inc.), respectively.
In January 2001, AltaVista, a majority-owned subsidiary of the Company,
sold its subsidiary, Raging Bull, and recorded a net pre-tax loss of
approximately $95.9 million. Also, in December 2000, AltaVista recorded a pre-
tax gain of approximately $19.8 million on the sale of an office building.
During the nine months ended April 30, 2001, the Company recorded a net
write-down of approximately $25.3 million related to certain investments in
affiliates, which were considered impaired. In February 2001, the Company
completed the sale of a majority interest in Signatures SNI, Inc (Signatures).
The Company recorded a loss on the sale of approximately $18.5 million and
retained a minority interest in Signatures. The Company will account for its
investment under the equity method of accounting.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
D. GAIN (LOSS) ON ISSUANCE OF STOCK BY SUBSIDIARIES AND AFFILIATES
During the nine months ended April 30, 2000, the Company sold approximately
8.0 million shares of Yahoo!, Inc. (Yahoo!) common stock, approximately 260,000
shares of Open Market, Inc. (Open Market) common stock and approximately 88,000
shares of Amazon.com Inc. (Amazon) common stock for total proceeds of
approximately $1 billion. The Company recorded pre-tax gains of approximately
$417.4 million, $5.8 million and $4.2 million on the sales of Yahoo!, Open
Market and Amazon common stock, respectively.
During the nine months ended April 30, 2001, the Company recognized gains
on issuance of stock by subsidiaries and affiliates primarily related to the
issuance of approximately 14.9 million shares of common stock by Engage, Inc.
(Engage), a majority-owned subsidiary of the Company, valued at approximately
$225.7 million in its acquisitions of Space Media Holdings Limited (Space) and
MediaBridge Technologies, Inc. (MediaBridge). The Company's ownership interest
in Engage decreased from approximately 86% to approximately 77% primarily as a
result of these stock issuances. The Company provided for deferred income taxes
resulting from the gains on issuance of stock by Engage.
During the nine months ended April 30, 2000, the Company recognized a $51.9
million pre-tax gain on issuance of stock by a subsidiary related to NaviSite,
Inc.'s (NaviSite) issuance of approximately 11.0 million shares of its common
stock at a price of $7 per share in connection with its initial public offering.
The Company's ownership interest in NaviSite decreased from approximately 90% to
approximately 69% primarily as a result of these stock issuances.
E. BUSINESS COMBINATIONS
On August 31, 2000, Engage completed its acquisition of Space. The total
purchase price for Space was valued at approximately $35.9 million consisting of
approximately 3.2 million shares of Engage common stock valued at approximately
$35.5 million and direct acquisition costs of approximately $425,000. Engage
also recorded approximately $18.9 million in deferred compensation related to
approximately 1.5 million shares of Engage common stock issuable to certain
employee shareholders of Space contingent upon continued employment for a one
year period following the date of acquisition. Lastly, contingent
consideration, comprised of approximately 1.4 million shares of Engage common
stock, has been placed in escrow to satisfy certain performance objectives by
Space. At April 30, 2001, the probability that the performance goals will be
attained is remote, and therefore it is unlikely that additional purchase price
will be recorded.
On September 11, 2000, Engage completed its acquisition of MediaBridge.
The total purchase price for MediaBridge was valued at approximately $219.1
million consisting of approximately 11.7 million shares of Engage common stock
valued at approximately $190.2 million, options to purchase Engage common stock
valued at approximately $31.1 million, direct acquisition costs of approximately
$482,000 and net cash acquired of $2.6 million. Of the purchase price, $700,000
was allocated to in-process research and development, which was charged to
operations during the first quarter of fiscal 2001. Engage also recorded
approximately $7.0 million in deferred compensation related to stock options
issued to certain MediaBridge employees. Approximately twelve percent of the
shares issued are subject to an escrow period of one year to secure certain
indemnification obligations of the former stockholders of MediaBridge. In the
third quarter of fiscal 2001, Engage recorded a $2.9 million adjustment to the
goodwill that was originally recorded for the MediaBridge acquisition. The
adjustment related principally to accruing additional liabilities related to
MediaBridge pre-acquisition contingencies. The additional goodwill recorded will
be amortized over the remaining life of the goodwill amortization periods as
originally determined for the MediaBridge acquisition.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The acquisitions completed during the first nine months of fiscal 2001 have
been accounted for using the purchase method and, accordingly, the purchase
prices have been allocated to the assets purchased and liabilities assumed based
upon their fair values at the dates of acquisition. The amounts of the purchase
prices allocated to goodwill and other identifiable intangible assets are being
amortized on a straight-line basis over three years. The acquired companies are
included in the Company's consolidated financial statements from the respective
dates of acquisition.
Amortization of intangible assets and stock-based compensation consists of:
Three months ended Nine months ended
-------------------------------- ---------------------------------
April 30, April 30,
-------------------------------- ---------------------------------
(in thousands) 2001 2000 2001 2000
-------- -------- ---------- --------
Amortization of intangible assets $223,971 $419,992 $1,315,537 $837,101
Amortization of stock-based compensation 23,468 45,295 63,919 52,056
-------- -------- ---------- --------
$247,439 $465,287 $1,379,456 $889,157
======== ======== ========== ========
The amortization of stock-based compensation for the three and nine months
ended April 30, 2001 and 2000 would have been primarily allocated to general and
administrative expense had the Company recorded the expense within the
functional department of the employee or director.
F. IMPAIRMENT OF INTANGIBLE ASSETS
The Company's management performs on-going business reviews and, based on
quantitative and qualitative measures, assesses the need to record impairment
losses on long-lived assets used in operations when impairment indicators are
present. Where impairment indicators were identified, management determined the
amount of the impairment charge by comparing the carrying value of goodwill and
certain other intangible assets to their fair value. Management determines 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 the relative
performance, future prospects and risk profile of the company in comparison to
the guideline companies. Management predominately utilizes third-party
valuation reports in its determination of fair value. As a result, during
management's quarterly review of the value and periods of amortization of both
goodwill and other intangible assets, it was determined that the carrying value
of goodwill and certain other intangible assets were not fully recoverable.
During the first quarter of fiscal 2001, the Company recorded an impairment
charge of approximately $69.6 million. Subsequent to October 31, 2000, CMGI
announced its decisions to exit the businesses conducted by its subsidiaries
iCAST and 1stUp.com. In connection with these decisions, management determined
that the carrying value of certain intangible assets, principally goodwill, were
permanently impaired and recorded impairment charges of approximately $3.6
million and $23.3 million related to iCAST and 1stUp.com, respectively. The
Company also recorded other impairment charges during the first quarter of
fiscal 2001 totaling approximately $42.7 million, consisting primarily of $16.8
million related to intangible assets of Engage, $8.9 million related to
intangible assets of MyWay, and $10.1 million related to intangible assets of
CMGion.
During the second quarter of fiscal 2001, the Company recorded impairment
charges totaling approximately $1.999 billion. Each of the companies for which
impairment charges were recorded in the second quarter had experienced declines
in operating and financial metrics over the previous several quarters in
comparison to the metrics forecasted at the time of their respective
acquisitions. The impairment analysis considered that these companies were
recently acquired during the time period from August 1999 to March 2000 and that
the intangible assets are recorded upon acquisition of these companies was
generally being amortized over a three-year useful life. However, sufficient
monitoring was performed over the course of the prior several quarters and the
companies had each completed an operating cycle since acquisition. This
monitoring process culminated with impairment charges for these companies in the
second quarter. The amount of the impairment charge was determined by comparing
the carrying value of goodwill and certain other intangible assets to fair value
at January 31, 2001. The discount rates used as of January 31, 2001 ranged from
20% to 25%. These discount rates were determined by an analysis of the risks
associated with certain goodwill and other intangible assets. The resulting net
cash flows to which the discount rates were applied were based on management's
estimates of revenues, operating expenses and income taxes from the assets with
identified impairment indicators.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As a result of sequential declines in operating results, primarily due to
the continued weak overall demand for on-line advertising and marketing services
and changes in business strategies, management determined that the carrying
value of goodwill and certain other intangible assets of Engage, yesmail.com,
CMGion's subsidiary, AdForce, and AltaVista should be adjusted. Accordingly,
the Company recorded an impairment charge of approximately $524.1 million,
$350.6 million, $241.8 million and $862.6 million, respectively, totaling
$1.979 billion during the second quarter of fiscal 2001 to adjust the carrying
value of these intangible assets.
Also during the second quarter of fiscal 2001, CMGI announced its decision
to cease funding of ExchangePath. In connection with this decision, management
determined that the carrying value of certain intangible assets of ExchangePath,
principally goodwill, were permanently impaired and recorded impairment charges
in the quarter ended January 31, 2001 of approximately $5.7 million. The Company
also recorded other impairment charges during the second quarter of fiscal 2001
totaling approximately $13.8 million primarily related to certain intangible
assets of Tallan.
During the third quarter of fiscal 2001, the Company recorded impairment
charges totaling approximately $609.5 million. As a result of a decline in
operating and financial metrics at Tallan over the past few quarters in
comparison to the metrics forecasted at the time of acquisition, management
determined that the carrying value of certain intangible assets, principally
goodwill, were permanently impaired and recorded impairment charges of $497.0
million during the third quarter of fiscal year 2001. In addition, CMGI
announced its decision to explore strategic alternatives for the businesses
conducted by its subsidiary, Activate, and AdForce, a subsidiary of CMGion. In
connection with these decisions, management determined that the carrying value
of certain intangible assets, principally goodwill, were permanently impaired
and recorded impairment charges of approximately $30.4 million and $81.4 million
related to Activate and AdForce, respectively, during the third quarter of
fiscal year 2001.
The impairment factors evaluated by management may change in subsequent
periods, given that the Company operates in a volatile business environment.
This could result in additional material impairment charges in future periods.
G. RESTRUCTURING CHARGES
During the nine months ended April 30, 2001, the Company recorded
restructuring charges of approximately $127.4 million in accordance with EITF
94-3, EITF 95-3 and SAB 100. The Company's recent restructuring initiatives
involved strategic decisions to exit certain businesses or to re-evaluate the
current state of on-going businesses. The restructuring charges recorded during
the first, second and third quarters of fiscal 2001 (Q1 Restructuring, Q2
Restructuring, Q3 Restructuring, respectively) primarily relate to contract
terminations, severance charges and equipment charges resulting from the closing
of the operations of iCAST, 1stUp.com and ExchangePath, and the Company's
decision to explore strategic alternatives for AdForce and to streamline its
remaining operations in connection with cost reduction initiatives. Severance
charges include employee termination costs as a result of headcount reductions
and salary expense for certain employees involved in the restructuring efforts.
Engage and AltaVista, who eliminated approximately 550 and 410 positions,
respectively, incurred the majority of these severance charges. Employees
affected by the restructuring were notified both through direct personal contact
and by written notification. The contract terminations primarily consisted of
costs to exit facility and equipment leases and to terminate bandwidth and other
vendor contracts. The majority of the contract terminations were incurred by
Engage in connection with the closing of several office locations, by CMGion's
subsidiary, AdForce, and by NaviPath in connection with the termination of
bandwidth agreements, by MyWay due to the termination of a contract with a
significant customer and by AltaVista in connection with the termination of a
contract with a significant customer, the termination of an office lease
commitment and the termination of other contracts due to a change in its
business strategy. The equipment charges primarily consist of future lease
commitments principally for servers, desktop computers and other
telecommunications equipment of Engage and MyWay which will not be redeployed
and the write-off of fixed assets by Engage, 1stUp.com and ExchangePath.
During the third quarter of fiscal 2001, the Company settled certain
employee related expenses and contractual obligations for amounts greater than
originally anticipated. As a result, the Company recorded a restructuring
adjustment of approximately $3.8 million to the Q2 Restructuring, primarily
related to an additional payment made by AltaVista to a third party to terminate
a service contract.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables summarizes the restructuring activity for the charges
recorded in the first, second and third quarters of fiscal 2001 from the dates
of the approvals of the restructuring plans to April 30, 2001:
(in thousands) Employee
Related Contractual Asset
Expenses Obligations Impairments Total
----------- ---------------- ----------------- ---------
Q1 Restructuring $ 4,667 $ 3,678 $ 496 $ 8,841
Q2 Restructuring 13,282 67,121 19,628 100,031
Q3 Restructuring 1,732 10,173 2,805 14,710
Restructuring adjustments 92 1,293 2,431 3,816
Cash charges (17,149) (31,679) 1,078 (47,750)
Non-cash charges - (21,105) (24,057) (45,162)
-------- -------- -------- --------
Reserve balance at April 30, 2001 $ 2,624 $ 29,481 $ 2,381 $ 34,486
======== ======== ======== ========
The Company anticipates that the remaining restructuring charges will be
settled by February 2003. The payments of employee related expenses are
substantially complete. The remaining contractual obligation payments are
primarily related to lease obligations.
The restructuring charges for the three and nine months ended April 30,
2001 would have been allocated as follows had the Company recorded the expense
within the functional department of the restructured activities:
Three Months Ended Nine Months Ended
April 30, 2001 April 30, 2001
------------------ -----------------
(in thousands)
Cost of revenue $ 439 $ 40,607
Research and development 779 13,737
Selling 5,407 26,327
General and administrative 11,901 46,727
------- --------
$18,526 $127,398
======= ========
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
H. SEGMENT INFORMATION
Based on the information provided to the Company's chief operating decision
maker for purposes of making decisions about allocating resources and assessing
performance, the Company's operations have been classified in five operating
segments that are strategic business units offering distinctive products and
services that are marketed through different channels.
The five operating segments are: (i) Interactive Marketing, (ii) eBusiness
and Fulfillment, (iii) Search and Portals, (iv) Infrastructure and Enabling
Technologies and (v) Internet Professional Services. Management evaluates
segment performance based on segment operating income or loss excluding in-
process research and development expenses, amortization, intangible asset
impairment and restructuring charges.
On October 11, 2000, CMGion acquired AdForce from the Company. On November
13, 2000, the Company announced its decision to cease funding the operations of
iCAST in the second quarter of fiscal 2001, but to continue to operate
Signatures Network, a business previously included in the operations of iCAST,
as an independent CMGI majority-owned subsidiary. As a result of these
transactions, the results of AdForce, which were previously included in the
Interactive Marketing segment, are included in the Infrastructure and Enabling
Technologies segment and the results of Signatures Network, which were
previously included in the Search and Portals segment, are included in the
eBusiness and Fulfillment segment. For comparative purposes, all prior period
segment results and certain other amounts for prior periods have been
reclassified to reflect these transactions and conform to current period
presentation. In February 2001, the Company completed the sale of a majority
interest of Signatures. The Company retained a minority interest in Signatures
and, beginning in the third quarter of fiscal 2001, accounted for its investment
in Signatures using the equity method of accounting rather than the
consolidation method.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Summarized financial information of the Company's results by operating
segment is as follows:
Three Months Ended April 30, Nine Months Ended April 30,
------------------------------ -----------------------------
(in thousands) 2001 2000 2001 2000
--------- --------- ----------- -----------
Net revenue:
Interactive Marketing $ 30,269 $ 64,783 $ 113,518 $ 114,802
eBusiness and Fulfillment 178,017 69,252 556,187 181,479
Search and Portals 37,060 63,074 152,673 168,986
Infrastructure and Enabling Technologies 34,603 26,582 105,618 43,524
Internet Professional Services 21,014 9,453 81,822 12,011
----------- --------- ----------- -----------
$ 300,963 $ 233,144 $ 1,009,818 $ 520,802
=========== ========= =========== ===========
Operating loss:
Interactive Marketing $ (102,717) $(225,609) $(1,462,741) $ (298,657)
eBusiness and Fulfillment (55,032) (561) (134,629) (9,160)
Search and Portals (106,503) (324,452) (1,659,370) (819,171)
Infrastructure and Enabling Technologies (198,913) (137,765) (818,830) (222,964)
Internet Professional Services (542,168) (18,417) (645,313) (30,678)
Other (24,345) (11,474) (70,208) (29,424)
============ ========= =========== ===========
$(1,029,678) $(718,278) $(4,791,091) $(1,410,054)
============ ========= =========== ===========
Operating income (loss), excluding in-process
research and development expenses,
depreciation, amortization, intangible asset
impairment and restructuring charges:
Interactive Marketing $ (25,297) $ (41,836) $ (124,427) $ (79,638)
eBusiness and Fulfillment (3,609) 2,683 (10,008) 447
Search and Portals (17,208) (66,902) (103,903) (187,479)
Infrastructure and Enabling Technologies (62,306) (56,603) (235,114) (112,327)
Internet Professional Services (712) (3,226) 4,342 (11,361)
Other (22,558) (10,979) (65,473) (28,711)
----------- --------- ----------- -----------
$ (131,690) $(176,863) $ (534,583) $ (419,069)
=========== ========= =========== ===========
I. BORROWING ARRANGEMENTS
As consideration for its acquisition of Tallan, the Company issued three
short-term promissory notes totaling approximately $376.9 million. Interest on
each note was payable at a rate of 6.5% per annum. Principal and interest
payments due on the notes were payable in September 2000 and December 2000. The
value of the promissory notes included in the purchase price was recorded net of
a discount of $8.2 million to reflect the difference between the actual interest
rates of the promissory notes and the Company's incremental borrowing rates for
similar types of borrowing transactions. On September 30, 2000, the Company
issued approximately 7.3 million shares of its common stock as payment of
approximately $241.8 million in principal on the notes. On January 2, 2001, the
Company issued approximately 22.9 million shares of its common stock as payment
of approximately $135.1 million representing the remaining principal balance on
these notes.
In June 2000, NaviSite sold certain of its equipment and leasehold
improvements in its two new data centers in a sale-leaseback transaction to a
bank for approximately $30.0 million. NaviSite entered into a capital lease (the
"Capital Lease") upon the leaseback of those assets. In January 2001, NaviSite
paid approximately $27.0 million to settle the Capital Lease obligation.
J. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
Earnings per Share. Basic earnings per share are computed based on the weighted
average number of common shares outstanding during the period. The dilutive
effect of common stock equivalents and convertible preferred stock are included
in the calculation of diluted earnings per share only when the effect of their
inclusion would be dilutive. Approximately 6.9 million and 16.0 million
weighted average common stock equivalents and approximately 9.7 million and 12.3
million shares representing the weighted average effect of assumed conversion of
convertible stock were excluded from the denominator in the diluted loss per
share calculation for the three months ended April 30, 2001 and 2000,
respectively. Approximately 9.2 million and 13.5 million weighted average
common stock equivalents and approximately 9.6 million and 12.2 million shares
representing the weighted average effect of assumed conversion of convertible
stock were excluded from the denominator in the diluted loss per share
calculation for the nine months ended April 30, 2001 and 2000, respectively.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net loss the income
attributable to the potential exercise of the dilutive stock options or warrants
of the subsidiary. The effect of income attributable to dilutive subsidiary
stock equivalents was immaterial for the three and nine months ended April 30,
2001 and 2000.
K. COMPREHENSIVE INCOME
The components of comprehensive income, net of income taxes, are as
follows:
(in thousands) Three months ended April 30, Nine months ended April 30,
---------------------------------------- --------------------------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Net loss $ (986,639) $(430,209) $(4,160,877) $(740,359)
Net unrealized holding gain (loss)
arising during period (38,528) (364,852) (557,443) 435,619
Less: reclassification adjustment for
loss (gain) realized in net loss 501 (125,613) (17,090) (251,792)
----------- --------- ----------- ---------
Comprehensive income (loss) $(1,024,666) $(920,674) $(4,735,410) $(556,532)
=========== ========= =========== =========
L. CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
(in thousands) Nine months ended April 30,
------------------------------------
2001 2000
------- -------
Cash paid during the period for:
Interest $ 5,296 $12,663
======= =======
Income taxes $16,794 $13,835
======= =======
During the nine months ended April 30, 2001, significant non-cash investing
activities included the following transactions:
On August 1, 2000, the Company settled the first tranche of an agreement
(see Note N) that hedged a portion of the Company's investment in common stock
of Yahoo! through the delivery of 581,499 shares of Yahoo! common stock to an
investment bank.
On August 18, 2000, the Company issued approximately 313,000 shares of its
common stock to Compaq Computer Corporation (Compaq) as a semi-annual interest
payment valued at approximately $11.5 million related to notes payable issued in
the acquisition of AltaVista.
On August 25, 2000, the Company and Cable and Wireless plc completed their
previously agreed to exchange of stock. CMGI received approximately 241.0
million shares of PCCW stock in exchange for approximately 13.4 million shares
of the Company's common stock.
On August 31, 2000, Yahoo! acquired eGroups, an @Ventures investee company.
In connection with the merger, CMG@Ventures III, LLC received approximately
91,000 shares of Yahoo! common stock.
On August 31, 2000 and September 12, 2000, respectively, Engage completed
the acquisitions of Space and MediaBridge in exchange for its own common stock
(see Note E).
On September 30, 2000, the Company issued approximately 7.3 million shares
of its common stock as payment of principal and interest totaling approximately
$249.8 million related to a note payable that had been issued in the Company's
acquisition of Tallan (see Note I).
On January 2, 2001, the Company issued approximately 22.9 million shares of
its common stock as payment of principal and interest totaling approximately
$141.8 million related to notes payable that had been issued in the Company's
acquisition of Tallan (see Note I).
On February 1, 2001, the Company settled the third tranche of an agreement
(see Note N) that hedged a portion of the Company's investment in common stock
of Yahoo! Through the delivery of 47,684 shares of Yahoo! common stock to an
investment bank.
On February 18, 2001, the Company issued approximately 2.0 million shares
of its common stock to Compaq as a semi-annual interest payment valued at
approximately $11.5 million related to notes payable issued in the acquisition
of AltaVista.
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
M. AVAILABLE-FOR-SALE SECURITIES
At April 30, 2001, available-for-sale securities primarily consisted of
common stock investments. Available-for-sale securities are carried at fair
value based on quoted market prices, net of a market value discount to reflect
any remaining restrictions on transferability. Available-for-sale securities at
April 30, 2001 included approximately 8.0 million shares of Primedia stock
valued at approximately $59.4 million, approximately 590,000 shares of Yahoo!
stock valued at approximately $11.9 million, approximately 4.6 million shares of
Vicinity Corporation stock valued at approximately $7.1 million and
approximately 282,000 shares of eBay, Inc. stock valued at approximately $13.8
million. Shares of publicly traded companies held by CMG@Ventures I and II,
which have been allocated but not distributed to CMG@Ventures I's and II's
profit members, have been classified in other assets in the accompanying
Consolidated Balance Sheets and valued at carrying value as of the date of
allocation. Certain shares included in available-for-sale securities at April
30, 2001 may be required to be allocated to CMG@Ventures I's and II's profit
members in the future. A net unrealized holding loss of approximately $78.9
million, net of deferred income taxes of approximately $55.2 million, has been
reflected in other comprehensive income in the equity section of the
consolidated balance sheet at April 30, 2001 based on the change in market value
of the available-for-sale securities from the dates of acquisition to April 30,
2001.
N. DERIVATIVE FINANCIAL INSTRUMENTS
In April 2000, the Company entered into an agreement with an investment bank
that hedged a portion of the Company's investment in common stock of Yahoo!
using equity collar arrangements. Under the terms of the contract, the Company
agreed to deliver, at its discretion, either cash or Yahoo! common stock in
three separate tranches, with maturity dates ranging from August 2000 to
February 2001. The Company executed the first tranche in April 2000 and
received approximately $106.4 million in cash. The Company subsequently settled
this tranche through the delivery of 581,499 shares of Yahoo! common stock in
August 2000. In May 2000, the Company received approximately $68.5 million and
$5.7 million upon the execution of the second and third tranches, respectively.
The Company settled the second tranche for cash totaling approximately $33.6
million in October 2000. The Company settled the third tranche through the
delivery of 47,684 shares of Yahoo! common stock in February 2001. In November
2000, the Company entered into a new agreement to hedge the Company's
investment in 581,499 shares of Yahoo! common stock. The Company received
approximately $31.5 million of cash in connection with this new agreement.
Under the terms of the new contract, the Company agreed to deliver, at its
discretion, either cash or shares of Yahoo! common stock on August 1, 2001
The equity collars are considered derivative financial instruments that
have been designated as fair value hedging instruments under the guidance
outlined in SFAS No. 133. The Company's objective relative to the use of these
hedging instruments is to limit the Company's exposure to and benefits from
price fluctuations in the underlying equity securities, which are classified as
available-for-sale securities in the Consolidated Balance Sheets. The Company
accounts for the collar arrangements as hedges and has determined that the
hedges are highly effective. Changes in the value of the hedge instrument are
substantially offset by changes in the value of the underlying investment
securities. The hedging of the Yahoo! common stock is part of the Company's
overall risk management strategy, which includes the preservation of cash and
the value of available-for-sale securities used to fund ongoing operations and
future investment opportunities. The Company does not hold or issue any
derivative financial instruments for trading purposes.
Including the effects of the transition accounting proscribed by SFAS No.
133 and settlement of the first, second and third tranches under the Yahoo!
forward sale agreement, the net gain recognized in the consolidated statement of
operations during the nine months ended April 30, 2001 was approximately $88.4
million, which primarily related to the settlement of the first and third
tranches through the delivery of 581,499 and 47,684 shares of Yahoo! common
stock in August 2000 and February 2001, respectively. The net gain is included
in "Other gains (losses), net", in the Consolidated Statements of Operations
(see Note C).
O. SUBSEQUENT EVENTS
On June 12, 2001, the Company announced that its subsidiary, NaviPath, has
engaged an investment banker to assist in exploring acquisition and
strategic alternatives. No assurances can be given that any such transaction
will occur.
On June 13, 2001, a purported class action lawsuit was filed in the United
States District Court for the Southern District of New York against NaviSite,
Inc., BancBoston Robertson Stephens and certain executives of NaviSite. The
complaint alleges violation of Federal Securities Laws in connection with
NaviSite's initial public offering in October 1999. The plaintiffs in the
lawsuit are seeking an undetermined amount of damages, recissory rights and
costs and expenses of litigation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended, that involve
risks and uncertainties. All statements other than statements of historical
information provided herein may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. Factors that could cause actual results to differ materially from
those reflected in the forward-looking statements include, but are not limited
to, those discussed in this section under the heading "Factors That May Affect
Future Results" and elsewhere in this report and the risks discussed in the
Company's other filings with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
RESTATEMENT
In the process of finalizing the Company's financial statements for the
quarter ended October 31, 2001, the Company discovered that inadvertent errors
had been made in the calculation of certain amounts included in the Company's
financial statements for the three and nine months ended April 30, 2001 included
in the Form 10-Q. These errors related to the recording of impairment and
amortization charges in consolidation of intangible assets associated with
AltaVista, a subsidiary of the Company. Accordingly, the Company has restated
its financial statements to reflect the correction of these inadvertent errors
and has taken remedial action over the consolidation process that the Company
believes will prevent or detect future such errors. Conforming changes
reflecting these corrections have been made in the Company's Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Consolidated Financial Statements and Notes thereto.
The effects of this restatement on previously reported consolidated
financial statements as of and for the three and nine months ended April 30,
2001 include the following changes (in thousands, except per share amounts):
Consolidated Statements of Operations:
Three Months Ended Nine Months Ended
April 30, 2001 April 30, 2001
-------------------------- --------------------------
As Reported Restated As Reported Restated
------------ ------------ ------------ ------------
Amortization of intangible assets and stock-based
compensation $ 213,714 $ 247,439 $ 1,345,731 $ 1,379,456
Impairment of long-lived assets 609,491 609,491 2,701,922 2,678,063
Operating loss (995,953) (1,029,678) (4,781,225) (4,791,091)
Minority interest, net 43,202 53,564 382,961 393,323
Loss before income taxes (1,005,406) (1,028,769) (4,238,133) (4,237,637)
Net loss (963,276) (986,639) (4,161,373) (4,160,877)
Net loss available to common stockholders (965,105) (988,468) (4,166,982) (4,166,486)
Basic and diluted loss per share (2.80) (2.87) (12.82) (12.82)
Consolidated Balance Sheets:
April 30, 2001
-----------
As Reported Restated
----------- -----------
Goodwill and other intangible assets, net of accumulated
amortization $ 1,355,347 $ 1,345,481
Total assets 3,572,876 3,563,010
Minority interest 384,631 374,269
Accumulated deficit (5,024,797) (5,024,301)
Total stockholders' equity 2,049,912 2,050,408
BASIS OF PRESENTATION
The Company reports five operating segments: i) Interactive Marketing,
ii) eBusiness and Fulfillment, iii) Search and Portals, iv) Infrastructure and
Enabling Technologies, and v) Internet Professional Services. CMGI also invests
in companies involved in various aspects of the Internet through its affiliated
venture capital arm, @Ventures. In accordance with accounting principles
generally accepted in the United States of America, all significant intercompany
transactions and balances have been eliminated in consolidation. Accordingly,
segment results reported by CMGI exclude the effect of transactions between
CMGI's subsidiaries.
On October 11, 2000, CMGion acquired AdForce from the Company. On November
13, 2000, the Company announced its decision to cease funding the operations of
its wholly-owned subsidiary, iCAST, in the second quarter of fiscal 2001 and to
continue to operate Signatures Network, a business previously included in the
operations of iCAST, as an independent CMGI majority-owned subsidiary. As a
result of these transactions, the results of AdForce, which were previously
included in the Interactive Marketing segment, are included in the
Infrastructure and Enabling Technologies segment and the results of Signatures
Network, which were previously included in the Search and Portals segment, are
included in the eBusiness and Fulfillment segment. For comparative purposes,
all prior period segment results and certain other amounts for prior periods
have been reclassified to reflect these transactions and conform to current
period presentations. In February 2001, the Company completed the sale of a
majority interest of Signatures. The Company retained a minority interest in
Signatures and, beginning in the third quarter of fiscal 2001, accounted for its
investment in Signatures using the equity method of accounting rather than the
consolidation method.
THREE MONTHS ENDED APRIL 30, 2001 COMPARED TO THREE MONTHS ENDED APRIL 30, 2000
NET REVENUE:
Three Months Three Month
Ended Ended
April 30, As a % of Total April 30, As a % of Total
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- -------------- --------- --------------- -------- --------
(in thousands)
Interactive Marketing $ 30,269 10% $ 64,783 28% $(34,514) (53)%
eBusiness and Fulfillment 178,017 59% 69,252 30% 108,765 157%
Search and Portals 37,060 12% 63,074 27% (26,014) (41)%
Infrastructure and Enabling
Technologies 34,603 12% 26,582 11% 8,021 30%
Internet Professional Services 21,014 7% 9,453 4% 11,561 122%
-------- -------- --------
Total $300,963 100% $233,144 100% $ 67,819 29%
======== === ======== ==== ======== ====
Net revenue increased $67.8 million, or 29%, to $301.0 million for the
three months ended April 30, 2001 from $233.1 million for the same period ended
in fiscal year 2000. The decrease in net revenue within the Interactive
Marketing segment was primarily due to decreases at both Engage and yesmail.com
due to a decline in the on-line advertising market. The increase in net revenue
within the eBusiness and Fulfillment segment was substantially the result of the
acquisition of uBid on April 28, 2000, partially offset by the effect of the
sale of a majority interest in Signatures in February 2001 and a decrease in net
revenue at SalesLink due to a decrease in the volume of orders from its major
customers. The decrease in net revenue within the Search and Portals segment
was primarily the result of a decrease in net revenue at AltaVista due to the
renegotiation of certain strategic deals, the softness in the on-line
advertising market and certain changes in AltaVista's business strategy. The
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
increase in net revenue within the Infrastructure and Enabling Technologies
segment was primarily the result of increased net revenue at NaviSite and
NaviPath partially offset by decreases in net revenue at AdForce due to the
softness in the on-line advertising market and due to the effect of the closing
of operations at 1stUp. The increase in net revenue for NaviSite was primarily
due to the growth in its customer base. The increase in net revenue for
NaviPath primarily related to the growth in usage hours on NaviPath's network.
The increase in net revenue within the Internet Professional Services segment
was primarily due to the acquisition of Tallan on March 31, 2000. The third
quarter of fiscal 2001 includes the impact of a full quarter of net revenue from
Tallan compared to the same period in fiscal year 2000.
COST OF REVENUE:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
------------ ----------------- ------------- ----------------- -------- --------
(in thousands)
Interactive Marketing $ 21,481 71% $ 47,945 74% $(26,464) (55)%
eBusiness and Fulfillment 159,496 90% 58,160 84% 101,336 174%
Search and Portals 16,477 44% 31,693 50% (15,216) (48)%
Infrastructure and Enabling
Technologies 58,688 170% 44,865 169% 13,823 31%
Internet Professional Services 15,732 75% 7,955 84% 7,777 98%
-------- -------- --------
Total $271,874 90% $190,618 82% $ 81,256 43%
======== === ======== ==== ======== ===
Cost of revenue increased $81.3 million, or 43%, to $271.9 million for the
three months ended April 30, 2001 from $190.6 million for same period ended in
fiscal year 2000. Cost of revenue consisted primarily of expenses related to
the purchase price of products sold, inbound and outbound shipping charges,
packing supplies and content, connectivity, payroll and production associated
with delivering the Company's products and services. The decrease in the
Interactive Marketing segment was primarily due to decreases in net revenue at
Engage. The increase within the eBusiness and Fulfillment segment is primarily
attributable to the fiscal 2000 acquisition of uBid, partially offset by the
effect of the deconsolidation of Signatures. The decrease in the Search and
Portals segment was primarily due to the renegotiation of certain strategic
deals by AltaVista, the closing of the operations of iCAST and the consolidation
of technology platforms at MyWay. The increase within the Infrastructure and
Enabling Technologies segment was primarily due to increased infrastructure
costs at both NaviSite and NaviPath needed to support an increase in the
customer base and network usage. The increase within the Internet Professional
Services segment was primarily due to the acquisition of Tallan. The third
quarter of fiscal 2001 includes the impact of a full quarter of cost of revenue
from Tallan compared to the same period in fiscal year 2000.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
RESEARCH AND DEVELOPMENT EXPENSES:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------------- ----------- ----------------- -------- --------
(in thousands)
Interactive Marketing $10,250 34% $ 9,883 15% $ 367 4%
eBusiness and Fulfillment - - 711 1% (711) (100)%
Search and Portals 14,914 40% 28,308 45% (13,394) (47)%
Infrastructure and Enabling
Technologies 10,457 30% 10,043 38% 414 4%
Internet Professional Services - - 888 9% (888) (100)%
Other - - (162) - 162 (100)%
------- ------- -------
Total $35,621 12% $49,671 21% $(14,050) (28)%
======= == ======= === ======== =====
Research and development expenses decreased $14.1 million, or 28%, to
$35.6 million for the three months ended April 30, 2001 from $49.7 million for
the same period ended in fiscal year 2000. Research and development expenses
consisted primarily of personnel and related costs to design, develop, enhance,
test and deploy the Company's product and service efforts either prior to the
development effort reaching technological feasibility or once the product had
reached the maintenance phase of its life cycle. The slight increase in the
Interactive Marketing segment was primarily related to the acquisition of
yesmail.com in March 2000, partially offset by a reduction in development
efforts at Engage. The decrease within the Search and Portals segment was
primarily due to the effects of the Company's restructuring initiatives at
AltaVista, iCAST and MyWay. The decrease at AltaVista is the result of the
effect of its change in business strategy, including the sale of its subsidiary,
Raging Bull. The decrease at iCAST was due to the closing of its operations and
the decrease at MyWay was due to the reduction in its development costs
resulting from its transition to a licensing based revenue model. The slight
increase in the Infrastructure and Enabling Technologies segment was primarily
the result of increased development efforts at NaviSite, partially offset by a
reduction in research and development expenses at ExchangePath as a result of
the closing of its operations.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES:
There were no in-process research and development expenses for the three
months ended April 30, 2001. In-process research and development expenses for
the three months ended April 30, 2000 were $29.3 million within the Interactive
Marketing segment primarily related to the Flycast acquisition and $11.9 within
the Infrastructure and Enabling Technologies segment related to the AdForce and
Equilibrium acquisitions.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
SELLING EXPENSES:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
------------- ----------------- ------------ ----------------- -------- --------
(in thousands)
Interactive Marketing $18,604 61% $ 35,768 55% $(17,164) (48)%
eBusiness and Fulfillment 14,317 8% 2,953 4% 11,364 385%
Search and Portals 24,719 67% 65,134 103% (40,415) (62)%
Infrastructure and Enabling
Technologies 18,974 55% 19,645 74% (671) (3)%
Internet Professional Services 1,027 5% 1,536 16% (509) (33)%
Other 5,050 - 1,576 - 3,474 220%
------- -------- --------
Total $82,691 27% $126,612 54% $(43,921) (35)%
======= == ======== === ======== ====
Selling expenses decreased $43.9 million, or 35%, to $82.7 million for the
three months ended April 30, 2001 from $126.6 million for the same period ended
in fiscal year 2000. Selling expenses consisted primarily of advertising and
other general marketing related expenses, compensation and employee-related
expenses, sales commissions, facilities costs, trade show expenses and travel
costs. Selling expenses also include certain fulfillment costs for the
Company's eBusiness and Fulfillment segment related to the distribution and
customer service center expenses for activities such as receiving of goods and
picking of goods for shipment. Selling expenses decreased during the third
quarter of fiscal year 2001 primarily due to the effect of the Company's
restructuring initiatives including a concerted effort to reduce existing
selling and marketing initiatives across all subsidiaries. The decrease within
the Interactive Marketing segment was primarily the result of a reduction in
headcount and a reduction of sales and marketing efforts at Engage. The
increase in the eBusiness and Fulfillment segment was substantially the result
of the acquisition of uBid during fiscal year 2000, partially offset by the
deconsolidation of Signatures. The decrease in the Search and Portals segment
was primarily the result of a reduction in headcount and a reduction of sales
and marketing programs at AltaVista, the closing of the operations at iCAST and
the consolidation of technology platforms at MyWay. The slight decrease in the
Infrastructure and Enabling Technologies segment was primarily the result of a
reduction in sales and marketing efforts at 1stUp, CMGion, ExchangePath and
NaviPath, partially offset by increased sales and marketing efforts at Activate,
Equilibrium and NaviSite. The decrease at NaviPath was the result of reductions
in headcount and a reduction of certain sales and marketing efforts related to
the NaviOne product line. The decrease at 1stUp and ExchangePath is a result of
the closing of the respective operations of each subsidiary during fiscal year
2001.
GENERAL AND ADMINISTRATIVE EXPENSES:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
------------ ----------------- ------------ ----------------- -------- --------
(in thousands)
Interactive Marketing $ 9,010 30% $15,814 24% $(6,804) (43)%
eBusiness and Fulfillment 9,398 5% 5,659 8% 3,739 66%
Search and Portals 4,724 13% 13,149 21% (8,425) (64)%
Infrastructure and Enabling
Technologies 17,113 49% 13,983 53% 3,130 22%
Internet Professional Services 5,514 26% 2,703 29% 2,811 104%
Other 19,240 - 10,006 - 9,234 92%
------- ------- -------
Total $64,999 22% $61,314 26% $ 3,685 6%
======= == ======= == ======= ===
General and administrative expenses increased $3.7 million, or 6%, to $65.0
million for the three months ended April 30, 2001 from $61.3 million for the
same period ended in fiscal year 2000. General and administrative expenses
consist primarily of compensation, bad debt expense, facilities costs and fees
for professional services. The increase was primarily a result of fiscal 2000
acquisitions partially offset by the effects of the Company's restructuring
initiatives. The decrease in the Interactive Marketing segment was primarily
the result of the restructuring initiative undertaken during fiscal year 2001 at
Engage, which resulted in cost savings through the reduction of headcount and
facility-related expenses. The increase in the eBusiness and Fulfillment segment
was substantially the result of the acquisition of uBid during fiscal year 2000,
partially offset
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
by the decrease related to the deconsolidation of Signatures. The decrease in
the Search and Portals segment was primarily the result of headcount reductions
at AltaVista, the closing of operations at iCAST and of certain operations at
MyWay resulting from the consolidation of MyWay's technology platforms. The
increase in the Infrastructure and Enabling Technologies segment was primarily
the result of increased bad debt expense at NaviSite and the building of
management infrastructure at Activate and Equilibrium, partially offset by the
reductions related to the closing of operations at 1stUp and ExchangePath. The
increase in the Other expenses, which includes certain administrative functions
such as legal, finance and business development which are not fully allocated to
CMGI's subsidiary companies, was primarily the result of the growth of CMGI's
corporate infrastructure including higher personnel costs due to increased
headcount, increased professional fees and facilities costs.
AMORTIZATION OF INTANGIBLE ASSETS AND STOCK-BASED COMPENSATION:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
------------ ----------------- ------------ ----------------- -------- --------
(in thousands)
Interactive Marketing $ 67,073 222% $151,682 234% $ (84,609) (56)%
eBusiness and Fulfillment 49,838 28% 2,330 3% 47,508 2,039%
Search and Portals 70,733 191% 232,542 369% (161,809) (70)%
Infrastructure and Enabling
Technologies 16,524 48% 63,891 240% (47,367) (74)%
Internet Professional Services 43,216 206% 14,788 156% 28,428 192%
Other 55 - 54 - 1 2%
-------- -------- ---------
Total $247,439 82% $465,287 200% $(217,848) (47)%
======== === ======== ==== ========= ====
Amortization of intangible assets and stock-based compensation decreased
$217.9 million, or 47%, to $247.4 million for the three months ended April 30,
2001 from $465.3 million for the same period ended in fiscal year 2000.
Amortization of intangible assets and stock-based compensation consisted
primarily of goodwill amortization expense related to acquisitions made during
fiscal year 2000. The intangible assets recorded as a result of acquisitions
are primarily being amortized over periods ranging from two to five years.
Included within amortization of intangible assets and stock-based compensation
expenses was approximately $23.5 and $45.3 million of stock-based compensation
for the three months ended April 30, 2001 and 2000, respectively. The decrease
in amortization is related to the impairment charges taken on certain intangible
assets by the Company during fiscal year 2001 which reduced the amount of
goodwill and intangible assets to be amortized in the future. The decrease in
amortization in the Interactive Marketing segment was primarily the result of
impairment charges taken against certain intangible assets during fiscal year
2001 by Engage and yesmail.com. The increase in the eBusiness and Fulfillment
segment was primarily the result of the acquisition of uBid during fiscal year
2000, and the acceleration of approximately $17 million of stock-based
compensation related to the sale of a majority interest in Signatures. The
decrease in the Search and Portals segment was primarily the result of
impairment charges taken against certain intangible assets of AltaVista, iCAST
and MyWay during fiscal year 2001. The decrease in the Infrastructure and
Enabling Technologies segment was primarily the result of the impairment charges
taken against certain intangible assets by AdForce, 1stUp and ExchangePath
during fiscal year 2001. The increase in the Internet Professional Services
segment was due to the impact of a full quarter of amortization from Tallan
during the third quarter of fiscal year 2001 versus one month of amortization
during the third quarter of fiscal 2000.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
IMPAIRMENT OF INTANGIBLE ASSETS:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
------------ ----------------- ------------ ----------------- -------- --------
(in thousands)
Interactive Marketing $ 547 2% $ - - $ 547 N/A
eBusiness and Fulfillment - - - - - N/A
Search and Portals 181 0% 16,700 26% (16,519) (99)%
Infrastructure and Enabling
Technologies 111,760 323% - - 111,760 N/A
Internet Professional Services 497,003 2,365% - - 497,003 N/A
Other - - - - - N/A
-------- ------- -- --------
Total $609,491 203% $16,700 7% $592,791 3,550%
======== ===== ======= == ======== =====
During the three months ended April 30, 2001, the Company recorded
impairment charges of approximately $609.5 million as a result of management's
ongoing business review and impairment analysis performed under its existing
policy regarding impairment of long-lived assets. Where impairment indicators
were identified, management determined the amount of the impairment charge by
comparing the carrying value of goodwill and certain other intangible assets to
their fair value. Management determines fair value based on a combination of
the discounted cash flow methodology, which was based upon converting expected
future cash flows to present value, and the market approach, which included
analysis of market price multiples of companies engaged in lines of business
similar to the company being evaluated. The market price multiples were
selected and applied to the company based on the relative performance, future
prospects and risk profile of the company in comparison to the guideline
companies. Management predominately utilizes valuation reports in its
determination of fair value. As a result, during management's quarterly review
of the value and periods of amortization of both goodwill and other intangible
assets, it was determined that the carrying value of goodwill and certain other
intangible assets were not fully recoverable. Each of the companies for which
impairment charges were recorded in the third quarter have experienced declines
in operating and financial metrics over the past several quarters in comparison
to the metrics forecasted at the time of their respective acquisitions. The
impairment analysis considered that these companies were recently acquired
during the period from August 1999 to March 2000 and that the intangible assets
recorded upon acquisition of these companies was generally being amortized over
a three to five-year useful life. However, sufficient monitoring was performed
over the course of the past several quarters and the companies have each
completed an operating cycle since acquisition. This monitoring process
culminated with impairment charges for these companies in the third quarter of
fiscal year 2001. The impairment charges incurred in the Infrastructure and
Enabling Technologies segment related to the write-down of approximately
$81.4 million and $30.4 million of goodwill and other intangible assets at
CMGion, related to its subsidiary AdForce, and Activate, respectively. The
impairment charges incurred in the Internet Professional Services segment
related to the write-down of approximately $497.0 million of goodwill and
certain other intangible assets at Tallan. The impairment factors evaluated by
management may change in subsequent periods, given that the Company operates in
a volatile business environment. This could result in material impairment
charges in future periods.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
RESTRUCTURING CHARGES:
Three Months Three Months
Ended Ended
April 30, As a % of Segment April 30, As a % of Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
------------ ----------------- ------------- ------------------ -------- --------
(in thousands)
Interactive Marketing $ 6,021 20% $ - - $ 6,021 N/A
eBusiness and Fulfillment - - - - - N/A
Search and Portals 11,815 32% - - 11,815 N/A
Infrastructure and Enabling
Technologies - - - - - N/A
Internet Professional Services 690 3% - - 690 N/A
Other - - - - - N/A
------- --------- -------
Total $18,526 6% $ - - $18,526 N/A
======= == ========= === =======
Restructuring charges of approximately $18.5 million recorded during the
three months ended April 30, 2001 consisted primarily of contract terminations,
severance charges and equipment charges incurred as a result of the closing of
certain subsidiaries and actions taken at the remaining subsidiaries to increase
operational efficiencies, improve margins and further reduce expenses at the
remaining subsidiaries. The restructuring charges incurred in the Interactive
Marketing segment primarily related to a loss incurred on the sale of a
component of its business by Engage and severance costs. The restructuring
charges incurred in the Search and Portals segment primarily consisted of the
termination of a contract with a significant customer, the termination of an
office lease commitment and the write-off of leasehold improvements related to
this office space. During the third quarter of fiscal 2001, the Company settled
certain employee-related expenses and contractual obligations for amounts
greater than originally anticipated. As a result, the Company recorded a
restructuring adjustment of approximately $3.8 million, primarily related to an
additional payment made by AltaVista to a third party to terminate a service
contract. The restructuring charges incurred in the Internet Professional
Services segment primarily relate to severance and equipment charges taken as a
result of workforce reductions of approximately 131 positions at Tallan.
OTHER INCOME/EXPENSES:
Gain (loss) on issuance of stock by subsidiaries and affiliates decreased
$20.4 million, or 102%, to $(432,000) for the three months ended April 30, 2001
from $20.0 million for the same period ended in fiscal year 2000. Loss on the
issuance of stock by subsidiaries and affiliates in the three months ended
April 30, 2001 primarily related to the pre-tax losses on the issuance of stock
by Engage and NaviSite to employees as a result of stock option exercises. Gain
on issuance of stock by subsidiaries and affiliates in the three months ended
April 30, 2000 primarily reflects the pre-tax gain of $20.9 million on the
issuance of common stock by Vicinity as a result of its initial public offering.
Other gains (losses), net decreased $261.7 million, or 123%, to
$(48.2) million for the quarter ended April 30, 2001 from a net gain of
$213.5 million for the same period in fiscal 2000. Other losses, net for the
quarter ended April 30, 2001 primarily consisted of a pre-tax loss of
approximately $26.1 million the write-downs of certain investments made by
@Ventures and of a pre-tax loss of approximately $18.5 million on the sale of a
majority interest in Signatures. Other gains, net for the three months ended
April 30, 2000 consisted primarily of pre-tax gains of approximately
$209.3 million on the sale of Yahoo! common stock.
Interest income decreased $1.9 million to $12.5 million for the three
months ended April 30, 2001 from $14.4 million for the same period ended in
fiscal year 2000, reflecting decreased interest income due to lower interest
rates partially offset by higher average cash and cash equivalent balances.
Interest expense decreased $6.4 million to $6.6 million for the three months
ended April 30, 2001 from $13.0 million for the same period in fiscal year 2000,
primarily due to the note payable issued in conjunction with the acquisition of
Tallan being paid in full during fiscal year 2001.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method
of accounting. Under the equity method, the Company's proportionate share of
each affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates decreased
approximately $342,000 to $9.9 million for the
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
three months ended April 30, 2001 from $10.3 million for the same period ended
in fiscal year 2000, primarily reflecting decreased ownership percentages and
smaller net losses of these affiliates accounted for under the equity method
compared to the ownership percentages and net losses for the same period last
year. Equity in losses of affiliates for the third quarter of fiscal year 2001
included the results from the Company's minority ownership in AnswerLogic, Inc.,
B2E Solutions, CarParts.com, Inc., Domania.com, Inc., Ensera, Inc., FoodBuy.com,
Inc., GXMedia, Inc., Idapta, Inc., Industria Solutions, Inc. KnowledgeFirst,
Inc., MyFamily.com, Inc., NameTree, Inc., NextMonet.com, Inc., NextOffice.com,
Inc., OneCore Financial Network, Inc., Radiate, Inc., Signatures, Undoo.com and
Virtual Ink Corporation. Equity in losses of affiliates for the third quarter of
fiscal year 2000 included the results from the Company's minority ownership in
Engage Technologies Japan, Inc., Foodbuy.com, Inc., GX Media, Inc., Half.com,
Inc.,ThingWorld.com, LLC and WebCT, Inc. The Company expects its affiliate
companies to continue to invest in development of their products and services
and to recognize operating losses, which will result in future charges recorded
by the Company to reflect its proportionate share of such losses.
Minority interest, net decreased to $53.6 million for the three months
ended April 30, 2001 from $56.0 million for the same period of fiscal 2000,
primarily reflecting minority interest in net losses of seven subsidiaries
during the third quarter of fiscal year 2001, including AltaVista, Engage,
MyWay, NaviSite, CMGion and NaviPath. The decrease is primarily related to a
decrease in the net losses reported by AltaVista and MyWay due to the effect of
the restructuring initiatives and the effect of previously recorded impairment
charges taken on goodwill and other intangible assets which significantly
reduced the amount of amortization expense recorded during the third fiscal
quarter of 2001 at AltaVista.
Income tax benefit recorded in the third quarter of fiscal 2001 was
approximately $42.1 million. Exclusive of taxes provided for significant,
unusual or extraordinary items that will be reported separately, the Company
provides for income taxes on a year to date basis at an effective rate based
upon its estimate of full year earnings. In determining the Company's effective
rate for the third quarter of fiscal 2001, gains (losses) on issuances of stock
by subsidiaries and affiliates, other gains (losses), net, and impairment
charges taken on intangible assets were excluded. Income tax expense in the
third quarter of fiscal 2001 differs from the amount computed by applying the
U.S. federal income tax rate of 35 percent to pre-tax loss primarily as a result
of non-deductible goodwill amortization and impairment charges, state taxes and
valuation allowances recognized on deferred tax assets.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
NINE MONTHS ENDED APRIL 30, 2001 COMPARED TO NINE MONTHS ENDED APRIL 30, 2000
NET REVENUE:
Nine Nine
Months Ended Months Ended
April 30, As a % of Total April 30, As a % of Total
2001 Net Revenue 2000 Net Revenue $ Change % Change
---------- --------------- ------------- --------------- -------- --------
(in thousands)
Interactive Marketing $ 113,518 11% $114,802 22% $ (1,284) (1)%
eBusiness and Fulfillment 556,187 55% 181,479 35% 374,708 206%
Search and Portals 152,673 15% 168,986 33% (16,313) (10)%
Infrastructure and Enabling
Technologies 105,618 11% 43,524 8% 62,094 143%
Internet Professional Services 81,822 8% 12,011 2% 69,811 581%
---------- -------- --------
Total $1,009,818 100% $520,802 100% $489,016 94%
========== === ======== ==== ======== ====
Net revenue increased $ 489.0 million, or 94%, to $1.010 billion for the
nine months ended April 30, 2001 from $520.8 million for the same period ended
in fiscal year 2000. The decrease in net revenue within the Interactive
Marketing segment was primarily due to decreased net revenue at Engage resulting
from a decline in the on-line advertising market, partially offset by the full
impact of fiscal year 2000 acquisitions of yesmail.com, Flycast and the
acquisition of MediaBridge in September 2000. The increase in net revenue
within the eBusiness and Fulfillment segment was substantially the result of the
acquisition of uBid in April 2000, and an increase in the volume of business at
SalesLink, partially offset by the effect of the sale of a majority interest in
Signatures. The decrease in net revenue within the Search and Portals segment
was primarily the result of a decrease in net revenue at AltaVista due to the
renegotiation of certain strategic deals, the softness in the on-line
advertising market and certain changes in AltaVista's business strategy,
partially offset by increased net revenue from MyWay. The increase in net
revenue within the Infrastructure and Enabling Technologies segment was
primarily the result of increased net revenue at NaviSite and NaviPath and the
impact of a full nine months of net revenue at Activate and AdForce (acquired in
November 1999 and January 2000, respectively). The increase in net revenue for
NaviSite was primarily due to the growth in its customer base facilitated by the
build-out of its data center facilities. The increase in net revenue for
NaviPath primarily related to the growth in usage hours on NaviPath's network.
The increase in net revenue within the Internet Professional Services segment
was substantially due to the acquisition of Tallan during fiscal year 2000.
COST OF REVENUE:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
-------- ----------- -------- ----------- ---------- ---------
(in thousands)
Interactive Marketing $ 84,599 75% $ 90,598 79% $ (5,999) (7)%
eBusiness and Fulfillment 496,305 89% 150,078 83% 346,227 231 %
Search and Portals 78,269 51% 92,335 55% (14,066) (15)%
Infrastructure and Enabling Technologies 205,250 194% 89,173 205% 116,077 130 %
Internet Professional Services 58,899 72% 11,414 95% 47,485 416 %
-------- --- -------- --- --------
Total $923,322 91% $433,598 83% $489,724 113 %
======== === ======== === ======== ====
Cost of revenue increased $489.7 million, or 113%, to $923.3 million for
the nine months ended April 30, 2001 from $433.6 million for the same period
ended in fiscal year 2000. The decrease in the Interactive Marketing segment
was primarily due to a decrease in net revenue at Engage, partially offset by an
increase at yesmail.com primarily due to the impact of a full nine months of
cost of revenue included in the nine months ended April 30, 2001 as compared to
the same period in fiscal year 2000. The increase within the eBusiness and
Fulfillment segment is primarily attributable to the fiscal year 2000
acquisition of uBid, partially offset by the effect of the deconsolidation of
Signatures in the third quarter of fiscal year 2001. The decrease within the
Search and Portals segment was primarily due to decreased net revenue at
AltaVista as a result of a change in business strategy and the overall softness
in the on-line advertising market. The increase within the Infrastructure and
Enabling Technologies segment was primarily due to increased infrastructure
costs as both NaviSite and NaviPath needed to support an
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
increase in the customer base and network usage. The increase in the Internet
Professional Services segment was primarily due to the acquisition of Tallan.
The results for the nine months ended April 30, 2001 include the impact of a
full nine months of cost of revenue from Tallan compared to the same period in
fiscal year 2001.
RESEARCH AND DEVELOPMENT EXPENSES:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 37,977 33% $ 18,300 16% $19,677 108 %
eBusiness and Fulfillment 703 0% 2,002 1% (1,299) (65)%
Search and Portals 57,085 37% 62,919 37% (5,834) (9)%
Infrastructure and Enabling Technologies 37,618 36% 15,302 35% 22,316 146 %
Internet Professional Services - - 2,760 23% (2,760) 100 %
Other - - - - - N/A
-------- -- -------- ------- ---
Total $133,383 13% $101,283 19% $32,100 32%
======== == ======== == ======= ====
Research and development expenses increased $32.1 million, or 32%, to
$133.4 million for the nine months ended April 30, 2001 from $101.3 million for
the same period in fiscal year 2000. The increase within the Interactive
Marketing segment was primarily the result of the fiscal year 2000 acquisitions
of AdKnowledge, Flycast and yesmail.com.com, the fiscal year 2001 acquisition of
MediaBridge and increased development efforts at Engage. The decrease in the
eBusiness and Fulfillment segment is primarily the result of the deconsolidation
of Signatures in February 2001. The decrease within the Search and Portals
segment was primarily the result of the decreases in research and development
expenses resulting from the closing of operations at iCAST and of certain
operations at MyWay, partially offset by increased efforts at AltaVista related
to further development of its search software. The increase in the
Infrastructure and Enabling Technologies segment was primarily the result of the
impact of a full nine months of expenses from Activate and AdForce during fiscal
year 2001 and increased development efforts at NaviSite.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 700 1% $31,617 28% $(30,917) 98%
eBusiness and Fulfillment - - - - - N/A
Search and Portals - - - - - N/A
Infrastructure and Enabling Technologies - - 14,320 33% (14,320) 100%
Internet Professional Services - - - - - N/A
Other 762 1% - - 762 N/A
------ - ------- - -------- ---
Total $1,462 0% $45,937 9% $(44,475) 97%
====== = ======= == ======== ===
In-process research and development expenses decreased to $1.5 million for
the nine months ended April 30, 2001 from $45.9 million for the same period in
fiscal year 2000. In-process research and development expenses for the nine
months ended April 30, 2000 were $31.6 million within the Interactive Marketing
segment primarily related to the Flycast acquisition and $14.3 within the
Infrastructure and Enabling Technologies segment related to the AdForce and
Equilibrium acquisitions.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
SELLING EXPENSES:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 86,648 76% $ 66,030 58% $ 20,618 31%
eBusiness and Fulfillment 43,591 8% 12,432 7% 31,159 250%
Search and Portals 116,850 77% 185,389 110% (68,539) (37)%
Infrastructure and Enabling Technologies 70,844 67% 37,893 87% 32,951 87%
Internet Professional Services 4,312 5% 4,060 34% 252 6%
Other 11,089 - 3,446 - 7,643 222%
-------- -------- --------
Total $333,334 33% $309,250 59% $ 24,084 8%
======== == ======== === ======== ====
Selling expenses increased $24.0 million, or 8%, to $333.3 million for the
nine months ended April 30, 2001 from $309.3 million for the same period ended
in fiscal year 2000. Selling expenses increased during the nine-month period
ended April 30, 2001 primarily due to the effects of fiscal year 2000
acquisitions, partially offset by the effects of the Company's restructuring
initiatives. The increase in the Interactive Marketing segment was primarily
the result of the fiscal year 2000 acquisitions of AdKnowledge, Flycast and
yesmail.com.com, the fiscal year 2001 acquisition of MediaBridge and increased
international sales and marketing efforts at Engage. The increase in the
eBusiness and Fulfillment segment was substantially the result of the
acquisition of uBid during fiscal year 2000, partially offset by the effect of
the deconsolidation of Signatures in the third quarter of fiscal year 2001.
The decrease in the Search and Portals segment was primarily the result of the
reduction in headcount and certain marketing campaigns at AltaVista, the closing
of operations of iCAST and the consolidation of technology platforms at MyWay.
The increase in the Infrastructure and Enabling Technologies segment was
primarily the result of the acquisitions of Activate, AdForce, Equilibrium,
ExchangePath, and Tribal Voice during fiscal year 2000 and increased sales and
marketing efforts at NaviSite. The increase within the Internet Professional
Services segment was substantially the result of the acquisition of Tallan
during fiscal year 2000.
GENERAL AND ADMINISTRATIVE EXPENSES:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 41,576 37% $ 23,817 21% $17,759 75%
eBusiness and Fulfillment 30,050 5% 19,038 11% 11,012 58%
Search and Portals 25,950 17% 35,323 21% (9,373) (27)%
Infrastructure and Enabling Technologies 52,786 50% 24,831 57% 27,955 113%
Internet Professional Services 15,936 20% 6,109 51% 9,827 161%
Other 58,193 - 25,813 - 32,380 125%
-------- -- -------- -- -------
Total $224,491 22% $134,931 26% $89,560 66%
======== == ======== == ======= ====
General and administrative expenses increased $89.6 million, or 66%, to
$224.5 million for the nine months ended April 30, 2001 from $135.0 million for
the same period ended in fiscal year 2000. General and administrative expenses
increased during the nine months ended April 30, 2001 primarily due to the
effect of the fiscal year 2000 acquisitions and the building of management
infrastructure at the corporate level and at several of the Company's existing
subsidiaries. The increase in the Interactive Marketing segment was primarily
the result of increased bad debt expense recorded by Engage, the fiscal year
2000 acquisitions of AdKnowledge, Flycast, and yesmail.com.com and the fiscal
year 2001 acquisition of MediaBridge. The increase in the eBusiness and
Fulfillment segment was substantially the result of the acquisition of uBid
during fiscal year 2000 partially offset by the deconsolidation of Signatures.
The decrease in the Search and Portals segment was primarily due to the
deconsolidation of Blaxxun in March 2000 and a decrease in the headcount at
AltaVista and MyWay as a result of the Company's restructuring initiatives.
The increase in the Infrastructure and Enabling Technologies segment was
primarily due to the acquisitions of Activate, AdForce, Equilibrium,
ExchangePath, 1stUp.com and Tribal Voice during fiscal year 2000 and the
building of management infrastructure at NaviSite and NaviPath. The increase in
the Internet
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Professional Services segment was primarily the result of the acquisition of
Tallan. The increase in the Other expenses, which includes certain
administrative functions such as legal, finance and business development which
are not fully allocated to CMGI's subsidiary companies, was primarily the result
of the growth of CMGI's corporate infrastructure including higher personnel
costs due to increased headcount, increased professional fees and facilities
costs.
AMORTIZATION OF INTANGIBLE ASSETS AND STOCK-BASED COMPENSATION:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 405,614 357% $183,097 159% $222,517 122 %
eBusiness and Fulfillment 116,667 21% 7,089 4% 109,578 1,546 %
Search and Portals 582,358 381% 595,491 352% (13,133) (2)%
Infrastructure and Enabling Technologies 138,109 131% 84,969 195% 53,140 63 %
Internet Professional Services 136,544 167% 18,346 153% 118,198 644 %
Other 164 - 165 - (1) 1 %
---------- -------- --------
Total $1,379,456 137% $889,157 171% $490,299 55 %
========== === ======== === ======== =====
Amortization of intangible assets and stock-based compensation increased
$490.3 million, or 55%, to $1.379 billion for the nine months ended April 30,
2001 from $889.2 million for the same period ended in fiscal year 2000.
Amortization of intangible assets and stock-based compensation consisted
primarily of goodwill amortization expense related to acquisitions made during
fiscal year 2000. The intangible assets recorded as a result of acquisitions
are being amortized over periods ranging from two to five years. Included
within amortization of intangible assets and stock-based compensation expenses
was approximately $63.9 million and $52.1 million of stock-based compensation
for the nine months ended April 30, 2001 and 2000, respectively. The increase
in amortization in the Interactive Marketing segment was primarily the result of
the fiscal year 2000 acquisitions of AdKnowledge, Flycast and yesmail.com
and the fiscal year 2001 acquisition of MediaBridge. The increase in the
eBusiness and Fulfillment segment was primarily the result of the acquisition of
uBid during fiscal year 2000. The decrease in the Search and Portals segment
was primarily the result of the impairment charge taken during fiscal year 2001
related to certain intangible assets of AltaVista and iCAST. The increase in
the Infrastructure and Enabling Technologies segment was primarily the result of
the acquisitions of Activate, AdForce, Equilibrium, ExchangePath, and Tribal
Voice during fiscal year 2000. The increase in the Internet Professional
Services segment was due to the acquisition of Tallan during fiscal year 2000.
IMPAIRMENT OF INTANGIBLE ASSETS:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 891,984 786% $ - N/A $ 891,984 N/A
eBusiness and Fulfillment 3,500 1% - N/A 3,500 N/A
Search and Portals 875,200 573% 16,700 10% 858,500 5,141%
Infrastructure and Enabling Technologies 396,625 376% - N/A 396,625 N/A
Internet Professional Services 510,754 624% - N/A 510,754 N/A
Other - - - - - -
---------- --- ------- - ---------- ------
Total $2,678,063 265% $16,700 3% $2,661,363 15,936%
========== === ======= === ========== ======
During the nine months ended April 30, 2001, the Company recorded
impairment charges of approximately $2.678 billion as a result of management's
ongoing business review and impairment analysis performed under its existing
policy regarding impairment of long-lived assets. Where impairment indicators
were identified, management determined the amount of the impairment charge by
comparing the carrying value of goodwill and certain other intangible assets to
their fair value.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Management determines 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.
The market price multiples are selected and applied to the company based on the
relative performance, future prospects and risk profile of the company in
comparison to the guideline companies. Management predominately utilizes
valuation reports in its determination of fair value. As a result, during
management's quarterly review of the value and periods of amortization of both
goodwill and other intangible assets, it was determined that the carrying value
of goodwill and certain other intangible assets were not fully recoverable.
The Interactive Marketing segment recorded impairment charges of approximately
$540.8 million related to the write-down of intangible assets at Engage related
to goodwill and certain other intangible assets of its media business and
approximately $351.1 million of goodwill and certain other intangible assets at
yesmail.com. The impairment charges incurred in the Search and Portals segment
primarily related to the write-down of approximately $862.8 million of goodwill
and other intangible assets related to AltaVista. The impairment charges in the
Infrastructure and Enabling Technologies segment primarily related to
approximately $336.8 million of goodwill and other intangible assets at CMGion
related to its subsidiary, AdForce, approximately $31.2 million of goodwill and
other intangible assets at Activate, approximately $23.0 million of goodwill and
other intangible assets at 1st Up, and approximately $5.6 million of goodwill at
ExchangePath. The other intangible assets of Activate and AdForce that were
determined to be impaired primarily related to a significant reduction in the
acquired customer bases and turnover of workforce, which was in place at the
time of the acquisitions of the companies. The impairment charges incurred in
the Internet Professional Services segment related to the write-down of
approximately $510.8 million of goodwill and other intangible assets at Tallan.
The other intangible assets that were determined to be impaired primarily
related to a significant reduction in the acquired customer base and turnover of
workforce, which was in place at the time of the acquisition. The impairment
factors evaluated by management may change in subsequent periods, given that the
Company operates in a volatile business environment. This could result in
material impairment charges in future periods.
RESTRUCTURING CHARGES:
Nine Nine
Months Ended As a % of Months Ended As a % of
April 30, Segment April 30, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
---- ----------- -------- ----------- -------- --------
(in thousands)
Interactive Marketing $ 27,161 24% $ - - $ 27,161 N/A
EBusiness and Fulfillment - - - - - N/A
Search and Portals 76,331 50% - - 76,331 N/A
Infrastructure and Enabling Technologies 23,216 22% - - 23,216 N/A
Internet Professional Services 690 1% - - 690 N/A
Other - - - - - N/A
-------- -- --------- -- -------- ---
Total $127,398 13% $ - - $127,398 N/A
======== == ========= -- ======== ---
Restructuring charges of approximately $127.4 million recorded during the
nine months ended April 30, 2001 consisted primarily of contract terminations,
severance charges and equipment charges incurred as a result of the closing of
certain subsidiaries and actions taken at the remaining subsidiaries to increase
operational efficiencies, improve margins and further reduce expenses at the
remaining subsidiaries. The restructuring charges incurred in the Interactive
Marketing segment primarily related to workforce reductions of approximately 550
positions and the closing of several office locations at Engage, future lease
commitments of Engage for servers, desktop computers and other
telecommunications equipment and the write-off of fixed assets by Engage. The
restructuring charges incurred in the Search and Portals segment primarily
consisted of workforce reductions of approximately 410 positions at AltaVista,
the termination of a contract with a significant customer and the termination of
other contracts by AltaVista in connection with the change in its business
strategy, the termination of a contract with a significant customer by MyWay,
the future lease commitments of MyWay for servers, desktop computers and other
telecommunications equipment and severance and other costs at iCAST incurred in
connection with the closing of its operations. The restructuring charges
incurred in the Infrastructure and Enabling Technologies segment primarily
related to the termination of bandwidth agreements by NaviPath and CMGion's
subsidiary, AdForce, severance costs at 1stUp.com and the write-off of fixed
assets by 1stUp.com and ExchangePath.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
OTHER INCOME/EXPENSES:
Gain (loss) on issuance of stock by subsidiaries and affiliates increased
$50.5 million, or 70%, to $122.4 million for the nine months ended April 30,
2001 from $71.9 million for the same period ended in fiscal year 2000. Gain
(loss) on the issuance of stock by subsidiaries and affiliates for the nine
months ended April 30, 2001 primarily relates to a pre-tax gain of approximately
$125.9 million on the issuance of stock by Engage in its acquisitions of
MediaBridge and Space Media Holdings Limited partially offset by a pre-tax loss
of approximately $4.4 million on the issuance of stock by Engage to employees as
a result stock option exercises. Gain (loss) on issuance of stock by
subsidiaries and affiliates for the nine months ended April 30, 2000 primarily
reflects the pre-tax gain of $51.9 million on the issuance of common stock by
NaviSite in connection with its initial public offering.
Other gains (losses), net decreased $355.8 million, or 83%, to
$72.3 million for the nine months ended April 30, 2001 from $428.0 million for
the same period in fiscal 2000. Other gains (losses), net for the nine months
ended April 30, 2001 primarily consisted of a pre-tax gain of approximately
$357.4 million on the sale of Lycos, Inc. common stock, a pre-tax gain of
approximately $135.3 million on the sale of Kana Communications, Inc. common
stock, a pre-tax gain of approximately $88.4 million on the sale of Yahoo!, Inc.
common stock, a pre-tax gain of approximately $64.2 million on the sale of
Terra Networks stock, a pre-tax gain of approximately $70.9 million on the sale
of Critical Path, Inc. common stock and a pre-tax gain of approximately
$19.8 million on the sale of a real estate holding by AltaVista, partially
offset by a pre-tax loss of approximately $358.9 million on the sale of Pacific
Century CyberWorks Limited stock, a pre-tax loss of approximately $95.9 million
on the sale of AltaVista's wholly-owned subsidiary, Raging Bull, and by a pre-
tax loss of approximately $149.1 million related to impairment charges taken on
certain available-for-sale securities held by the Company. Other gains, net for
the nine months ended April 30, 2000 primarily consisted of pre-tax gains of
approximately $417.4 million on the sale of Yahoo! common stock.
Interest income increased $13.4 million to $44.4 million for the nine
months ended April 30, 2001 from $31.0 million for the same period in fiscal
2000, reflecting increased interest income associated with higher cash and cash
equivalent balances partially offset by lower interest rates. Interest expense
increased $13.1 million to $39.6 million for the nine months ended April 30,
2001 from $26.5 million for the same period in fiscal 2000, primarily due to the
notes issued in connection with the acquisition of Tallan.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method.
Under the equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates increased
$23.7 million to $39.4 million for nine months ended April 30, 2001, from
$15.7 million for the same period ended in fiscal year 2000, primarily
reflecting an increased number of investments accounted for under the equity
method compared to the same period last year. Equity in losses of affiliates for
the nine months ended April 30, 2001 included the results from the Company's
minority ownership in AnswerLogic, Inc., B2E Solutions, Inc., BizBuyer.com,
Inc., CarParts.com, Inc., Corrigo, Inc., Domania.com, Inc., eCircles
Corporation, Ensera, Inc., FindLaw, Inc., FoodBuy.com, Inc., GXMedia, Inc.,
HotLinks Network, Inc., Idapta, Inc., Industria Solutions, Inc. KnowledgeFirst,
Inc., MyFamily.com, Inc., NameTree, Inc., NextMonet.com, Inc., NextOffice.com,
Inc., OneCore Financial Network, Inc., Radiate, Inc., Signatures,
ThingWorld.com, LLC, Undoo.com, Vicinity, and Virtual Ink Corporation. Equity in
losses of affiliates for the nine months ended April 30, 2000 included the
results from the Company's minority ownership in Engage Technologies Japan,
Inc., FoodBuy.com, GX Media, Inc., Half.com, and ThingWorld.com, LLC. The
Company expects its affiliate companies to continue to invest in development of
their products and services, and to recognize operating losses, which will
result in future charges recorded by the Company to reflect its proportionate
share of such losses.
Minority interest, net increased to $393.3 million for the nine months
ended April 30, 2001 from $110.8 million for the same period ended fiscal year
2000, primarily reflecting minority interest in net losses of seven subsidiaries
during the first nine months of fiscal 2001, including AltaVista, Engage, MyWay,
NaviSite, CMGion and NaviPath. The increase is primarily related to an increase
in the net losses reported by Engage and AltaVista due to substantial
amortization, impairment and restructuring charges recorded during the second
fiscal quarter of fiscal year 2001.
Income tax benefit recorded for the nine months ended April 30, 2001 was
approximately $76.8 million. Exclusive of taxes provided for significant,
unusual or extraordinary items that will be reported separately, the Company
provides for income taxes on a year to date basis at an effective rate based
upon its estimate of full year earnings. In determining the Company's
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
effective rate for the nine months ended April 30, 2001, gains (losses) on
issuances of stock by subsidiaries and affiliates, other gains (losses), net,
and impairment charges taken on intangible assets were excluded. Income tax
expense in the nine months ended April 30, 2001 differs from the amount computed
by applying the U.S. federal income tax rate of 35 percent to pre-tax loss
primarily as a result of non-deductible goodwill amortization and impairment
charges, state taxes and valuation allowances recognized on deferred tax assets.
During the nine months ended April 30, 2001, the Company recorded a valuation
allowance against its net deferred tax assets not expected to be utilized in
fiscal 2001, as it is more likely than not that these assets will not be
realized in future years. Prior to the second quarter of fiscal 2001, the
Company has recorded valuation allowance against net deferred tax assets only
with respect to majority owned subsidiaries not included in the Company's
federal consolidated group. The increase in valuation allowance resulted in
additional tax expense of approximately $89 million for nine months ended
April 30, 2001.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 30, 2001 decreased to $720.4 million compared to
$1.11 billion at July 31, 2000. The net decrease in working capital is primarily
attributable to a $1.47 billion decrease in available-for-sale securities,
partially offset by a $489.4 million decrease in notes payable, a $322.0 million
decrease in current deferred tax liabilities and a $206.2 million increase in
cash and cash equivalents. The Company's principal sources of capital during
the nine months ended April 30, 2001 were from the sales of approximately
8.4 million shares of Lycos, Inc. common stock for proceeds of approximately
$394.7 million, approximately 241.0 million shares of Pacific Century CyberWorks
Limited stock for proceeds of $190.2 million, approximately 3.7 million shares
of Kana Communications, Inc. common stock for proceeds of $137.6 million,
approximately 6.8 million shares of Terra Networks, S.A. (Terra Networks) stock
for proceeds of approximately $78.3 million, approximately 1.3 million shares of
Critical Path, Inc. common stock for proceeds of $72.8 million and approximately
1.0 million shares of eBay, Inc. common stock for proceeds of $48.0 million.
The Company's principal uses of capital during the nine months ended April 30,
2001 were $606.6 million for funding operations, $91.3 million for purchases of
property and equipment and $64.9 million for investments in affiliates,
primarily through the Company's @Ventures venture capital funds.
Under the terms of an agreement with an investment bank entered into during
fiscal 2000, the Company agreed to deliver, at its discretion, either cash or
Yahoo! common stock in three separate tranches, with maturity dates ranging from
August 2000 to February 2001. The Company executed the first tranche in
April 2000 and received approximately $106.4 million. The Company subsequently
settled this tranche through the delivery of 581,499 shares of Yahoo! common
stock in August 2000. In May 2000, the Company received approximately
$68.5 million and $5.7 million upon the execution of the second and third
tranches, respectively. The Company settled the second tranche for cash totaling
approximately $33.6 million in October 2000. The company settled the third
tranche through the delivery of 47,684 shares of Yahoo! common stock in February
2001. In November 2000, the Company entered into a new agreement to hedge the
Company's investment in 581,499 shares of Yahoo! common stock. The Company
received approximately $31.5 million in connection with this agreement. Under
the terms of the new contract, the Company agreed to deliver, at its discretion,
either cash or shares of Yahoo! common stock on August 1, 2001.
During the nine months ended April 30, 2001, the Company, through its
limited liability company subsidiaries CMG@Ventures II, LLC, CMG@Ventures III,
LLC, CMGI@Ventures IV, LLC and CMG@Ventures Expansion, LLC acquired initial or
follow-on minority ownership interests in nineteen Internet and technology
companies for an aggregate total of approximately $48.8 million.
On August 18, 2000 and February 18, 2001, the Company issued approximately
313,000 and 2.0 million shares, respectively, of its common stock to Compaq
Computer Corporation, each as a semi-annual interest payment of approximately
$11.5 million related to notes payable issued in the acquisition of AltaVista.
During the nine months ended April 30, 2001, the Company issued approximately
30.2 million shares of its common stock as payment of principal and interest
totaling approximately $391.6 million related to notes payable that had been
issued in the Company's acquisition of Tallan.
On August 23, 2000, the Company announced it had acquired the exclusive
naming and sponsorship rights to the New England Patriots' new stadium, to be
known as "CMGI Field," for a period of fifteen years. In return for the naming
and sponsorship rights, CMGI will pay $7.6 million per year for the first ten
years, with consumer price index adjustments for years eleven through fifteen.
CMGI will make its first semi-annual payment under this agreement in January
2002.
On August 25, 2000, the Company and Cable and Wireless plc, completed a
previously agreed to exchange of stock. CMGI received approximately
241.0 million shares of PCCW stock from Cable and Wireless in exchange for
approximately 13.4 million shares of the Company's common stock.
During the first nine months of fiscal 2001, the Company's subsidiary,
Engage, completed two acquisitions for combined consideration of approximately
$257.6 million consisting of approximately 14.9 million shares of Engage common
stock valued at approximately $225.7 million, options to purchase Engage common
stock at approximately $31.1 million and direct acquisition costs of
approximately $907,000.
On December 15, 2000 and January 24, 2001, the Company funded $50.0 million
and $30.0 million, respectively, to its subsidiary, NaviSite, under a note and
warrant purchase agreement. The annual interest rate on the note is 7.5% payable
quarterly in, at NaviSite's discretion, either in cash or NaviSite common stock.
The principal amount is due in full by December 12, 2003. In June 2001, NaviSite
made an interest payment to CMGI, Inc. in the form of approximately 960,000
shares of its common stock.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
On December 29, 2000, the Company's subsidiary, AltaVista, sold an office
building and received proceeds of approximately $35.8 million.
On February 2, 2001 the Company sold its majority interest in Signatures
SNI, Inc., parent of Signatures Network. Under the terms of the transaction,
the Company paid cash of $6.6 million and received a note receivable in the
amount of $10.0 million. The note bears interest at 7.5% per annum, compounded
quarterly and is due in full on February 6, 2006. In addition, the Company
retained a minority interest in Signatures, which will be accounted for under
the equity method.
The Company currently projects funding in the forseeable future for
CMGI@Ventures of up to $15 million per quarter for both new and follow-on
investments. The Company currently expects operating cash burn to be between
$140 and $150 million for its fiscal fourth quarter. The term "operating cash
burn" reflects CMGI's consolidated cash burn excluding the effects of payments
made for restructuring expenses, @Ventures investments, proceeds from sales of
stock holdings and other significant non-recurring items. The Company has
undertaken several initiatives, which are intended to reduce its operating cash
requirements in the future. There can be no assurance, however, that the effect
of these initiatives will reduce its cash requirements.
The Company believes that existing working capital and the availability of
marketable securities, which could be sold or posted as collateral for
additional loans, will be sufficient to fund its operations, investments and
capital expenditures for the foreseeable future. Should additional capital be
needed to fund future investment and acquisition activity, the Company may seek
to raise additional capital through the sale of certain subsidiaries, through
public or private offerings of the Company's or its subsidiaries' stock, or
through debt financing. There can be no assurance, however, that the Company
will be able to raise additional capital on terms that are favorable to the
Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. Forward-
looking statements in this document and those made from time to time by the
Company through its senior management are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements concerning the expected future revenues or earnings or
concerning projected plans, performance, product development, product release or
product shipment, as well as other estimates related to future operations are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to, the
following:
CMGI may not have operating income or net income in the future.
During the fiscal year ended July 31, 2000 and for the nine months ended
April 30, 2001, CMGI had operating losses of approximately $2.19 billion and
$4.79 billion, respectively, and net losses of approximately $1.38 billion and
$4.16 billion, respectively. CMGI anticipates continuing to incur significant
operating expenses in the future, including significant costs of revenue and
selling, general and administrative and amortization expenses. As a result, CMGI
expects to continue to incur operating losses and may not have enough money to
grow its business in the future. CMGI can give no assurance that it will achieve
profitability or be capable of sustaining profitable operations.
CMGI may have problems raising money it needs in the future.
In recent years, CMGI has financed its operating losses in part with
profits from selling some of the stock of companies in which CMGI had invested
directly or through the @Ventures funds. This funding source may not be
sufficient in the future, and CMGI may need to obtain funding from outside
sources. However, CMGI may not be able to obtain funding from outside sources.
In addition, even if CMGI finds outside funding sources, CMGI may be required to
issue to such outside sources securities with greater rights than those
currently possessed by holders of CMGI's currently outstanding securities. CMGI
may also be required to take other actions, which may lessen the value of its
common stock, including borrowing money on terms that are not favorable to CMGI.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
CMGI may incur significant costs to avoid investment company status and may
suffer adverse consequences if deemed to be an investment company.
CMGI may incur significant costs to avoid investment company status and may
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. Some of CMGI's equity investments in other
businesses and its venture subsidiaries may constitute investment securities
under the Investment Company Act. A company may be deemed to be an investment
company if it owns investment securities with a value exceeding 40% of its total
assets, subject to certain exclusions. Investment companies are subject to
registration under, and compliance with, the Investment Company Act unless a
particular exclusion or safe harbor provision applies. If CMGI were to be deemed
an investment company, CMGI would become subject to the requirements of the
Investment Company Act. As a consequence, CMGI would be prohibited from engaging
in business or issuing securities as it has in the past and might be subject to
civil and criminal penalties for noncompliance. In addition, certain of CMGI's
contracts might be voidable, and a court-appointed receiver could take control
of CMGI and liquidate its business.
Although CMGI's investment securities currently comprise less than 40% of
its total assets, fluctuations in the value of these securities or of CMGI's
other assets may cause this limit to be exceeded. Unless an exclusion or safe
harbor was available to CMGI, CMGI would have to attempt to reduce its
investment securities as a percentage of its total assets. This reduction can be
attempted in a number of ways, including the disposition of investment
securities and the acquisition of non-investment security assets. If CMGI were
required to sell investment securities, CMGI may sell them sooner than it
otherwise would. These sales may be at depressed prices and CMGI may never
realize anticipated benefits from, or may incur losses on, these investments.
CMGI may be unable to sell some investments due to contractual or legal
restrictions or the inability to locate a suitable buyer. Moreover, CMGI may
incur tax liabilities when selling assets. CMGI may also be unable to purchase
additional investment securities that may be important to its operating
strategy. If CMGI decides to acquire non-investment security assets, CMGI may
not be able to identify and acquire suitable assets and businesses or the terms
on which CMGI is able to acquire such assets may be unfavorable.
If CMGI fails to successfully execute on its segmentation strategy, its revenue,
earnings prospects and business may be materially and adversely affected.
On September 7, 2000, CMGI announced that it had formally organized its
majority-owned operating companies and venture capital affiliates into six
segments. These six segments include five operational disciplines - Interactive
Marketing; eBusiness and Fulfillment; Search and Portals; Infrastructure and
Enabling Technologies; and Internet Professional Services - as well as CMGI's
affiliated venture capital arm, @Ventures. To successfully implement its
segmentation strategy, CMGI must achieve each of the following:
. overcome the difficulties of integrating its operating companies;
. decrease its cash burn rate;
. attain an optimal number of operating companies through acquisitions,
consolidations and divestitures; and
. improve its cash position and revenue run rate.
If CMGI fails to address each of these factors, its business prospects for
achieving and sustaining profitability, and the market value of its securities
may be materially and adversely affected. Even if its implementation of this
segmentation strategy is successful, the revised structure and reporting
procedures of the new segmentation strategy may not lead to increased market
clarity or stockholder value. In addition, the execution of the segmentation
strategy, including planned reductions in the number of operating companies,
could result in restructuring charges being recorded by CMGI in future periods.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
CMGI depends on certain important employees, and the loss of any of those
employees may harm CMGI's business.
CMGI's performance is substantially dependent on the performance of its
executive officers and other key employees, in particular, David S. Wetherell,
CMGI's chairman, president and chief executive officer, Andrew J. Hajducky III,
CMGI's executive vice president, chief financial officer and treasurer, and
David Andonian, CMGI's president, corporate development. The familiarity of
these individuals with the Internet industry makes them especially critical to
CMGI's success. In addition, CMGI's success is dependent on its ability to
attract, train, retain and motivate high quality personnel, especially for its
management team. The loss of the services of any of CMGI's executive officers or
key employees may harm its business. CMGI's success also depends on its
continuing ability to attract, train, retain and motivate other highly qualified
technical and managerial personnel. Competition for such personnel is intense.
There may be conflicts of interest among CMGI's network companies, CMGI's
officers, directors and stockholders and CMGI.
Some of CMGI's officers and directors also serve as officers or directors
of one or more of CMGI's network companies. As a result, CMGI, CMGI's officers
and directors, and CMGI's network companies may face potential conflicts of
interest with each other and with its stockholders. Specifically, CMGI's
officers and directors may be presented with situations in their capacity as
officers or directors of one of CMGI's network companies that conflict with
their fiduciary obligations as officers or directors of CMGI or of another
network company.
In fiscal 2000 and the first nine months of fiscal 2001, CMGI derived a
significant portion of its revenue from a small number of customers and the loss
of any of those customers could significantly damage CMGI's business.
During the fiscal year ended July 31, 2000, sales to Cisco accounted for
11% of CMGI's consolidated net revenue and 36% of CMGI's net revenue from its
eBusiness and Fulfillment segment. During the nine months ended April 30, 2001,
sales to Cisco accounted for 7% of CMGI's consolidated net revenue and 13% of
CMGI's net revenue from its eBusiness and Fulfillment segment. CMGI currently
does not have any agreements with Cisco which obligate this customer to buy a
minimum amount of products from CMGI or to designate CMGI as its sole supplier
of any particular products or services. During the fiscal year ended July 31,
2000, approximately 12% of CMGI's consolidated net revenue and 35% of net
revenue from CMGI's Search and Portals segment was derived from customer
advertising contracts serviced by DoubleClick, Inc. During the nine months ended
April 30, 2001, 1% of CMGI's consolidated net revenue and 8% of the net revenue
from CMGI's Search and Portals segment was derived from customer advertising
contracts serviced by DoubleClick, Inc. CMGI believes that it will continue to
derive a significant portion of its operating revenue from sales to a small
number of customers.
CMGI's strategy of selling assets of or investments in the companies that it has
acquired and developed presents risks.
One element of CMGI's business plan involves raising cash for working
capital for its business by selling, in public or private offerings, some of the
companies, or portions of the companies, that it has acquired and developed or
in which it has invested. Market and other conditions largely beyond CMGI's
control affect:
. its ability to engage in such sales;
. the timing of such sales; and
. the amount of proceeds from such sales.
As a result, CMGI may not be able to sell some of these assets.
In addition, even if CMGI is able to sell, CMGI may not be able to sell at
favorable prices. If CMGI is unable to sell these assets at favorable prices,
its business will be harmed.
CMGI's stock price may fluctuate because the value of some of its companies
fluctuates.
A portion of CMGI's assets include the equity securities of both publicly
traded and non-publicly traded companies. For example, as of June 11, 2001, CMGI
directly or through its @Ventures funds owned shares of common stock of divine,
inc., (formerly divine Interventures, inc.), Engage, Inc., Kana Communications,
Inc., Marketing Services Group, Inc., NaviSite, Inc.,
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Pacific Century CyberWorks Limited, Primedia, Inc., Ventro Corporation and
Vicinity Corporation which are publicly traded companies. The market price and
valuations of the securities that CMGI holds in these and other companies may
fluctuate due to market conditions and other conditions over which CMGI has no
control. Fluctuations in the market price and valuations of the securities that
CMGI holds in other companies may result in fluctuations of the market price of
CMGI's common stock and may reduce the amount of working capital available to
CMGI.
CMGI's strategy of expanding its business through acquisitions of other
businesses and technologies presents special risks.
CMGI intends to continue to expand through the acquisition of businesses,
technologies, products and services from other businesses. Acquisitions involve
a number of special problems, including:
. difficulty integrating acquired technologies, operations, and personnel
with the existing businesses;
. diversion of management attention in connection with both negotiating
the acquisitions and integrating the assets;
. strain on managerial and operational resources as management tries to
oversee larger operations;
. exposure to unforeseen liabilities of acquired companies;
. potential issuance of securities in connection with an acquisition with
rights that are superior to the rights of holders of CMGI's currently
outstanding securities;
. the need to incur additional debt; and
. the requirement to record potentially significant additional future
operating costs for the amortization of goodwill and other intangible
assets.
CMGI may not be able to successfully address these problems. Moreover,
CMGI's future operating results will depend to a significant degree on its
ability to successfully manage growth and integrate acquisitions. In addition,
many of CMGI's investments are in early-stage companies with limited operating
histories and limited or no revenues. CMGI may not be able to successfully
develop these young companies.
CMGI faces competition from other acquirors of and investors in Internet-related
ventures which may prevent CMGI from realizing strategic opportunities.
Although CMGI creates many of its network companies, it also acquires or
invests in existing companies that it believes are complementary to its network
and further its vision of the Internet. In pursuing these opportunities, CMGI
faces competition from other capital providers and operators of Internet-related
companies, including publicly-traded Internet companies, venture capital
companies and large corporations. Some of these competitors have greater
financial resources than CMGI does. This competition may limit CMGI's
opportunity to acquire interests in companies that could advance its vision of
the Internet and increase its value.
CMGI's growth places strain on its managerial, operational and financial
resources.
CMGI's rapid growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources.
Further, CMGI manages multiple relationships with various customers, strategic
partners and other third parties. CMGI's further growth or an increase in the
number of its strategic relationships will increase this strain on its
managerial, operational and financial resources, inhibiting its ability to
achieve the rapid execution necessary to successfully implement its business
plan.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
CMGI must develop and maintain positive brand name awareness.
CMGI believes that establishing and maintaining its brand names is
essential to expanding its business and attracting new customers. CMGI also
believes that the importance of brand name recognition will increase in the
future because of the growing number of Internet companies that will need to
differentiate themselves. Promotion and enhancement of CMGI's brand names will
depend largely on its ability to provide consistently high-quality products and
services. If CMGI is unable to provide high-quality products and services, the
value of its brand names may suffer.
CMGI's quarterly results may fluctuate widely.
CMGI's operating results have fluctuated widely on a quarterly basis during
the last several years, and it expects to experience significant fluctuation in
future quarterly operating results. Many factors, some of which are beyond
CMGI's control, have contributed to these quarterly fluctuations in the past and
may continue to do so. Such factors include:
. demand for its products and services;
. payment of costs associated with its acquisitions, sales of assets and
investments;
. timing of sales of assets;
. market acceptance of new products and services;
. charges for impairment of long-lived assets in future periods;
. potential restructuring charges in connection with CMGI's segmentation
strategy;
. specific economic conditions in the industries in which CMGI competes;
and
. general economic conditions.
The emerging nature of the commercial uses of the Internet makes
predictions concerning CMGI's future revenues difficult. CMGI believes that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of its future
performance. It is also possible that in some fiscal quarters, CMGI's operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of CMGI's common stock may decline.
The price of CMGI's common stock has been volatile.
The market price of CMGI's common stock has been, and is likely to continue
to be, volatile, experiencing wide fluctuations. In recent years, the stock
market has experienced significant price and volume fluctuations, which have
particularly impacted the market prices of equity securities of many companies
providing Internet-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of such
companies. Future market movements may adversely affect the market price of
CMGI's common stock.
CMGI's common stockholders may suffer dilution in the future upon the conversion
and repayment of outstanding securities.
CMGI has outstanding securities that have conversion or repayment
provisions that may result in dilution to CMGI's common stockholders. CMGI
currently has 375,000 shares of Series C Convertible Preferred Stock issued and
outstanding. The Series C Convertible Preferred Stock is separated into three
tranches of 125,000 shares each with separate conversion prices: tranche 1
shares have a current conversion price of $45.72 per share; tranche 2 shares
have a current conversion price of $37.58 per share; and tranche 3 shares have a
current conversion price of $37.66 per share. The Series C Convertible Preferred
Stock may be converted into common stock by the holders at these fixed prices at
any time prior to June 30, 2002. On June 30, 2002, any outstanding shares of
Series C Convertible Preferred Stock automatically convert into common stock at
a conversion price equal to the average of the closing bid prices of the common
stock on the ten consecutive trading days ending on the trading day prior to
June 30, 2002. Subject to certain limitations, when converted, the shares of
Series C Convertible Preferred Stock convert into the number of shares of common
stock determined by taking the $1,000 per share initial stated value, adding
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
to such initial stated value per share any completed or accrued dividend
adjustments, and dividing such sum by the applicable conversion price. Upon
conversion of the Series C Convertible Preferred Stock into shares of CMGI's
common stock, the common stockholders will be diluted.
In connection with CMGI's acquisition of AltaVista, CMGI issued to Compaq,
among other things, promissory notes in the aggregate principal amount of
$220 million. The promissory notes are due on August 18, 2002. Interest on the
notes, accruing at a rate of 10.5% per annum, is due and payable semiannually on
each February 18 and August 18 until the notes are paid in full. Any principal
and interest on the notes is payable, at CMGI's option, in cash, marketable
securities or shares of CMGI common stock based on the average of the closing
prices of the common stock during the 15-day period ending on the trading day
immediately preceding the applicable payment date. If CMGI determines to repay
the principal and interest with shares of CMGI's common stock, the common
stockholders will be diluted.
CMGI relies on NaviSite for Web site hosting.
CMGI and many of its operating companies rely on NaviSite for network
connectivity and hosting of servers. If NaviSite fails to perform such services,
CMGI's internal business operations may be interrupted, and the ability of
CMGI's operating companies to provide services to customers may also be
interrupted. Such interruptions may have an adverse impact on CMGI's business
and revenues and its operating companies.
The success of CMGI's network companies depends greatly on increased use of the
Internet by business and individuals.
The success of CMGI's network companies depends greatly on increased use of
the Internet for advertising, marketing, providing services and conducting
business. Commercial use of the Internet is currently at an early stage of
development and the future of the Internet is not clear. In addition, it is not
clear how effective advertising on the Internet is in generating business as
compared to more traditional types of advertising such as print, television and
radio. The businesses of CMGI's network companies will suffer if commercial use
of the Internet fails to grow in the future.
CMGI network companies are subject to intense competition.
The market for Internet products and services is highly competitive.
Moreover, the market for Internet products and services lacks significant
barriers to entry, enabling new businesses to enter this market relatively
easily. Competition in the market for Internet products and services may
intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with the products and services
of CMGI network companies. In addition, many of the current and potential
competitors of CMGI network companies have greater financial, technical,
operational and marketing resources than those of CMGI network companies. CMGI
network companies may not be able to compete successfully against these
competitors. Competitive pressures may also force prices for Internet goods and
services down and such price reductions may reduce the revenues of CMGI network
companies.
Growing concerns about the use of "cookies" may limit Engage's ability to
develop user profiles.
Web sites typically place small files of information commonly known as
"cookies" on a user's hard drive. Cookie information is passed to the Web site
through the Internet user's browser software. Engage's technology currently uses
cookies to collect information about an Internet user's movement through the
Engage Media Network. Most of the currently available Internet browsers allow
users to modify their browser settings to prevent cookies from being stored on
their hard drive, and a small minority of users currently choose to do so. Users
can also delete cookies from their hard drive at any time. Some Internet
commentators and privacy advocates have suggested limiting or eliminating the
use of cookies, and the Federal Trade Commission has recently concluded an
informal inquiry into the data collection practices of DoubleClick, Inc., but
reserved the right to take additional action. The effectiveness of Engage's
technology could be limited by any reduction or limitation in the use of
cookies. If the use or effectiveness of cookies is limited, Engage would likely
have to switch to other technology that would allow it to gather demographic and
behavioral information. This could require significant reengineering time and
resources, might not be completed in time to avoid negative consequences to
CMGI's business, financial condition or results of operations, and might not be
possible at all.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
If the United States or other governments regulate the Internet more closely,
the businesses of CMGI network companies may be harmed.
Because of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
privacy, pricing, taxation and content. The enactment of any additional laws or
regulations may impede the growth of the Internet and the Internet-related
business of CMGI network companies and could place additional financial burdens
on their businesses.
To succeed, CMGI network companies must respond to the rapid changes in
technology and distribution channels related to the Internet.
The markets for the Internet products and services of our network companies
are characterized by:
. rapidly changing technology;
. evolving industry standards;
. frequent new product and service introductions;
. shifting distribution channels; and
. changing customer demands.
The success of CMGI network companies will depend on their ability to adapt
to this rapidly evolving marketplace. They may not be able to adequately adapt
their products and services or to acquire new products and services that can
compete successfully. In addition, CMGI network companies may not be able to
establish and maintain effective distribution channels.
CMGI network companies face security risks.
Consumer concerns about the security of transmissions of confidential
information over public telecommunications facilities is a significant barrier
to electronic commerce and communications on the Internet. Many factors may
cause compromises or breaches of the security systems CMGI network companies or
other Internet sites use to protect proprietary information, including advances
in computer and software functionality or new discoveries in the field of
cryptography. A compromise of security on the Internet would have a negative
effect on the use of the Internet for commerce and communications and negatively
impact CMGI network companies' businesses. Security breaches of their activities
or the activities of their customers and sponsors involving the storage and
transmission of proprietary information, such as credit card numbers, may expose
CMGI network companies to a risk of loss or litigation and possible liability.
CMGI cannot assure that the security measures of CMGI network companies will
prevent security breaches.
The success of the global operations of CMGI network companies is subject to
special risks and costs.
CMGI network companies have begun, and intend to continue, to expand their
operations outside of the United States. This international expansion will
require significant management attention and financial resources. The ability of
CMGI network companies to expand their offerings of CMGI's products and services
internationally will be limited by the general acceptance of the Internet and
intranets in other countries. In addition, CMGI and its network companies have
limited experience in such international activities. Accordingly, CMGI and its
network companies expect to commit substantial time and development resources to
customizing the products and services of its network companies for selected
international markets and to developing international sales and support
channels.
CMGI expects that the export sales of its network companies will be
denominated predominantly in United States dollars. As a result, an increase in
the value of the United States dollar relative to other currencies may make the
products and services of its network companies more expensive and, therefore,
potentially less competitive in international markets.
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
As CMGI network companies increase their international sales, their total
revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
CMGI network companies could be subject to infringement claims.
From time to time, CMGI network companies have been, and expect to continue
to be, subject to third party claims in the ordinary course of business,
including claims of alleged infringement of intellectual property rights.
Any such claims may damage the businesses of CMGI network companies by:
. subjecting them to significant liability for damages;
. resulting in invalidation of their proprietary rights;
. being time-consuming and expensive to defend even if such claims are not
meritorious; and
. resulting in the diversion of management time and attention.
CMGI network companies may have liability for information retrieved from the
Internet.
Because materials may be downloaded from the Internet and subsequently
distributed to others, CMGI network companies may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature, content, publication and distribution of
such materials.
SIGNATURE
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.
CMGI, Inc.
By: /s/ George A. McMillan
-------------------------------
Date: December 12, 2001 George A. McMillan
Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)