SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended January 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22846
CMGI, INC.
----------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 Brickstone Square, First Floor 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 March 12, 1999
Common Stock, par value $.01 per share 46,679,750
--------------------------------------- ----------
Class Number of shares outstanding
CMGI, INC.
FORM 10-Q/A
INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
January 31, 1999 (Restated) and July 31, 1998 (Restated) 3
Consolidated Statements of Operations
Three and six months ended January 31, 1999 (Restated) and 1998 4
Consolidated Statements of Cash Flows
Six months ended January 31, 1999 (Restated) and 1998 5
Notes to Interim Consolidated Financial Statements (Restated) 6-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 30-31
SIGNATURE 32
This Quarterly Report on Form 10-Q/A ("Report") Amends and supersedes, to the
extent set forth herein, the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended January 31, 1999 previously filed on March 17, 1999. as
more particularly set forth below, the following financial and related
information has been updated in connection with the filing of the restated
financial statements included herein. Additionally, all share amounts of the
Registrant's common stock contained in this Report have been retroactively
adjusted to reflect a 2-FOR-1 stock split effected by the Registrant in the form
of a stock dividend on January 11, 1999.
Page 2
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
January 31, 1999 July 31,
1999 1998
---------------- ----------
(Unaudited and (Restated)
Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 106,318 $ 61,537
Available-for-sale securities 957,480 5,764
Accounts receivable, trade, less allowance for doubtful accounts 23,780 21,431
Inventories 10,324 8,250
Prepaid expenses 2,913 2,991
Net current assets of discontinued operations 1,052 482
Other current assets -- 2,364
---------- --------
Total current assets 1,101,867 102,819
Property and equipment, net 13,076 13,403
Investments in affiliates 55,495 82,616
Cost in excess of net assets of subsidiaries acquired, net of accumulated amortization 52,830 55,770
Net non-current assets of discontinued operations 1,101 1,246
Other assets 26,979 3,964
---------- --------
$1,251,348 $259,818
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 22,700 $ 27,656
Current installments of long-term debt 16,631 16,594
Accounts payable 12,183 10,809
Accrued income taxes 5,612 10,085
Accrued expenses 24,067 18,731
Deferred revenues 7,874 4,932
Deferred income taxes 360,133 --
Other current liabilities 899 1,228
---------- --------
Total current liabilities 450,099 90,035
Long-term debt, less current installments 1,000 1,373
Deferred income taxes 7,680 15,536
Other long-term liabilities 4,322 4,428
Minority interest 54,761 15,310
Commitments and contingencies
Preferred stock, $.01 par value. Authorized 5,000,000 shares; issued 50,000 shares Series B
convertible, redeemable preferred stock at January 31, 1999, interest at 4% per annum 50,030 --
Stockholders' equity:
Common stock, $.01 par value. Authorized 100,000,000 shares; issued 46,661,835 shares at
January 31, 1999 and 46,067,886 shares at July 31, 1998 467 461
Additional paid-in capital 110,369 91,029
Net unrealized gain (loss) on available-for-sale securities 478,975 (436)
Unearned compensation (913) (1,442)
Retained earnings 94,558 43,524
---------- --------
Total stockholders' equity 683,456 133,136
---------- --------
$1,251,348 $259,818
========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended January 31, Six months ended January 31,
------------------------------ ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Restated) (Restated)
Net revenues $ 38,972 $ 15,230 $ 76,377 $ 37,825
Operating expenses:
Cost of revenues 37,123 14,275 72,748 27,950
Research and development 5,239 4,513 10,592 10,560
In-process research and development -- 875 -- 875
Selling 6,932 5,211 15,170 15,748
General and administrative 10,747 3,993 19,064 8,527
-------- -------- -------- --------
Total operating expenses 60,041 28,867 117,574 63,660
-------- -------- -------- --------
Operating loss (21,069) (13,637) (41,197) (25,835)
-------- -------- -------- --------
Other income (deductions):
Interest income 748 296 1,307 1,139
Interest expense (1,165) (716) (2,233) (1,486)
--------
Gain on sale of Lycos, Inc. stock 43,596 10,764 45,475 17,088
Gain on sale of Premiere Technologies, Inc. stock -- -- -- 4,174
Gain on sale of Amazon.com, Inc. stock 7,002 -- 7,002 --
Gain (loss) on stock issuance by Lycos, Inc. (121) 8 20,253 (86)
Gain on stock issuance by GeoCities 4,382 -- 28,514 --
Gain on sale of investment in Sage Enterprises, Inc. -- -- 19,057 --
Gain on sale of investment in Reel.com, Inc. -- -- 23,158 --
Equity in losses of affiliates (6,189) (2,987) (9,548) (4,516)
Minority interest 103 -- 204 (28)
-------- -------- -------- --------
48,356 7,365 133,189 16,285
-------- -------- -------- --------
Income (loss) from continuing operations before income
taxes 27,287 (6,272) 91,992 (9,550)
Income tax expense (benefit) 14,138 (336) 40,454 (1,355)
-------- -------- -------- --------
Income (loss) from continuing operations 13,149 (5,936) 51,538 (8,195)
Discontinued operations, net of income taxes:
Income (loss) from operations of lists and database
services segment (148) 102 (279) 68
Gain on sale of data warehouse product rights -- -- -- 4,978
-------- -------- -------- --------
Net income (loss) $ 13,001 $ (5,834) $ 51,259 $ (3,149)
======== ======== ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.28 $ (0.15) $ 1.11 $ (0.21)
Income (loss) from discontinued operations of lists and
database services segment -- -- (0.01) --
Gain on sale of data warehouse product rights -- -- -- 0.13
-------- -------- -------- --------
Net income (loss) $ 0.28 $ (0.15) $ 1.10 $ (0.08)
======== ======== ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.25 $ (0.15) $ 1.02 $ (0.21)
Income (loss) from discontinued operations of lists and
database services segment -- -- (0.01) --
Gain on sale of data warehouse product rights -- -- -- 0.13
-------- -------- -------- --------
Net income (loss) $ 0.25 $ (0.15) $ 1.01 $ (0.08)
======== ======== ======== ========
Shares used in computing earnings (loss) per share:
Basic 46,260 40,160 46,160 39,312
======== ======== ======== ========
Diluted 51,257 40,160 50,650 39,312
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended January 31,
----------------------------
1999 1998
---- ----
(Restated)
Cash flows from operating activities:
Income (loss) from continuing operations $ 51,538 $ (8,195)
Adjustments to reconcile income (loss) from continuing operations to net cash
used for continuing operations:
Depreciation and amortization 5,820 2,795
Deferred income taxes 20,261 (1,534)
Non-operating gains, net (143,460) (21,176)
Equity in losses of affiliates 9,548 4,516
Minority interest (204) 28
In-process research and development -- 875
Changes in operating assets and liabilities, excluding effects from
divestitures of subsidiaries:
Trade accounts receivable (3,905) (3,251)
Inventories (2,074) (3,273)
Prepaid expenses (209) (1,999)
Accounts payable and accrued expenses 7,473 1,704
Deferred revenues 5,956 1,922
Refundable and accrued income taxes, net 10,497 3,906
Other assets and liabilities (227) (289)
--------- --------
Net cash used for operating activities of continuing operations (38,986) (23,971)
Net cash used for operating activities of discontinued operations (673) (3,277)
--------- --------
Net cash used for operating activities (39,659) (27,248)
--------- --------
Cash flows from investing activities:
Additions to property and equipment - continuing operations (3,689) (2,852)
Additions to property and equipment - discontinued operations (29) (76)
Purchase of available-for-sale securities (31,123) --
Proceeds from sale of Lycos, Inc. common stock 53,106 18,798
Proceeds from sale of Amazon.com, Inc. common stock 27,177 --
Proceeds from sale of Premiere Technologies, Inc. common stock -- 7,555
Proceeds from sale of data warehouse product rights - discontinued operations
-- 9,543
Investments in affiliates (14,013) (7,387)
Reduction in cash due to deconsolidation of Lycos, Inc. -- (41,017)
Other 1,536 (154)
--------- --------
Net cash provided by (used for) investing activities 32,965 (15,590)
--------- --------
Cash flows from financing activities:
Net proceeds from (repayments of) notes payable (3,956) 206
Repayments of long-term debt (335) (1,531)
Net proceeds from issuance of Series B convertible preferred stock 49,805 --
Net proceeds from issuance of common stock 3,500 12,142
Net proceeds from issuance of stock by subsidiaries 2,805 477
Other (344) 1,895
--------- --------
Net cash provided by financing activities 51,475 13,189
--------- --------
Net increase (decrease) in cash and cash equivalents 44,781 (29,649)
Cash and cash equivalents at beginning of period 61,537 59,762
--------- --------
Cash and cash equivalents at end of period $ 106,318 $ 30,113
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation
The accompanying consolidated financial statements have been prepared by CMGI,
Inc. ("CMGI" or "the Company") in accordance with generally accepted accounting
principles. 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, 1998 which
are contained in the Company's Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission ("the SEC") on May 26, 1999. The results for
the three and six month periods ended January 31, 1999 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 generally accepted accounting principles to
conform with current year presentation.
Financial information related to the Company's former lists and database
services segment has been presented as discontinued operations (see Note C).
Certain prior period amounts in the consolidated financial statements have been
reclassified in accordance with generally accepted accounting principles to
reflect the Company's lists and database services segment as discontinued
operations.
B. Restatement Related to In-Process Research and Development Expense
The accompanying consolidated financial statements have been restated to reflect
the impact of adjustments made by Lycos, Inc. (Lycos) to its previously reported
in-process research and development charges associated with Lycos' acquisitions
of Tripod, Inc., WiseWire Corporation, GuestWorld, Inc. and WhoWhere? Inc.
during CMGI's third and fourth quarters of fiscal 1998 and first quarter of
fiscal 1999. The accompanying consolidated financial statements have also been
restated to reflect a change in the original accounting for the purchase price
allocation related to CMGI's acquisition of Accipiter, Inc. (Accipiter) in the
third fiscal quarter of 1998.
Lycos reduced the amount of its charges for in-process research and development
in connection with the above noted acquisitions and, correspondingly, increased
the amounts allocated to intangible assets by $89.4 million. During the periods
effected, CMGI's ownership in Lycos ranged from approximately 46% to
approximately 22%, and CMGI accounted for its investment in Lycos under the
equity method of accounting, whereby CMGI's portion of the net operating
performance of Lycos was reflected in equity in losses of affiliates.
Additionally, during such periods CMGI recorded gains on sales of portions of
its Lycos stock holdings, and recorded gains on issuances of stock by Lycos. As
a result of the Lycos restatements, CMGI has accordingly restated previously
reported equity in losses of Lycos, gains on sales of Lycos stock and gains on
issuance of stock by Lycos for CMGI's fiscal quarters ended April 30, 1998, July
31, 1998, October 31, 1998 and January 31, 1999. Lycos' reduction of previously
recorded in-process research and development charges resulted in higher gains on
Lycos stock issuances recorded by the Company, thereby increasing CMGI's book
basis in its Lycos investment and resulting in lower gains on sales of Lycos
stock and reduced gains on Lycos stock issuances in subsequent quarters.
Related higher amortization charges recorded by Lycos in subsequent quarters
resulted in higher equity in loss of affiliates amounts recorded by CMGI.
Upon consummation of the Accipiter acquisition in the third fiscal quarter of
1998, CMGI, in its consolidated financial statements, reported an expense of
approximately $18.0 million representing acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. On May 7, 1999, CMGI announced a voluntary restatement
of the in-process research and development charge related to the Accipiter
acquisition to address valuation methodologies suggested by the SEC in a letter
dated September 9, 1998 to the American Institute of Certified Public
Accountants SEC Regulations Committee and as clarified through subsequent
practice. Upon consideration of this guidance and additional practice that has
developed since the SEC letter was first made public, the $18.0 million charge
as previously reported has been reduced to $9.2 million and amounts allocated to
goodwill and other intangible assets have been increased from $11.5 million to
$20.3 million.
Page 6
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Restatement Related to In-Process Research and Development Expense
(continued)
The effect of the restatement on previously reported consolidated financial
statements as of and for the three and six months ended January 31, 1999 and as
of July 31, 1998 is as follows (in thousands, except per share amounts):
Statements of Operations:
Three Months Ended Six Months Ended
January 31, 1999 January 31, 1999
------------------------- -----------------------
As Reported Restated As Reported Restated
------------ ----------- ------------ ---------
Cost of revenues $ 37,043 $ 37,123 $ 72,588 $ 72,748
General and administrative expenses 10,366 10,747 18,302 19,064
Operating loss (20,608) (21,069) (40,275) (41,197)
Gain on sale of Lycos, Inc. common stock 44,503 43,596 46,521 45,475
Gain (loss) on stock issuance by Lycos, Inc. (21) (121) 19,161 20,253
Equity in losses of affiliates (6,071) (6,189) (8,660) (9,548)
Income from continuing operations before income taxes 28,873 27,287 93,756 91,992
Income tax expense 14,601 14,138 40,800 40,454
Income from continuing operations 14,272 13,149 52,956 51,538
Net income 14,124 13,001 52,677 51,259
Basic income from continuing operations per share 0.30 0.28 1.14 1.11
Basic net income per share 0.30 0.28 1.13 1.10
Diluted income from continuing operations per share 0.28 0.25 1.05 1.02
Diluted net income per share 0.28 0.25 1.04 1.01
Balance Sheets:
January 31, 1999 July 31, 1998
------------------------ ----------------------
As Reported Restated As Reported Restated
----------- ---------- ----------- --------
Investments in affiliates $ 55,495 $ 55,495 $ 66,187 $ 82,616
Cost in excess of net assets of subsidiaries acquired,
net of accumulated amortization 47,053 52,830 49,301 55,770
Other assets 21,290 26,979 2,238 3,964
Total assets 1,239,882 1,251,348 235,194 259,818
Current deferred income tax liabilities 359,639 360,133 -- --
Total current liabilities 449,605 450,099 90,035 90,035
Non-current deferred income tax liabilities 7,680 7,680 10,528 15,536
Minority interest 51,767 54,761 11,045 15,310
Net unrealized holding gain (loss) on available-for-sale
securities 484,930 478,975 (436) (436)
Retained earnings 80,625 94,558 28,173 43,524
Total stockholders' equity 675,478 683,456 117,785 133,136
C. Discontinued Operations
On March 11, 1999, the Company announced the signing of a binding agreement to
sell its wholly-owned subsidiary, CMG Direct Corporation (CMG Direct) to
Marketing Services Group, Inc. (MSGI). At the time, CMG Direct comprised the
Company's entire lists and database services segment. As a result, the
operations of the Company's lists and database services segment have been
reflected as income (loss) from discontinued operations. The gain on sale of
certain data warehouse product rights by the Company's subsidiary, Engage
Technologies, Inc. (Engage) in the first quarter of fiscal 1998 has also been
reflected as discontinued operations. These data warehouse products were
developed by Engage during fiscal 1996 and 1997, when Engage was included in the
Company's lists and database services segment. CMG Direct's net assets, which
included accounts receivable, prepaid expenses, net property and equipment, net
goodwill, other assets, accounts payable, accrued expenses and other liabilities
are reported as net current and non-current assets of discontinued operations at
January 31, 1999.
Page 7
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Deconsolidation of Vicinity
Beginning in November, 1998, CMGI's ownership interest in Vicinity was reduced
to below 50% as a result of employee stock option exercises. As such, beginning
in November, 1998, the Company began to account for its remaining investment in
Vicinity under the equity method of accounting, rather than the consolidation
method. Prior to these events, the operating results of Vicinity were
consolidated within the operating results of the Company's investment and
development segment, and the assets and liabilities of Vicinity were
consolidated with those of CMGI's other majority-owned subsidiaries in the
Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1998
included Vicinity sales of $1,454,000 and operating losses of $621,000.
E. Deconsolidation of Lycos, Inc.
During the first quarter of fiscal year 1998, the Company owned in excess of 50%
of Lycos and accounted for its investment under the consolidation method.
Through the subsequent sale and distribution of Lycos shares, the Company's
ownership percentage in Lycos was reduced to below 50% beginning in November,
1997. As such, beginning in November, 1997, the Company began accounting for
its remaining investment in Lycos under the equity method of accounting, rather
than the consolidation method. Prior to these events, the operating results of
Lycos were consolidated within the operating results of the Company's investment
and development segment, and the assets and liabilities of Lycos were
consolidated with those of CMGI's other majority-owned subsidiaries in the
Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1997
included Lycos sales of $9,303,000 and operating losses of $433,000. As a
result of additional Lycos stock sales, beginning in January, 1999, CMGI's
ownership in Lycos was further reduced below 20%. Accordingly, CMGI began
accounting for its investment in Lycos (net of shares attributable to
CMG@Ventures I, LLC's profit members and shares which may be required to be
sold to Lycos pursuant to employee stock option exercises) as available-for-sale
securities, carried at fair value (see Note K.)
The following table contains summarized financial information for Lycos for the
quarters ended October 31, 1998 and January 31, 1999, as restated to reflect
Lycos' adjustments to in-process research and development charges and
amortization of acquisition related intangible assets (See Note B):
(in thousands)
Condensed Statement of Operations:
Quarter Quaarter
Ended Ended
October 31, January 31,
1998 1999
----- ----
Net revenues $ 24,784 $ 30,552
======== ========
Operating loss $(15,612) $(15,368)
======== ========
Net loss $ (3,596) $(13,753)
======== ========
Condensed Balance Sheet:
October 31, January 31,
1998 1999
---- ----
Current assets $203,041 $198,209
Noncurrent assets 272,991 266,706
-------- --------
Total assets $476,032 $464,915
======== ========
Current liabilities $ 53,694 $ 50,612
Noncurrent liabilities 29,873 29,087
Stockholders' equity 392,465 385,216
-------- --------
Total liabilities and stockholders' equity $476,032 $464,915
======== ========
Page 8
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Two-for-one Common Stock Split
On January 11, 1999, the Company effected a two-for-one common stock split in
the form of a stock dividend. Accordingly, the consolidated financial
statements have been retroactively adjusted for all periods presented to reflect
this event.
G. Sale of CMG@Ventures Investments and Investment in Hollywood
Entertainment
In August, 1998, the Company's subsidiary, CMG@Ventures II, LLC (CMG@Ventures
II) converted its holdings in Sage Enterprises, Inc. (Sage Enterprises) into
225,558 shares of Amazon.com, Inc. (Amazon.com) common stock as part of a merger
wherein Amazon.com acquired Sage Enterprises. CMG@Ventures II invested $4.5
million in Sage Enterprises beginning in June, 1997. The Company recorded a
pre-tax gain of $19,057,000 on the conversion of its investment in Sage
Enterprises during the fiscal quarter ended October 31, 1998. Such gain was
recorded net of the 20% interest attributable to CMG@Ventures II's profit
members.
In October, 1998, CMG@Ventures II's holdings in Reel.com, Inc. (Reel.com) were
converted into 1,943,783 restricted common and 485,946 restricted, convertible
preferred shares of Hollywood Entertainment Corporation (Hollywood
Entertainment) as part of a merger wherein Hollywood Entertainment acquired
Reel.com. The preferred shares were convertible into common shares on a 1-for-1
basis, subject to approval by Hollywood Entertainment shareholders.
CMG@Ventures II invested $6.9 million in Reel.com beginning in July, 1997. The
Company recorded a pre-tax gain of $23,158,000 on the conversion of its
investment in Reel.com during the fiscal quarter ended October 31, 1998. The
gain was reported net of the 20% interest attributable to CMG@Ventures II's
profit members.
Also in October, 1998, in a separate transaction, the Company purchased
1,524,644 restricted common and 803,290 restricted, convertible preferred shares
of Hollywood Entertainment for a total cash purchase price of $31.1 million.
The preferred shares were convertible into common shares on a 1-for-1 basis,
subject to approval by Hollywood Entertainment shareholders. In December, 1998,
CMGI's and CMG@Ventures II's entire holdings in Hollywood Entertainment
preferred stock were converted into common shares.
H. Gain on Stock Issuances by Lycos, Inc. and GeoCities
In August, 1998, the Company's affiliate, GeoCities, completed its initial
public offering of common stock, issuing approximately 5.5 million shares at a
price of $17.00 per share, which raised $84.5 million in net proceeds for
GeoCities. As a result of the initial public offering, the Company's ownership
interest in GeoCities was reduced from approximately 34% to approximately 28%.
The Company, through its subsidiaries, CMG@Ventures I, LLC (CMG@Ventures I) and
CMG@Ventures II, has invested a total of $5.9 million in GeoCities beginning in
January, 1996. In December, 1998, GeoCities issued additional stock in
conjunction with its acquisition of Starseed, Inc. (known as WebRing). CMGI
recorded a pre-tax gain of $24,132,000 on the issuance of stock by GeoCities
during the fiscal quarter ended October 31, 1998 and a pre-tax gain of
$4,382,000 on the issuance of stock by GeoCities during the second fiscal
quarter ended January 31, 1999. These pre-tax gains represent the increase in
the book value of the Company's net equity in GeoCities, primarily as a result
of the initial public offering and acquisition of Starseed, Inc. The gains were
recorded net of the interests attributable to CMG@Ventures I's and II's profit
members.
The Company recorded a pre-tax gain of $20,374,000 in the first quarter of
fiscal 1999 resulting from the issuance of stock by Lycos. The gain for the
quarter was primarily related to the issuance of 4.1 million shares by Lycos
during August, 1998 in its acquisition of WhoWhere? Inc. As a result of the
issuance of stock by Lycos for the acquisition of WhoWhere? Inc., the Company's
ownership interest in Lycos was reduced from approximately 24% to approximately
22%. The gain was recorded net of the interest attributable to CMG@Ventures I's
profit members.
Page 9
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Commitment to Fund CMG@Ventures III, LLC
In December, 1998, CMGI announced the close of the @Ventures III venture capital
fund. This fund has secured $212 million in capital commitments from outside
investors, which will be invested in emerging Internet service and technology
companies through two newly formed entities, @Ventures III L.P. and @Ventures
III Foreign Fund, L.P. CMGI does not have a direct ownership interest in either
of these newly created entities, but is entitled to 2% of the net capital gains
realized by both entities. Management of these entities, including investment
and sale decisions, is the responsibility of @Ventures Partners III, LLC, whose
members include David S. Wetherell, CMGI's President and Chief Executive
Officer, and Andrew J. Hajducky III, CMGI's Chief Financial Officer. The
Company has committed to contribute $54 million to its newly formed limited
liability company subsidiary, CMG@Ventures III, LLC. CMG@Ventures III, LLC will
take strategic positions side by side with @Ventures III L.P. CMGI owns 100% of
the capital and is entitled to 80% of the net capital gains realized by
CMG@Ventures III, LLC. @Ventures Partners III, LLC is entitled to the remaining
20% of the net capital gains realized by CMG@Ventures III, LLC.
J. Investments in Affiliates
During the first quarter of fiscal year 1999, the Company, through its limited
liability company subsidiary, CMG@Ventures III, LLC, invested a total of
$1,142,000 to acquire initial minority ownership interests in three Internet
companies, including Raging Bull, Asimba and Virtual Ink. Raging Bull is a
financial Web message board service that offers the ability to filter content
and tailor personally relevant financial information to meet users' needs.
Asimba is creating a content rich, personalized, online community for the
competitive and recreational sports market. Virtual Ink is a newly launched
company focused on the development of Digital Meeting Assistant TM (DMA)
technologies. During the second quarter of fiscal year 1999, through
CMG@Ventures III, LLC, CMGI acquired initial minority ownership interests in six
additional Internet companies, including Ancestry.com, Furniture.com, ONElist,
and three others, for an aggregate total of $5,825,000. Ancestry.com is a
provider of community, content and commerce resources for families via the
Internet, including the Web's largest repository of searchable genealogy data.
Furniture.com is an e-commerce provider of a broad selection of furniture and
home furnishing accessories. ONElist provides free e-mail communities via the
Internet, allowing users to search for or subscribe to tens of thousands of
communities on different topics or create their own community. Also during the
second half of fiscal year 1999, CMG@Ventures II, LLC invested $1.9 million to
participate in follow - on equity rounds raised by Critical Path and KOZ. The
Company anticipates synergies between these strategic positions and CMGI's core
businesses, including speeding technological innovation and access to markets.
Each of the new investments made by CMG@Ventures II, LLC and CMG@Ventures III,
LLC during the first six months of fiscal 1999 are carried at cost in CMGI's
consolidated financial statements.
Also during the first fiscal quarter of 1999, the Company invested an additional
$2 million in Magnitude Network, LLC (Magnitude Network), increasing CMGI's
ownership percentage in Magnitude Network to 23% at October 31, 1998 from 5% at
July 31, 1998. Accordingly, beginning October 22, 1998, the Company began
accounting for its investment in Magnitude Network under the equity method of
accounting, rather than the cost method (also see Note T.)
Page 10
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Sales of Lycos and Amazon.com Stock
During the first quarter of fiscal year 1999, CMG@Ventures I distributed
3,585,207 of its shares of Lycos common stock to the Company, and 558,317 shares
to CMG@Ventures I's profit members. During the first quarter of fiscal 1999 the
Company sold 70,000 of its Lycos shares on the open market. As a result of the
sale, the Company received proceeds of $2.5 million, and recognized a pre-tax
gain of $1,879,000, reported net of the associated interest attributed to
CMG@Ventures I's profit members. During the second quarter of fiscal 1999 the
Company sold 748,000 of its Lycos shares on the open market. As a result of
second quarter Lycos sales, the Company received proceeds of $50.6 million, and
recognized a pre-tax gain of $43,596,000, reported net of the associated
interest attributed to CMG@Ventures I's profit members. As a result of the
Company's sale of Lycos shares, during January, 1999, the Company's ownership
interest in Lycos fell below 20% of Lycos' outstanding shares. With this
decline in ownership below 20%, CMGI began accounting for its investment in
Lycos (net of shares attributable to CMG@Ventures I's profit members and shares
which may be required to be sold to Lycos pursuant to employee stock option
exercises) as available-for-sale securities, carried at fair value, rather than
under the equity method.
In November, 1998, CMGI received a distribution of 169,538 shares of Amazon.com
stock from CMG@Ventures II LLC. The Company sold these shares for total
proceeds of $27.2 million in November, 1998, and recognized a pre-tax gain of
$7,002,000, reported net of the associated interest attributed to CMG@Ventures
II's profit members.
L. Segment Information
The Company's continuing operations are classified in two primary business
segments: (i) investment and development and (ii) fulfillment services. The
Company's lists and database services segment is reported as discontinued
operations (see Note C.) During the quarter ended January 31, 1999, non-
consolidated related parties accounted for approximately 16% of net revenues in
the investment and development segment. Summarized financial information by
business segment for continuing operations is as follows:
Three months ended January 31, Six months ended January 31,
----------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net revenues:
Investment and development $ 4,902,000 $ 1,760,000 $ 9,814,000 $ 12,331,000
Fulfillment services 34,070,000 13,470,000 66,563,000 25,494,000
------------ ------------ ------------ ------------
$ 38,972,000 $ 15,230,000 $ 76,377,000 $ 37,825,000
============ ============ ============ ============
Operating income (loss):
Investment and development $(21,974,000) $(14,786,000) $(42,359,000) $(28,045,000)
Fulfillment services 905,000 1,149,000 1,162,000 2,210,000
------------ ------------ ------------ ------------
$(21,069,000) $(13,637,000) $(41,197,000) $(25,835,000)
============ ============ ============ ============
Page 11
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
L. Segment Information (Continued)
Operating income in the fulfillment services segment was adjusted during the
fourth quarter of fiscal year 1998 to correct prior quarters' understatements of
cost of sales by SalesLink's subsidiary company, Pacific Link. The cost of
sales understatement was caused by estimates used in determining the material
content in cost of sales. As a result, previous quarterly results had
understated cost of sales and overstated inventory. Had such adjustments been
recorded in the period in which they occurred, quarterly fulfillment services
segment operating income (loss) would have been as follows:
Three Months Ended
October 31, January 31, 1998 April 30, July 31,
---------- ---------------- -------- --------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
As Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
M. Borrowing Arrangements
The Company's $20 million collateralized corporate borrowing facility became
payable in full on January 20, 1999. Upon its maturity, CMGI renewed this $20
million note for another one-year period, with similar terms as the expiring
note. This borrowing is now secured by 762,465 of CMGI's shares of Lycos common
stock. Under this agreement, CMGI could become subject to additional collateral
requirements under certain circumstances. The Company expects to again seek
the renewal of this note upon its next maturity on January 20, 2000. SalesLink
had an outstanding line of credit balance of $2.7 million as of January 31, 1999
and an additional $1.2 million reserved in support of outstanding letters of
credit for operating leases. SalesLink also has a $15.5 million bank term note
outstanding at January 31, 1999, which provides for repayment in quarterly
installments beginning January, 1999 through November, 2002. The obligations of
Saleslink under the bank line of credit and bank term loans have been guaranteed
by CMGI. As of July 31, 1998 and January 31, 1999, SalesLink did not comply
with certain covenants of their borrowing arrangements. SalesLink is working
with the bank to cure the non-compliance as of January 31, 1999, and
prospectively, through waivers or amendments to the covenant terms. SalesLink
has not yet received such waivers or amendments, nor is there any assurance that
such waivers or amendments will be obtained. Accordingly, all of SalesLink's
bank borrowings have been classified as current liabilities in the January 31,
1999 balance sheet.
N. Issuance of Series B Convertible Redeemable Preferred Stock
On December 22, 1998, CMGI completed a $50 million private placement of 50,000
shares of newly issued Series B convertible preferred stock. Each preferred
share has a stated value of $1,000 per share, and accretes an incremental
conversion premium at a rate of 4% per year. Subject to certain limitations,
the Series B convertible preferred stock plus accreted conversion premium may be
converted into shares of the Company's common stock at a fixed price of $52 per
common share for one year or until the earlier occurrence of certain specified
events. Under certain circumstances, the Company has the option to redeem the
Series B convertible preferred stock; and under certain circumstances the
Company may be required to redeem the Series B convertible preferred stock.
After one year or the earlier occurrence of certain specified events, if the
Series B convertible preferred stock has not been redeemed, the conversion price
is based upon a formula which is tied to the undiscounted market price of the
Company's common stock. Subject to waiver by the Company, the maximum number of
shares of the Company's common stock into which the Series B convertible
preferred stock may convert is 2,083,334. The Series B convertible preferred
stock automatically converts into common stock on December 22, 2000. Preferred
shareholders have preference over common stockholders in dividends and
liquidation rights. Proceeds of the private placement were raised to be used
for acquisitions of controlling positions in companies and working capital
purposes.
Page 12
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
O. Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents are included in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from income (loss) from
continuing operations, 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 six months ended January 31, 1999.
The following table sets forth the reconciliation of the numerators and
denominators for the earnings per share calculations per SFAS No. 128:
(in thousands) Three months ended January 31, Six months ended January 31,
------------------------------ ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic earnings per share:
- -------------------------
Income (loss) from continuing operations $13,149 $(5,936) $51,538 $(8,195)
Less: Convertible preferred stock interest (225) -- (225) --
------- ------- ------- -------
Income (loss) from continuing operations available to
common stockholders 12,924 (5,936) 51,313 (8,195)
Income (loss) from discontinued operations of lists
and database services segment (148) 102 (279) 68
Gain on sale of data warehouse product rights -- -- -- 4,978
------- ------- ------- -------
Net income (loss) available to common stockholders $12,776 $(5,834) $51,034 $(3,149)
======= ======= ======= =======
Weighted average common shares outstanding 46,260 40,160 46,160 39,312
======= ======= ======= =======
Diluted earnings per share:
- ---------------------------
Income (loss) from continuing operations available to
common stockholders $12,924 $(5,936) $51,313 $(8,195)
Add: Convertible preferred stock interest 225 -- 225 --
Less: Net effect of income attributable to dilutive
subsidiary stock equivalents -- (19) -- (102)
------- ------- ------- -------
Income (loss) from continuing operations used in
computing diluted earnings per share 13,149 (5,955) 51,538 (8,297)
Income (loss) from discontinued operations of lists
and database services segment (148) 102 (279) 68
Gain on sale of data warehouse product rights -- -- -- 4,978
------- ------- ------- -------
Net income (loss) used in computing diluted earnings
per share $13,001 $(5,853) $51,259 $(3,251)
======= ======= ======= =======
Weighted average common shares outstanding 46,260 40,160 46,160 39,312
Effect of dilutive securities 4,997 -- 4,490 --
------- ------- ------- -------
Shares used in computing diluted earnings per share 51,257 40,160 50,650 39,312
======= ======= ======= =======
Page 13
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
P. Comprehensive Income
As of August 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, it has no impact on the Company's net income or
stockholders' equity. SFAS No. 130 requires all changes in equity from non-
owner sources to be included in the determination of comprehensive income.
The components of comprehensive income (loss), net of income taxes, are as
follows:
(in thousands) Three months ended January 31, Six months ended January 31,
-------------------------------------- --------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $ 13,001 $(5,834) $ 51,259 $(3,149)
Net unrealized holding gain arising during period 483,619 -- 483,530 1,603
Less: reclassification adjustment for gain
realized in net income (loss) (4,119) -- (4,119) (2,455)
-------- ------- -------- -------
Comprehensive income (loss) $492,501 $(5,834) $530,670 $(4,001)
======== ======= ======== =======
Q. Consolidated Statements of Cash Flows Supplemental Information
(in thousands) Six months ended January 31,
------------------------------------
1999 1998
---- ----
Cash paid during the period for:
Interest $ 1,833 $ 1,334
======== ========
Income taxes $ 9,476 $ 383
======== ========
During the six months ended January 31, 1999, significant non-cash investing
activities included the sale of the Company's equity interest in Reel.com in
exchange for Hollywood Entertainment available-for-sale securities valued at
$32,801,000, as well as the sale of the Company's minority investment in Sage
Enterprises in exchange for Amazon.com available-for-sale securities valued at
$26,519,000 (See Note G).
R. Available-for-sale Securities
At January 31, 1999, available-for-sale securities include 234,393 shares of
Lycos common stock and 143,330 shares of USWeb Corporation common stock held by
CMG@Ventures I. Available-for-sale securities at January 31, 1999 also include
the following securities held by CMG@Ventures II: 67,668 shares of Amazon.com
common stock (as adjusted for Amazon.com's 3-for-1 stock split in December 1998)
and 2,429,729 shares of Hollywood Entertainment common stock. Subject to the
terms of CMG@Ventures I and II's operating agreements, certain of the shares
held by these entities may be allocated to CMG@Ventures I and II's profit
members in the future.
Additionally, available-for-sale securities at January 31, 1999 include the
following securities held by CMGI, Inc. directly or through its other
subsidiaries: 5,523,845 shares of Lycos, Inc. common stock; 142,896 shares of
Informix Corporation (formerly Red Brick Systems) common stock; 386,473 shares
of Open Market, Inc. common stock; and 2,327,934 shares of Hollywood
Entertainment common stock.
Page 14
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
R. Available-for-sale Securities (Continued)
Available-for-sale securities are carried at fair value as of January 31, 1999,
based on quoted market prices, net of a market value discount to reflect the
remaining restrictions on transferability on certain of these securities. A net
unrealized holding gain of $478,975,000, net of deferred income taxes of
$334,011,000, has been reflected in the equity section of the consolidated
balance sheet based on the change in market value of the available-for-sale
securities from dates of acquisition to January 31, 1999.
CMG@Ventures II also holds 45,177 shares of Amazon.com stock at January 31, 1999
which have been allocated to its profit members and, therefore, have not been
classified as available-for-sale securities in the accompanying consolidated
balance sheet. At January 31, 1999, CMG@Ventures I also holds approximately 1.4
million shares of Lycos common stock which have been allocated to its profit
members and approximately 750,000 Lycos shares which CMG@Ventures I may be
obligated to sell to Lycos in the future, as necessary, to provide for shares
issuable upon the exercise of certain stock options granted by Lycos under its
1995 stock option plan. These shares of Lycos common stock have not been
classified as available-for-sale securities in the accompanying consolidated
balance sheet.
CMG@Ventures II's shares of Amazon.com stock are being held in escrow by an
outside trustee until August 27, 1999 as indemnification related to Amazon.com's
acquisition of Sage Enterprises.
The Hollywood Entertainment common shares held by CMGI and CMG@Ventures II are
subject to restrictions on transferability until September 1, 1999.
S. New Accounting Pronouncements
In March, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, issued SOP 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use," which
requires the capitalization of certain internal costs related to the
implementation of computer software obtained for internal use. The Company is
required to adopt this standard in the first quarter of fiscal year 2000. The
Company expects that the adoption of SOP 98-1 will not have a material impact on
the Company's financial position or its results of operations.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2000. The Company expects that the adoption of SFAS No.
133 will not have a material impact on the Company's financial position or its
results of operations.
Page 15
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
T. Subsequent Events
During February, 1999, CMGI exercised its right to invest an additional $22
million to increase its ownership in Magnitude Network from 23% to 92%. CMGI
had previously invested a total of $2.5 million in Magnitude Network in July and
October, 1998. Accordingly, beginning February, 1999, CMGI began accounting for
our investment in Magnitude Network under the consolidation method of
accounting, rather than the equity method. The acquisition accounting and
valuation for CMGI's investment in Magnitude Network may result in a significant
portion of the investment being identified as in-process research and
development, in accordance with valuation methodologies provided by the
Securities and Exchange Commission, which is expected to be charged to operating
results in the fourth quarter when the amount is determined.
On February 1, 1999, the Company announced that it had signed a definitive
agreement to acquire 2CAN Media, Inc., a site -focused online advertising
representation firm. 2CAN Media will be combined with the Company's subsidiary,
ADSmart. The transaction includes the 5 sales divisions of 2CAN Media -
Pinnacle Interactive, WebRep, ECG, MediaPlus and Grupo NetFuerza.
On March 1, 1999, CMGI announced a binding letter of intent to purchase Internet
Profiles Corporation (I/PRO), a leader in World Wide Web traffic verification,
analysis and research. I/PRO analyzes, correlates and validates Web site
activity, which enables marketers to understand their online business and
improve the effectiveness of their site. The Company plans to merge I/PRO with
its subsidiary, Engage Technologies.
On March 4, 1999, the Company announced a binding letter of intent to acquire
Activerse, Inc., a provider of open standard Internet messaging technologies.
With this acquisition, CMGI will invest in the rapidly expanding market for
tools and technologies that enable live communication via the Internet.
Activerse's products address the complex dynamics of Web communication by
providing instant access to Internet-connected communities, workgroups, social
groups and individuals. The Ding! suite of products from Activerse utilizes
current and emerging open Internet standards, including Java and HTML, and
allows both consumer and corporate audiences to enhance online communities
through the convenience of instant messaging.
Subsequent to January 31, 1999, CMG@Ventures III, LLC made a follow-on
investment in Virtual Ink and acquired minority ownership interests in Boston
Financial Network and one other investment. Boston Financial Network offers an
integrated set of Web-based financial applications targeted at small businesses.
Subsequent to January 31, 1999, CMG@Ventures II, LLC made follow-on investments
in Silknet and ThingWorld.com.
Page 16
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,
that involve risks and uncertainties. All statements other than statements of
historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section and
elsewhere in this report, the risks discussed in the "Risk Factors" section
included in the Company's registration statement on Form S-3 filed with the SEC
on February 5, 1999, as amended and the risks discussed in the Company's other
filings with the SEC. These risks and uncertainties could cause actual results
to differ materially from those reflected in the forward-looking statements.
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 Related to In-process Research and Development Expense
The accompanying consolidated financial statements have been restated to
reflect the impact of adjustments made by Lycos, Inc. (Lycos) to its previously
reported in-process research and development charges associated with Lycos'
acquisitions of Tripod, Inc., WiseWire Corporation, GuestWorld, Inc. and
WhoWhere? Inc. during CMGI's third and fourth quarters of fiscal 1998 and first
quarter of fiscal 1999. The accompanying consolidated financial statements have
also been restated to reflect a change in the original accounting for the
purchase price allocation related to CMGI's acquisition of Accipiter, Inc.
(Accipiter) in the third fiscal quarter of 1998.
Lycos reduced the amount of its charges for in-process research and
development in connection with the above noted acquisitions and,
correspondingly, increased the amounts allocated to intangible assets by $89.4
million. During the periods effected, CMGI's ownership in Lycos ranged from
approximately 46% to approximately 22%, and CMGI accounted for its investment in
Lycos under the equity method of accounting, whereby CMGI's portion of the net
operating performance of Lycos was reflected in equity in losses of affiliates.
Additionally, during such periods CMGI recorded gains on sales of portions of
its Lycos stock holdings, and recorded gains on issuances of stock by Lycos. As
a result of the Lycos restatements, CMGI has accordingly restated previously
reported equity in losses of Lycos, gains on sales of Lycos stock and gains on
issuance of stock by Lycos for CMGI's fiscal quarters ended April 30, 1998, July
31, 1998, October 31, 1998 and January 31, 1999. Lycos' reduction of previously
recorded in-process research and development charges resulted in higher gains on
Lycos stock issuances recorded by the Company, thereby increasing CMGI's book
basis in its Lycos investment and resulting in lower gains on sales of Lycos
stock and reduced gains on Lycos stock issuances in subsequent quarters.
Related higher amortization charges recorded by Lycos in subsequent quarters
resulted in higher equity in loss of affiliates amounts recorded by CMGI.
Upon consummation of the Accipiter acquisition in the third fiscal quarter
of 1998, CMGI, in its consolidated financial statements, reported an expense of
approximately $18.0 million representing acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. On May 7, 1999, CMGI announced a voluntary restatement
of the in-process research and development charge related to the Accipiter
acquisition to address valuation methodologies suggested by the SEC in a letter
dated September 9, 1998 to the American Institute of Certified Public
Accountants SEC Regulations Committee and as clarified through subsequent
practice. Upon consideration of this guidance and additional practice that has
developed since the SEC letter was first made public, the $18.0 million charge
as previously reported has been reduced to $9.2 million and amounts allocated to
goodwill and other intangible assets have been increased from $11.5 million to
$20.3 million.
Page 17
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The effect of this restatement on previously reported consolidated
financial statements as of and for the three and six months ended January 31,
1999 and as of July 31, 1998 is as follows (in thousands, except per share
amounts):
Statements of Operations:
Three Months Ended Six Months Ended
January 31, 1999 January 31, 1999
------------------------- -----------------------
As Reported Restated As Reported Restated
------------ ----------- ------------ ---------
Cost of revenues $ 37,043 $ 37,123 $ 72,588 $ 72,748
General and administrative expenses 10,366 10,747 18,302 19,064
Operating loss (20,608) (21,069) (40,275) (41,197)
Gain on sale of Lycos, Inc. common stock 44,503 43,596 46,521 45,475
Gain (loss) on stock issuance by Lycos, Inc. (21) (121) 19,161 20,253
Equity in losses of affiliates (6,071) (6,189) (8,660) (9,548)
Income from continuing operations before income taxes 28,873 27,287 93,756 91,992
Income tax expense 14,601 14,138 40,800 40,454
Income from continuing operations 14,272 13,149 52,956 51,538
Net income 14,124 13,001 52,677 51,259
Basic income from continuing operations per share 0.30 0.28 1.14 1.11
Basic net income per share 0.30 0.28 1.13 1.10
Diluted income from continuing operations per share 0.28 0.25 1.05 1.02
Diluted net income per share 0.28 0.25 1.04 1.01
Balance Sheets:
January 31, 1999 July 31, 1998
------------------------ ----------------------
As Reported Restated As Reported Restated
----------- ---------- ----------- --------
Investments in affiliates $ 55,495 $ 55,495 $ 66,187 $ 82,616
Cost in excess of net assets of subsidiaries acquired,
net of accumulated amortization 47,053 52,830 49,301 55,770
Other assets 21,290 26,979 2,238 3,964
Total assets 1,239,882 1,251,348 235,194 259,818
Current deferred income tax liabilities 359,639 360,133 -- --
Total current liabilities 449,605 450,099 90,035 90,035
Non-current deferred income tax liabilities 7,680 7,680 10,528 15,536
Minority interest 51,767 54,761 11,045 15,310
Net unrealized holding gain (loss) on available-for-sale
securities 484,930 478,975 (436) (436)
Retained earnings 80,625 94,558 28,173 43,524
Total stockholders' equity 675,478 683,456 117,785 133,136
Deconsolidation of Lycos beginning in the second quarter of fiscal year 1998
During the first quarter of fiscal year 1998, the Company owned in excess
of 50% of Lycos and accounted for its investment under the consolidation method.
Through the subsequent sale and distribution of Lycos shares, the Company's
ownership percentage in Lycos was reduced to below 50% beginning in November,
1997. As such, beginning in November, 1997, the Company began accounting for
its remaining investment in Lycos under the equity method of accounting, rather
than the consolidation method. Prior to these events, the operating results of
Lycos were consolidated within the operating results of the Company's investment
and development segment, and the assets and liabilities of Lycos were
consolidated with those of CMGI's other majority-owned subsidiaries in the
Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1997
included Lycos sales of $9,303,000 and operating losses of $433,000.
Page 18
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Deconsolidation of Vicinity beginning in the second quarter of fiscal year 1999
Beginning in November, 1998, CMGI's ownership interest in Vicinity was
reduced to below 50% as a result of employee stock option exercises. As such,
beginning in November, 1998, the Company began to account for its remaining
investment in Vicinity under the equity method of accounting, rather than the
consolidation method. Prior to these events, the operating results of Vicinity
were consolidated within the operating results of the Company's investment and
development segment, and the assets and liabilities of Vicinity were
consolidated with those of CMGI's other majority-owned subsidiaries in the
Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1998
included Vicinity sales of $1,454,000 and operating losses of $621,000.
Fiscal 1998 Fulfillment Segment Results
Operating income in the fulfillment services segment was adjusted during
the fourth quarter of fiscal year 1998 to correct prior quarters'
understatements of cost of sales by SalesLink's subsidiary company, Pacific
Link. The cost of sales understatement was caused by estimates used in
determining the material content in cost of sales. As a result, previous
quarterly results had understated cost of sales and overstated inventory. Had
such adjustments been recorded in the period in which they occurred, quarterly
fulfillment services segment operating income (loss) would have been as follows:
Three Months Ended
October 31, January 31, April 30, July 31,
----------- ----------- ----------- -------------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
As Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
Discontinued Operations
On March 11, 1999, the Company announced the signing of a binding agreement
to sell its wholly-owned subsidiary, CMG Direct to Marketing Services Group,
Inc. (MSGI). At the time, CMG Direct comprised the Company's entire lists and
database services segment. As a result, the operations of the Company's lists
and database services segment have been reflected as income (loss) from
discontinued operations. The gain on sale of certain data warehouse product
rights by the Company's subsidiary, Engage Technologies, Inc. (Engage) in the
first quarter of fiscal 1998 has also been reflected as discontinued operations.
These data warehouse products were developed by Engage during fiscal 1996 and
1997, when Engage was included in the Company's lists and database services
segment. CMG Direct's net assets, which included accounts receivable, prepaid
expenses, net property and equipment, net goodwill, other assets, accounts
payable, accrued expenses and other liabilities are reported as net current and
non-current assets of discontinued operations at January 31, 1999. Certain prior
period amounts in the consolidated financial statements have been reclassified
in accordance with generally accepted accounting principles to reflect the
Company's lists and database services segment as discontinued operations.
Page 19
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Three months ended January 31, 1999 compared to three months ended January 31,
1998
Net revenues for the quarter ended January 31, 1999 increased $23,742,000,
or 156%, to $38,972,000 from $15,230,000 for the quarter ended January 31, 1998.
The increase was largely attributable to an increase of $20,600,000 in net
revenues for the Company's fulfillment services segment, reflecting increased
volume of turnkey business from Cisco Systems and the acquisitions of On-Demand
Solutions and InSolutions during the fourth quarter of fiscal 1998.
Additionally, net revenues in the Company's investment and development segment
increased $3,142,000. Vicinity net revenues for last year's second quarter
ended January 31, 1998 were $1,233,000. Absent the impact of Vicinity, net
revenues in the investment and development segment increased by $4,375,000, or
830%, reflecting improved sales by Engage, Navisite, Planet Direct and ADSmart,
and the acquisitions of Accipiter and Servercast during the second half of
fiscal 1998. During the quarter ended January 31, 1999, non-consolidated related
parties accounted for approximately 16% of net revenues in the investment and
development segment. The Company believes that its subsidiary companies will
continue to develop and introduce their products commercially, actively pursue
increased revenues from new and existing customers, and look to expand into new
market opportunities during fiscal 1999. Additionally, subsequent to January
31, 1999 the Company signed agreements to acquire three additional Internet
companies, 2CAN Media, Internet Profiles Corporation and Activerse, and in early
February, CMGI exercised its right to increase its ownership in Magnitude
Network from 23% to 92%. Therefore, as a result of both increased sales by
existing companies, and incremental revenues from new acquisitions, the Company
expects to report future revenue growth.
Cost of revenues increased $22,848,000, or 160%, to $37,123,000 in the
second quarter of fiscal 1999 from $14,275,000 for the corresponding period in
fiscal 1998, reflecting increases of $18,805,000 and $4,043,000 in the
fulfillment services and investment and development segments, respectively.
Adjusted for the $814,000 impact of prior year understatements, cost of sales
increased $17,991,000 in the fulfillment services segment resulting from higher
revenues, the acquisitions of On-Demand Solutions and InSolutions, and
incremental costs incurred in fiscal 1999 associated with relocating SalesLink's
Boston and Chicago operations to more efficient facilities. Investment and
development segment cost of sales increases were primarily attributable to
higher revenues and the acceleration of operations in the segment, partially
offset by $872,000 lower cost of sales resulting from the deconsolidation of
Vicinity beginning in the second quarter of fiscal 1999. Revenue increases as
start up of Internet operations has begun to ramp during early stages, offset in
part by the impact of deconsolidating Vicinity, is the primary reason cost of
revenues as a percentage of revenues in the investment and development segment
decreased to 161% in the second quarter of fiscal 1999 from 218% in the prior
year. After adjusting for prior year understatements, fulfillment services
segment cost of revenues as a percentage of net revenues increased to 86% in the
second quarter of fiscal 1999 from 84% in the second quarter of fiscal 1998,
primarily reflecting the impact of facilities relocation costs incurred.
Research and development expenses increased $726,000, or 16%, to $5,239,000
in the quarter ended January 31, 1999 from $4,513,000 in the prior year's second
quarter. All research and development expenses in both periods were incurred
within the Company's investment and development segment. The $726,000 increase
over prior year was primarily due to increased development efforts at Engage and
incremental costs associated with the development of NaviNet's technology
platform, partially offset by a reduction due to the deconsolidation of
Vicinity. The Company anticipates it will continue to devote substantial
resources to product development and that these costs may substantially increase
in future periods.
Page 20
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling expenses increased $1,721,000 or 33% to $6,932,000 in the second
quarter ended January 31, 1999 from $5,211,000 for the corresponding period in
fiscal 1998, primarily reflecting a $1,641,000 increase in the Company's
investment and development segment. The increased costs in the investment and
development segment reflects sales and marketing efforts related to several
product launches and continued growth of sales and marketing infrastructures,
partially offset by reduced selling expenses due to the deconsolidation of
Vicinity. Selling expenses in the fulfillment services segment increased by
$80,000 in comparison with last year's second quarter due to the acquisitions of
On-Demand Solutions and InSolutions, offset by headcount reductions by
PacificLink. Selling expenses decreased as a percentage of net revenues to 18%
in the second quarter of fiscal 1999 from 34% for the corresponding period in
fiscal 1998, primarily reflecting the impact of increased revenues. As the
Company completes the acquisitions of 2CAN Media, Internet Profiles Corporation
and Activerse, and as existing subsidiaries continue to introduce new products
and expand sales, the Company expects to incur significant promotional expenses,
as well as expenses related to the hiring of additional sales and marketing
personnel and increased advertising expenses, and anticipates that these costs
will substantially increase in future periods.
General and administrative expenses increased $6,754,000, or 169%, to
$10,747,000 in the second quarter of fiscal 1999 from $3,993,000 for the
corresponding period in fiscal 1998. The investment and development segment
experienced an increase of $4,795,000, primarily due to the building of
management infrastructures in several of the Company's Internet investments.
General and administrative expenses in the fulfillment services segment
increased by $1,959,000 in comparison with last year's second quarter, largely
due to the acquisitions of On-Demand Solutions and InSolutions, including
approximately $650,000 higher goodwill charges. General and administrative
expenses as a percentage of net sales remained virtually level at 26%. The
Company anticipates that its general and administrative expenses will continue
to increase significantly as the Company adds newly acquired subsidiaries and as
existing subsidiaries continue to grow and expand their administrative staffs
and infrastructures.
Gain on sale of Lycos, Inc. common stock reflects the Company's net gain
realized on the sale of 748,000 shares in the second quarter of fiscal 1999 and
340,000 shares in the second quarter of fiscal 1998. Gain on sale of Amazon.com,
Inc. stock reflects the Company's net gain realized on the sale of 169,538
Amazon.com shares in the second quarter of fiscal 1999. Gain on stock issuance
by GeoCities in fiscal 1999 arose primarily as a result of the sale of stock by
GeoCities in its acquisition of Starseed, Inc. (known as WebRing) in December,
1998.
Interest income increased $452,000 to $748,000 in the second fiscal quarter
of 1999 from $296,000 in fiscal 1998, reflecting increased income associated
with higher average corporate cash equivalent balances compared with prior year.
Interest expense increased $449,000 compared with the second quarter of fiscal
1998, primarily due to higher corporate collateralized borrowings and borrowings
incurred in conjunction with the Company's acquisition of InSolutions.
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 for the quarter ended
January 31, 1999 include the results from the Company's minority ownership in
Lycos (until January 1999 when the Company's ownership in Lycos was reduced
below 20%), GeoCities, ThingWorld.com (formerly Parable), Silknet, Speech
Machines, Mother Nature, Vicinity, Engage Japan JV, and Magnitude Network.
Equity in losses of affiliates for the quarter ended January 31, 1998 included
the results from the Company's minority ownership in Ikonic Interactive, Inc.,
ThingWorld.com, Silknet, GeoCities, Reel.com, Lycos, Chemdex, Planet All and
Speech Machines. 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.
Income tax expense in the second quarter of fiscal 1999 was $14,138,000.
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 second quarter of fiscal
1999, gains on sales of Lycos, Inc. and Amazon.com, Inc. common stock and gain
on stock issuance by GeoCities were excluded.
Page 21
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Six months ended January 31, 1999 compared to six months ended January 31, 1998
Net revenues for the six months ended January 31, 1999 increased
$38,552,000, or 102%, to $76,377,000 from $37,825,000 for the six months ended
January 31, 1998. The increase was largely attributable to an increase of
$41,069,000 in net revenues for the Company's fulfillment services segment,
reflecting increased volume of turnkey business from Cisco Systems and the
acquisitions of On-Demand Solutions and InSolutions during the fourth quarter of
fiscal 1998. Net revenues in the Company's investment and development segment
decreased $2,517,000 primarily reflecting the impact of the deconsolidation of
Lycos and Vicinity. Lycos and Vicinity net revenues for the six months ended
January 31, 1998 were $9,303,000 and $2,143,000 respectively, while Vicinity net
revenues for the quarter ended October 31, 1999 were $1,454,000. Absent the
impact of Lycos and Vicinity, net revenues in the investment and development
segment increased by $7,475,000 reflecting improved sales by Engage, Navisite,
Planet Direct and ADSmart, and the acquisitions of Accipiter and Servercast
during the second half of fiscal 1998. The Company believes that its subsidiary
companies will continue to develop and introduce their products commercially,
actively pursue increased revenues from new and existing customers, and look to
expand into new market opportunities during fiscal 1999. Additionally,
subsequent to January 31, 1999, the Company signed agreements to acquire three
additional Internet companies, 2CAN Media, Internet Profiles Corporation and
Activerse, and in early February, 1999, CMGI exercised its right to increase its
ownership in Magnitude Network from 23% to 92%. Therefore, as a result of both
increased sales by existing companies and incremental revenues from new
acquisitions, the Company expects to report future revenue growth.
Cost of revenues increased $44,798,000, or 160%, to $72,748,000 for the six
months ended January 31, 1999 from $27,950,000 for the corresponding period in
fiscal 1998, reflecting increases of $38,120,000 and $6,678,000 in the
fulfillment services and investment and development segments, respectively.
Adjusted for the $1,596,000 impact of prior year understatements, cost of sales
increased $36,524,000 in the fulfillment services segment, primarily resulting
from higher revenues, the acquisitions of On-Demand Solutions and InSolutions,
and incremental costs incurred in fiscal 1999 associated with relocating
SalesLink's Boston and Chicago operations to more efficient facilities.
Investment and development segment cost of sales increases were primarily
attributable to higher revenues and the acceleration of operations in the
segment, partially offset by $1,878,000 lower cost of sales resulting from the
deconsolidation of Lycos beginning in the second quarter of fiscal 1998, as well
as lower cost of sales resulting from the deconsolidation of Vicinity beginning
in the second quarter of fiscal 1999. The start up of Internet operations with
minimal revenues during early stages, and the impact of deconsolidating Lycos
and Vicinity, are the primary reasons cost of revenues as a percentage of
revenues in the investment and development segment increased to 153% in the
first six months of fiscal 1999 from 68% in the prior year. After adjusting for
prior year understatements, fulfillment services segment cost of revenues as a
percentage of net revenues increased to 87% in the first six months of fiscal
1999 from 83% in the first six months of fiscal 1998, reflecting operating
inefficiencies during a period of high volume growth and the impact of
incremental facilities relocation costs.
Research and development expenses increased $32,000, or less than 1%, to
$10,592,000 for the six months ended January 31, 1999 from $10,560,000 for the
corresponding period in fiscal 1998. All research and development expenses in
both periods were incurred within the Company's investment and development
segment. The net increase in research and development expenses primarily
reflects a $1,870,000 reduction due to the deconsolidation of Lycos and
Vicinity, offset by increased development efforts at Engage and incremental
costs associated with the development of NaviNet's technology platform. The
Company anticipates it will continue to devote substantial resources to product
development and that these costs may substantially increase in future periods.
Page 22
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling expenses decreased $578,000 or 4% to $15,170,000 for the six months
ended January 31, 1999 from $15,748,000 for the corresponding period in fiscal
1998, primarily reflecting a $915,000 decrease in the Company's investment and
development segment. Investment and development results include a $5,479,000
decrease due to the deconsolidation of Lycos, offset by sales and marketing
efforts related to several product launches and continued growth of sales and
marketing infrastructures. Selling expenses in the fulfillment services segment
increased by $337,000 in comparison with the corresponding period in fiscal 1998
due to the acquisitions of On-Demand Solutions and InSolutions, partially offset
by headcount reductions by PacificLink. Selling expenses decreased as a
percentage of net revenues to 20% for the first six months of fiscal 1999 from
42% for the corresponding period in fiscal 1998, primarily reflecting the
deconsolidations of Lycos and Vicinity as well as the impact of increased
revenues. As the Company completes the acquisitions of 2CAN Media, Internet
Profiles Corporation and Activerse, and as existing subsidiaries continue to
introduce new products and expand sales, the Company expects to incur
significant promotional expenses, as well as expenses related to the hiring of
additional sales and marketing personnel and increased advertising expenses, and
anticipates that these costs will substantially increase in future periods.
General and administrative expenses increased $10,537,000, or 124%, to
$19,064,000 for the six months ended January 31, 1999 from $8,527,000 for the
corresponding period in fiscal 1998. The investment and development segment
experienced an increase of $6,877,000, primarily due to the building of
management infrastructures in several of the Company's Internet investments.
Such increases were somewhat offset by reductions associated with the
deconsolidations of Lycos and Vicinity in the amount of $1,119,000. General
and administrative expenses in the fulfillment services segment increased by
$3,660,000 in comparison with last year's corresponding period, largely due to
the acquisitions of On-Demand Solutions and InSolutions, including approximately
$800,000 higher goodwill charges. General and administrative expenses increased
as a percentage of net sales to 25% for the six months ended January 31, 1999
from 23% for the corresponding period in fiscal 1998. The Company anticipates
that its general and administrative expenses will continue to increase
significantly as the Company adds newly acquired subsidiaries and as existing
subsidiaries continue to grow and expand their administrative staffs and
infrastructures.
Gain on sale of Lycos, Inc. common stock reflects the Company's net gain
realized on the sale of 818,000 Lycos shares in fiscal 1999 and 560,000 shares
in fiscal 1998. Gain on stock issuance by Lycos, Inc. resulted primarily from
the issuance of stock by Lycos for the first quarter fiscal 1999 acquisition of
WhoWhere? Gain on stock issuance by GeoCities in fiscal 1999 arose as a result
of the sale of stock by GeoCities in an initial public offering in August, 1998
and the sale of stock by GeoCities in its acquisition of Starseed, Inc. (known
as WebRing) in December, 1998. Gain on sale of investment in Sage Enterprises,
Inc. occurred during the first quarter of fiscal year 1999 when CMG@Ventures
II's holdings in Sage Enterprises were converted into 225,558 shares of
Amazon.com, Inc. common stock as part of a merger wherein Amazon.com, Inc.
acquired Sage Enterprises. Gain on sale of investment in Reel.com, Inc.
occurred in October, 1998, when CMG@Ventures II's holdings in Reel.com were
converted into 1,943,783 restricted common and 485,946 restricted, convertible
preferred shares of Hollywood Entertainment Corporation (Hollywood
Entertainment) as part of a merger wherein Hollywood Entertainment acquired
Reel.com. Gain on sale of Amazon.com, Inc. stock reflects the Company's net
gain realized on the sale of 169,538 shares in the second quarter of fiscal
1999. Gain on sale of Premiere Technologies, Inc. stock reflects the Company's
net gain on the sale of 224,795 shares of Premiere Technologies, Inc. stock
during the first quarter of fiscal 1998.
Interest income increased $168,000 to $1,307,000 for the six months ended
January 31, 1999 from $1,139,000 in fiscal 1998, reflecting increased income
associated with higher average corporate cash equivalent balances compared with
prior year, partially offset by a $540,000 decrease from the deconsolidation of
Lycos. Interest expense increased $747,000 compared with the corresponding
period in fiscal 1998, primarily due to higher corporate collateralized
borrowings and borrowings incurred in conjunction with the Company's acquisition
of InSolutions.
Page 23
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 for the six months
ended January 31, 1999 include the results from the Company's minority ownership
in Lycos (until January 1999 when the Company's ownership in Lycos was reduced
below 20%), GeoCities, ThingWorld.com, Silknet, Speech Machines, Mother
Nature,Vicinity, Engage Japan JV, and Magnitude Network. Equity in losses of
affiliates for the six months ended January 31, 1998 included the results from
the Company's minority ownership in Ikonic, ThingWorld.com, Silknet, GeoCities,
Reel.com, Lycos, Chemdex, Planet All and Speech Machines. 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.
Income tax expense for the six months ended January 31, 1999 was
$40,454,000. 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
fiscal 1999, gains on stock issuances by Lycos and GeoCities, gains on sales of
investments in Sage Enterprises, Inc. and Reel.com, Inc., and gains on sales of
Lycos, Inc. and Amazon.com, Inc. common stock were excluded.
Liquidity and Capital Resources
During January, 1999, CMGI also sold 748,000 shares of Lycos, Inc. stock
for total proceeds of $50.6 million. As a result of the Company's sale of Lycos
shares, during January, 1999, the Company's ownership interest in Lycos fell
below 20% of Lycos' outstanding shares. With this decline in ownership below
20%, CMGI began accounting for its investment in Lycos as available-for-sale
securities, carried at fair value, rather than under the equity method.
Excluding shares attributable to profit members of CMG@Ventures I, LLC and
shares which may be required to be sold to Lycos pursuant to employee stock
option exercises, at January 31, 1999, the carrying value of the Lycos shares
was approximately $780 million.
Working capital at January 31, 1999 increased to $652 million compared to
$13 million at July 31, 1998. Approximately $590 million of the net increase in
working capital is attributable to increased amounts of available-for sale
securities, net of associated deferred tax liabilities. The largest contributing
factor to this increase was the change in the Company's method of accounting for
its investment in Lycos to available-for-sale securities, carried at fair value,
rather than under the equity method. The Company's principal sources of capital
during the first six months of fiscal 1999 were $53.1 million received from the
sale of Lycos stock, $49.9 million from issuance of Series B convertible
preferred stock, and $27.2 million received from the sale of Amazon.com stock.
The Company's principal uses of capital during the first six months of fiscal
1999 were $39 million for funding of operations, primarily those of start-up
activities in the Company's investment and development segment, $31.1 million
for the purchase of Hollywood Entertainment stock, $14 million for investments
in affiliates, $4 million for net repayments of notes payable, and $3.7 million
for purchases of property and equipment.
Page 24
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company's $20 million collateralized corporate borrowing facility
became payable in full on January 20, 1999. Upon its maturity, CMGI renewed
this $20 million note for another one-year period, with similar terms as the
expiring note. This borrowing is now secured by 762,465 of CMGI's shares of
Lycos common stock. Under this agreement, CMGI could become subject to
additional collateral requirements under certain circumstances. The Company
expects to again seek the renewal of this note upon its next maturity on January
20, 2000. SalesLink had an outstanding line of credit balance of $2.7 million
as of January 31, 1999 and an additional $1.2 million reserved in support of
outstanding letters of credit for operating leases. SalesLink also has a $15.5
million bank term note outstanding at January 31, 1999, which provides for
repayment in quarterly installments beginning January, 1999 through November,
2002. The obligations of Saleslink under the bank line of credit and bank term
loans have been guaranteed by CMGI. As of July 31, 1998 and January 31, 1999,
SalesLink did not comply with certain covenants of its borrowing arrangements.
SalesLink is working with the bank to cure the non-compliance as of January 31,
1999, and prospectively, through waivers or amendments to the covenant terms.
SalesLink has not yet received such waivers or amendments, nor is there any
assurance that such waivers or amendments will be obtained. Accordingly, all of
SalesLink's bank borrowings have been classified as current liabilities in the
January 31, 1999 balance sheet.
In December 1998, CMGI announced the close of the @Ventures III venture
capital fund. This fund has secured $212 million in capital commitments from
outside investors, which will be invested in emerging Internet service and
technology companies through two newly formed entities, @Ventures III L.P. and
@Ventures III Foreign Fund, L.P. CMGI does not have a direct ownership interest
in either of these newly created entities, but CMGI is entitled to 2% of the net
capital gains realized by both entities. Management of these entities,
including investment and sale decisions, is the responsibility of @Ventures
Partners III, LLC, whose members include David S. Wetherell, CMGI's President
and Chief Executive Officer, and Andrew J. Hajducky III, CMGI's Chief Financial
Officer. The Company has committed to contribute $54 million to its newly
formed limited liability company subsidiary, CMG@Ventures III, LLC.
CMG@Ventures III, LLC will take strategic positions side by side with @Ventures
III L.P. CMGI owns 100% of the capital and is entitled to 80% of the net
capital gains realized by CMG@Ventures III, LLC. @Ventures Partners III, LLC is
entitled to the remaining 20% of the net capital gains realized by CMG@Ventures
III, LLC.
During the second quarter of fiscal year 1999, through CMG@Ventures III,
LLC, CMGI acquired initial minority ownership interests in six Internet
companies, including Ancestry.com, Furniture.com, ONElist, and three others, for
an aggregate total of $5,825,000. Ancestry.com is a provider of community,
content and commerce resources for families via the Internet, including the
Web's largest repository of searchable genealogy data. Furniture.com is an e-
commerce provider of a broad selection of furniture and home furnishing
accessories. ONElist provides free e-mail communities via the Internet,
allowing users to search for or subscribe to tens of thousands of communities on
different topics or create their own community. The Company anticipates
synergies between these strategic positions and CMGI's core businesses,
including speeding technological innovation and access to markets. Each of the
six new investments made by CMG@Ventures III, LLC during the second fiscal
quarter are carried at cost in CMGI's consolidated financial statements.
During February, 1999, CMGI exercised its right to invest an additional $22
million to increase its ownership in Magnitude Network from 23% to 92%. CMGI
had previously invested a total of $2.5 million in Magnitude Network in July and
October, 1998. Accordingly, beginning February, 1999, CMGI began accounting for
its investment in Magnitude Network under the consolidation method of
accounting, rather than the equity method. The acquisition accounting and
valuation for CMGI's investment in Magnitude Network may result in a significant
portion of the investment being identified as in-process research and
development, in accordance with valuation methodologies provided by the
Securities and Exchange Commission, which is expected to be charged to operating
results in the fourth quarter when the amount is determined.
Page 25
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
On February 1, 1999, the Company announced that it had signed a definitive
agreement to acquire 2CAN Media, Inc., a site-focused online advertising
representation firm. 2CAN Media will be combined with the Company's subsidiary,
ADSmart. The transaction includes the 5 sales divisions of 2CAN Media -
Pinnacle Interactive, WebRep, ECG, MediaPlus and Grupo NetFuerza.
On March 1, 1999, CMGI announced a binding letter of intent to purchase
Internet Profiles Corporation (I/PRO), a leader in World Wide Web traffic
verification, analysis and research. I/PRO analyzes, correlates and validates
Web site activity, which enables marketers to understand their online business
and improve the effectiveness of their site. The Company plans to merge I/PRO
with its subsidiary, Engage Technologies.
On March 4, 1999, the Company announced a binding letter of intent to
acquire Activerse, Inc., a provider of open standard Internet messaging
technologies. With this acquisition, CMGI will invest in the rapidly expanding
market for tools and technologies that enable live communication via the
Internet. Activerse's products address the complex dynamics of Web
communication by providing instant access to Internet-connected communities,
workgroups, social groups and individuals. The Ding! suite of products from
Activerse utilizes current and emerging open Internet standards, including Java
and HTML, and allows both consumer and corporate audiences to enhance online
communities through the convenience of instant messaging.
Subsequent to January 31, 1999, CMG@Ventures III, LLC made a follow-on
investment in Virtual Ink and acquired minority ownership interests in Boston
Financial Network and one other investment. Boston Financial Network offers an
integrated set of Web-based financial applications targeted at small businesses.
Subsequent to January 31, 1999, CMG@Ventures II, LLC made a follow-on
investments in Silknet and ThingWorld.com.
Along with CMGI's other Internet subsidiaries, Magnitude Network, 2CAN
Media, IPRO and Activerse are in early stages of business development and
therefore are expected to require additional cash funding by the Company to fund
their operations. The Company intends to continue to fund existing and future
Internet and interactive media investment and development efforts, and to
actively seek new CMG@Ventures investment opportunities. The Company believes
that existing working capital and the availability of available-for-sale
securities which could be sold or posted as additional collateral for additional
loans, will be sufficient to fund its operations, investments and capital
expenditures for the foreseeable future. Additionally, the Company may also
choose to raise additional capital through private placement. Should additional
capital be needed to fund future investment and acquisition activity, the
Company may seek to raise additional capital through public or private offerings
of the Company's or its subsidiaries' stock, or through debt financing. It is
also contemplated that the Company may look to raise a fourth Internet
investment fund, which could seek to secure outside investment commitments of up
to $1 billion in the near future.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies will need to update or replace
their software and computer systems in order to comply with such "Year 2000"
requirements. CMGI is in the process of evaluating the Year 2000 compliance of
its products and services. The Company is also evaluating the Year 2000
compliance of third party equipment and software that CMGI uses in both
information technology and non-information technology applications in our
business. Examples of non-information technology systems include our building
security and voice mail systems.
Page 26
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company's Year 2000 project plan is coordinated by a committee that
reports to senior management, as well as to CMGI's Board of Directors on a
periodic basis. The Company's Year 2000 readiness efforts consist of the
following four phases:
(1) Identification of all software products, information technology
systems and non-information technology systems the Company offers or
uses. The Company has substantially completed this phase for its
existing systems.
(2) Testing and assessment of these products and systems to determine
repair or replacement requirements for each. The Company expects to
complete this phase by May 1999 for its existing systems.
(3) Repair or replacement of products and systems, where required, to
achieve Year 2000 compliance. The Company expects to complete this
phase by July 1999 for its existing business-critical systems.
(4) Creation of contingency plans in the event of Year 2000 failures. The
Company expects that its initial contingency plan will be completed by
May 1999.
To date the Company has incurred expenditures of approximately $900,000 in
connection with Year 2000 readiness efforts. Preliminary cost estimates for the
Company to evaluate and address its Year 2000 issues for CMGI's existing
business-critical systems are in the range of $4 million to $5 million. The
Company also anticipates that CMGI will continue to expand its business and add
new systems after July 1999; particularly as the Company's NaviSite subsidiary
continues to build-out existing and add new data centers, and as CMGI expands
its NaviNet network. The Company anticipates that readiness efforts for such new
systems could continue until March 2000 and cost in the range of $600,000 to
$1,000,000. There is no assurance though that our Year 2000 costs will not
exceed these estimated amounts.
The Company's business model includes expansion through the acquisition of
businesses, technologies, products and services from other businesses. As the
Company continues to expand in this manner throughout calendar 1999, the scope
and cost estimates of CMGI's Year 2000 efforts may increase substantially.
The Company's failure to resolve Year 2000 issues with respect to its
products and services could damage CMGI's business and revenues and result in
liability on the Company's part for such failure. The Company's business and its
prospects may be permanently affected by either the liability the Company incurs
to third parties or the negative impact on CMGI's business reputation. The
Company also relies upon various vendors, utility companies, telecommunications
service companies, delivery service companies and other service providers who
are outside of CMGI's control. There is no assurance that such companies will
not suffer a Year 2000 business disruption, which could harm CMGI's business and
financial condition. Furthermore, if third-party equipment or software CMGI
uses in its business fails to operate properly with regard to the year 2000 CMGI
may need to incur significant unanticipated expenses to remedy any such
problems.
Page 27
CMGI, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION (CONTINUED)
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
-----------------------------------------------------------
The Company is exposed to equity price risks on the marketable portion
of its equity securities. The Company's available-for-sale securities at January
31, 1999 includes strategic equity positions in companies in the Internet
industry sector, including Lycos, Inc., Amazon.com, Inc. and Open Market, Inc.,
many of which have experienced significant historical volatility in their stock
prices. The Company typically does not attempt to reduce or eliminate its market
exposure on these securities. A 20% adverse change in equity prices, based on a
sensitivity analysis of the Company's available-for-sale securities portfolio as
of January 31, 1999, would result in an approximate $191.5 million decrease in
the fair value of the Company's available-for-sale securities.
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
carrying value of long-term debt approximates its fair value, as estimated by
using discounted future cash flows based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in interest rates on its borrowing
arrangements. The Company does not enter into derivative financial instruments
for trading purposes. As a matter of policy all derivative positions are used
to reduce risk by hedging underlying economic exposure. The derivatives the
Company uses are straightforward instruments with liquid markets. At January
31, 1999, the Company was primarily exposed to the London Interbank Offered Rate
(LIBOR) interest rate on the outstanding borrowings under its line of credit and
other bank borrowing arrangements.
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may
dramatically increase. Therefore, in the future, the Company may consider
utilizing derivative instruments to mitigate such risks.
Page 28
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
(a) and (b) On December 22, 1998, the Registrant issued 50,000 shares
of its newly designated Series B Convertible Preferred Stock to RGC
International Investors, LDC and RGC Investments II, L.P. (the "Investors"). The
rights and preferences of the Series B Convertible Preferred Stock are as set
forth in a Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock ("Certificate of Designations") which was filed with
the Secretary of State of the State of Delaware on December 22, 1998 designating
50,000 shares of the Registrant's blank check preferred stock as Series B
Convertible Preferred Stock. The Certificate of Designations was filed as part
of Exhibit 99.3 to the Registrant's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 7, 1999.
The description of the Series B Convertible Preferred Stock contained
herein is qualified in its entirety by reference to the Certificate of
Designations. The Series B Convertible Preferred Stock possesses a liquidation
preference equal to a stated value of $1,000 per share plus interest accreted on
such stated value at an annual rate of 4% from the date of issue of the Series B
Convertible Preferred Stock. The approval of the holders of a majority of the
then outstanding shares of Series B Convertible Preferred Stock is required for
the Registrant to take certain actions.
The Series B Convertible Preferred Stock may be converted into shares
of the Registrant's common stock at a fixed price (116% of the average closing
price for the Company's common stock for the three trading days preceding
December 21, 1998) for one year or until the earlier occurrence of certain
specified events. Under certain circumstances, the Registrant has the option to
redeem the Series B Convertible Preferred Stock. Upon the occurrence of other
specified events the Registrant is obligated to redeem the Series B Convertible
Preferred Stock.
After one year, or the earlier occurrence of certain enumerated events,
if the Series B Convertible Preferred Stock has not been redeemed, the
conversion price is based upon a formula which is tied to the undiscounted
market price of the Registrant's common stock. Subject to waiver by the
Registrant, there is a maximum number of shares of the Registrant's common stock
into which the Series B Convertible Preferred Stock may convert.
(c) On December 22, 1998 the Registrant issued 50,000 shares of Series
B Convertible Preferred Stock to the Investors for an aggregate purchase price
of $50,000,000. No underwriter was engaged in connection with the foregoing
issuance of shares of Series B Convertible Preferred Stock. The shares of Series
B Convertible Preferred Stock were issued in a private placement in reliance
upon the exemption from registration provided by Rule 506 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). See the description
above concerning the conversion of shares of Series B Convertible Preferred
Stock into shares of the Registrant's common stock.
Page 29
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On December 17, 1998 the Company held its annual meeting of
stockholders. At the annual meeting the following matters were approved:
1. William H. Berkman was elected as a Class II Director with
30,698,048 shares of Common Stock voting for such election and
67,350 shares of Common Stock abstaining.
2. John A. McMullen was elected as a Class II Director with
30,697,524 shares of Common Stock voting for such election and
67,874 shares of Common Stock abstaining.
3. An amendment to the Company's Restated Certificate of
Incorporation changing the name of the Company from "CMG
Information Services, Inc." to "CMGI, Inc." was approved.
30,668,804 shares of Common Stock were voted for such amendment,
43,064 shares of Common Stock were voted against such amendment
and 45,730 shares of Common Stock abstained from the vote. 7,800
shares of common stock were subject to non-votes.
4. An amendment to the Company's Restated Certificate of
Incorporation to provide for an increase in the number of
authorized shares of Common Stock, $0.01 par value per share,
from 40,000,000 to 100,000,000 was approved. 27,423,828 shares of
Common Stock were voted for such amendment, 2,409,998 shares of
Common Stock were voted against such amendment and 923,772 shares
of Common Stock abstained from the vote. 7,800 shares of common
stock were subject to non-votes.
5. The appointment of KPMG Peat Marwick LLP as the Company's
independent accountants for the current fiscal year was ratified.
30,615,404 shares of Common Stock were voted for such
ratification, 92,736 shares of Common Stock were voted against
such ratification and 57,258 shares of Common Stock abstained
from the vote.
ITEM 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
The following exhibits are filed herewith or incorporated by
reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934:
- ------------------------------------------------------------------------------------------------------------------------------
Exhibit No. Title Method of Filing
----------- ----- ----------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3 (I) Restated Certificate of Incorporation, as amended Incorporated by reference from Exhibit 99.3 to the
Current Report on Form 8-K filed with the SEC on
January 7, 1999.
- ------------------------------------------------------------------------------------------------------------------------------
3 (ii) Restated By-Laws Incorporated by reference from Registration
Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518).
- ------------------------------------------------------------------------------------------------------------------------------
4 Specimen stock certificate representing the common stock Incorporated by reference from Registration
Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518).
- ------------------------------------------------------------------------------------------------------------------------------
Page 30
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
ITEM 6. Exhibits and Reports on Form 8-K (Continued)
---------------------------------------------
(b) Exhibits (continued)
- ----------------------------------------------------------------------------------------------------------------------------
Exhibit No. Title Method of Filing
---------- ----- ----------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
10.1 ISDA Master Swap Agreement (the "Swap Agreement"), dated Previously filed.
January 15, 1999, between BankBoston, N.A. and CMGI, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
10.2 Schedule to the Swap Agreement, dated January 15, 1999. Previously filed.
- ----------------------------------------------------------------------------------------------------------------------------
10.3 Confirmation to the Swap Agreement, dated January 15, 1999. Previously filed.
- ----------------------------------------------------------------------------------------------------------------------------
10.4 ISDA Credit Support Annex, dated January 15, 1999, between Previously filed.
BankBoston, N.A. and CMGI, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
10.5 Agreement for the Assignment of Voting Rights, dated Previously filed.
January 15, 1999, between CMGI, Inc. and Long Lane Master
Trust.
- ----------------------------------------------------------------------------------------------------------------------------
10.6 Long Lane Floating Rate Trust Certificates Purchase Previously filed.
Agreement, dated January 15, 1999, between CMGI, Inc. and
Long Lane Master Trust.
- ----------------------------------------------------------------------------------------------------------------------------
10.7 Repurchase Agreement, dated January 15, 1999, between CMGI, Previously filed.
Inc. and Long Lane Master Trust.
- ----------------------------------------------------------------------------------------------------------------------------
10.8 Unlimited Guaranty, dated as of October 30, 1998, by CMG Previously filed.
Information Services, Inc. in favor of BankBoston, N.A.
- ----------------------------------------------------------------------------------------------------------------------------
10.9 CMGI and Participating Subsidiaries Deferred Compensation Previously filed.
Plan, effective as of December 1, 1998.
- ----------------------------------------------------------------------------------------------------------------------------
27.1 Restated Financial Data Schedule for the six months ended Filed herewith.
January 31, 1999.
- ----------------------------------------------------------------------------------------------------------------------------
(b) Reports on Form 8-K.
On January 7, 1999, the Company filed a Current Report on Form 8-K in
conjunction with the issuance of 50,000 shares of its newly designated Series B
Convertible Preferred Stock to RGC International Investors, LDC and RGC
Investments II, L.P.
Page 31
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/ Andrew J. Hajducky III
--------------------------
Date: May 26, 1999 Andrew J. Hajducky III, CPA
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
Page 32
5
1,000
6-MOS
JUL-31-1999
AUG-01-1998
JAN-31-1999
106,318
957,480
23,780
0
10,324
1,101,867
13,076
0
1,251,348
450,099
0
50,030
0
467
682,989
1,251,348
76,377
76,377
72,748
72,748
44,826
0
2,233
91,992
40,454
51,538
(279)
0
0
51,259
1.10
1.01
