FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended October 31, 2002
¨ |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-23262
CMGI, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE |
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04-2921333 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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100 Brickstone Square |
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01810 |
Andover, Massachusetts |
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(Zip Code) |
(Address of principal executive offices) |
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(978) 684-3600
(Registrants 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes x No ¨
Number of shares outstanding of the issuers common stock, as of December 10, 2002:
Common Stock, par value $.01 per share |
|
392,976,352 |
Class |
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Number of shares outstanding |
CMGI, INC.
FORM 10-Q
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Page Number
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Item 1. |
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2 |
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3 |
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4 |
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5 |
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Item 2. |
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17 |
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Item 3. |
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35 |
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Item 4. |
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35 |
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Item 1. |
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36 |
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Item 6. |
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38 |
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39 |
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40 |
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42 |
1
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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October 31, 2002
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July 31, 2002
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(Unaudited) |
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(in thousands, except share and per share amounts) |
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ASSETS |
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Current assets: |
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|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
193,327 |
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$ |
239,491 |
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Available-for-sale securities |
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26,437 |
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10,335 |
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Trading security |
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63,255 |
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94,271 |
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Accounts receivable, trade, net of allowance for doubtful accounts |
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64,365 |
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57,446 |
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Inventories |
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41,820 |
|
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47,918 |
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Prepaid expenses and other current assets |
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49,869 |
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39,869 |
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Due from affiliates |
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1,348 |
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|
|
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Current assets of discontinued operations |
|
|
|
|
|
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52,769 |
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Deferred loss on disposal of subsidiary |
|
|
|
|
|
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31,869 |
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|
|
|
|
|
|
|
|
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Total current assets |
|
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440,421 |
|
|
|
573,968 |
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|
|
|
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|
|
|
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Property and equipment, net |
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61,864 |
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64,783 |
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Investments in affiliates |
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41,731 |
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57,770 |
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Goodwill and other intangible assets, net of accumulated amortization |
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145,339 |
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151,759 |
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Non-current assets of discontinued operations |
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24,374 |
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Other assets |
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10,322 |
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|
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33,249 |
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|
|
|
|
|
|
|
|
|
|
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$ |
699,677 |
|
|
$ |
905,903 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable |
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$ |
63,255 |
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$ |
94,271 |
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Current installments of long-term debt |
|
|
1,370 |
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|
1,370 |
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Accounts payable |
|
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44,723 |
|
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|
42,654 |
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Accrued restructuring |
|
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20,148 |
|
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27,566 |
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Accrued income taxes |
|
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94,217 |
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93,515 |
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Accrued expenses |
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74,430 |
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64,343 |
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Due to affiliates |
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1,361 |
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|
|
|
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Current liabilities of discontinued operations |
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|
|
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33,617 |
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Other current liabilities |
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10,787 |
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12,753 |
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|
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|
|
|
|
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Total current liabilities |
|
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310,291 |
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|
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370,089 |
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|
|
|
|
|
|
|
|
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Long-term debt, less current installments |
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7,496 |
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|
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7,890 |
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Other long-term liabilities |
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16,544 |
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15,691 |
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Non-current liabilities of discontinued operations |
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|
|
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58,942 |
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Minority interest |
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39,443 |
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|
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35,977 |
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Commitments and contingencies |
|
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|
|
|
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Stockholders equity: |
|
|
|
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|
|
|
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Preferred stock, $0.01 par value per share. Authorized 5,000,000 shares; zero issued or outstanding as of October 31,
2002 and July 31, 2002 |
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|
|
|
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|
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Common stock, $0.01 par value per share. Authorized 1,405,000,000 shares; issued and outstanding 392,917,800 shares at
October 31, 2002 and 392,679,011 shares at July 31, 2002 |
|
|
3,929 |
|
|
|
3,926 |
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Additional paid-in capital |
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|
7,293,654 |
|
|
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7,293,061 |
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Accumulated deficit |
|
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(6,974,036 |
) |
|
|
(6,880,452 |
) |
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|
|
|
|
|
|
|
|
|
|
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323,547 |
|
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|
416,535 |
|
Accumulated other comprehensive income |
|
|
2,356 |
|
|
|
779 |
|
|
|
|
|
|
|
|
|
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Total stockholders equity |
|
|
325,903 |
|
|
|
417,314 |
|
|
|
|
|
|
|
|
|
|
|
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$ |
699,677 |
|
|
$ |
905,903 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim unaudited condensed consolidated
financial statements
2
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
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Three months ended October 31,
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|
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2002
|
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|
2001
|
|
|
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(in thousands, except per share amounts) |
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Net revenue |
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$ |
190,514 |
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$ |
176,579 |
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Operating expenses: |
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Cost of revenue |
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164,414 |
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158,721 |
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Research and development |
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8,682 |
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12,845 |
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Selling |
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24,035 |
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34,066 |
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General and administrative |
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35,778 |
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34,492 |
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Amortization of intangible assets and stock-based compensation |
|
|
4,325 |
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|
|
56,784 |
|
Impairment |
|
|
192 |
|
|
|
9,263 |
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Restructuring |
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1,930 |
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5,133 |
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|
|
|
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|
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Total operating expenses |
|
|
239,356 |
|
|
|
311,304 |
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|
|
|
|
|
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Operating loss |
|
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(48,842 |
) |
|
|
(134,725 |
) |
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|
|
|
|
|
|
|
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Other income (expense): |
|
|
|
|
|
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Interest income |
|
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1,443 |
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|
|
6,211 |
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Interest (expense) recovery, net |
|
|
26,855 |
|
|
|
(6,720 |
) |
Other gains (losses), net |
|
|
(55,045 |
) |
|
|
(8,550 |
) |
Equity in losses of affiliates, net |
|
|
(515 |
) |
|
|
(12,249 |
) |
Minority interest |
|
|
(2,284 |
) |
|
|
9,644 |
|
|
|
|
|
|
|
|
|
|
|
|
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(29,546 |
) |
|
|
(11,664 |
) |
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|
|
|
|
|
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|
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Loss from continuing operations before income taxes |
|
|
(78,388 |
) |
|
|
(146,389 |
) |
Income tax expense |
|
|
856 |
|
|
|
12,579 |
|
|
|
|
|
|
|
|
|
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Loss from continuing operations |
|
|
(79,244 |
) |
|
|
(158,968 |
) |
Discontinued operations, net of income taxes: |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(14,340 |
) |
|
|
(65,836 |
) |
|
|
|
|
|
|
|
|
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Net loss |
|
|
(93,584 |
) |
|
|
(224,804 |
) |
Preferred stock accretion and amortization of discount |
|
|
|
|
|
|
(1,890 |
) |
|
|
|
|
|
|
|
|
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Net loss available to common stockholders |
|
$ |
(93,584 |
) |
|
$ |
(226,694 |
) |
|
|
|
|
|
|
|
|
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Basic and diluted loss per share: |
|
|
|
|
|
|
|
|
Loss from continuing operations available to common stockholders |
|
$ |
(0.20 |
) |
|
$ |
(0.46 |
) |
Loss from discontinued operations |
|
|
(0.04 |
) |
|
|
(0.19 |
) |
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(0.24 |
) |
|
$ |
(0.65 |
) |
|
|
|
|
|
|
|
|
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Shares used in computing basic and diluted loss per share: |
|
|
392,682 |
|
|
|
351,052 |
|
|
|
|
|
|
|
|
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|
See accompanying notes to interim
unaudited condensed consolidated financial statements
3
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
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Three months ended October 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
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(in thousands) |
|
Cash flows from operating activities of continuing operations: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(93,584 |
) |
|
$ |
(224,804 |
) |
Adjustments to reconcile net loss to cash used for continuing operations: |
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment charges |
|
|
13,584 |
|
|
|
133,747 |
|
Deferred income taxes |
|
|
|
|
|
|
12,579 |
|
Non-operating losses, net |
|
|
23,958 |
|
|
|
5,899 |
|
Equity in losses of affiliates |
|
|
515 |
|
|
|
12,249 |
|
Deferred loss on sale of subsidiary |
|
|
31,869 |
|
|
|
|
|
Minority interest |
|
|
(2,284 |
) |
|
|
(9,817 |
) |
Changes in operating assets and liabilities, excluding effects from acquired and divested subsidiaries:
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(7,259 |
) |
|
|
23,890 |
|
Prepaid expenses and other current assets |
|
|
(5,795 |
) |
|
|
(16,810 |
) |
Accounts payable and accrued expenses |
|
|
8,064 |
|
|
|
(32,093 |
) |
Deferred revenues |
|
|
(769 |
) |
|
|
(264 |
) |
Refundable and accrued income taxes, net |
|
|
702 |
|
|
|
7,706 |
|
Other assets and liabilities |
|
|
19,961 |
|
|
|
(4,869 |
) |
|
|
|
|
|
|
|
|
|
Net cash used for operating activities of continuing operations |
|
|
(11,038 |
) |
|
|
(92,587 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations: |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(6,840 |
) |
|
|
(5,309 |
) |
Net proceeds from maturities of (purchases of) available-for-sale securities, net |
|
|
(10,259 |
) |
|
|
36,395 |
|
Proceeds from liquidation of stock investments |
|
|
|
|
|
|
15,947 |
|
Cash impact of acquisitions and divestitures of subsidiaries, net |
|
|
(583 |
) |
|
|
431 |
|
Net investments in affiliates |
|
|
257 |
|
|
|
(978 |
) |
Other, net |
|
|
|
|
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities of continuing operations |
|
|
(17,425 |
) |
|
|
46,384 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations: |
|
|
|
|
|
|
|
|
Net repayments of obligations under capital leases |
|
|
(561 |
) |
|
|
(3,040 |
) |
Net repayments of long-term debt |
|
|
(394 |
) |
|
|
(278 |
) |
Net proceeds from issuance of common stock |
|
|
153 |
|
|
|
1,961 |
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities of continuing operations |
|
|
(802 |
) |
|
|
(1,357 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) discontinued operations |
|
|
(16,899 |
) |
|
|
926 |
|
Net decrease in cash and cash equivalents |
|
|
(46,164 |
) |
|
|
(46,634 |
) |
Cash and cash equivalents at beginning of period |
|
|
239,491 |
|
|
|
655,229 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
193,327 |
|
|
$ |
608,595 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to interim
unaudited condensed consolidated financial statements
4
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared by CMGI, Inc. (together with
its consolidated subsidiaries, CMGI or the Company) in accordance with accounting principles generally accepted in the United States of America (US GAAP). In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Companys 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 condensed consolidated financial statements should be read in conjunction with the audited financial
statements and related notes for the year ended July 31, 2002 which are contained in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC) on October 29, 2002. The results for the
three-month period ended October 31, 2002 are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior year amounts in the condensed consolidated financial statements have been reclassified in accordance with
US GAAP to conform to the current year presentation.
Certain costs related to the purchase price of products
sold, inbound and outbound shipping charges, packing supplies and other costs associated with the marketplace business of the Companys eBusiness and Fulfillment segment are classified as cost of revenue. Certain fulfillment costs, including
warehousing costs related to activities such as receiving goods and the picking and packing of goods for shipment within the Companys eBusiness and Fulfillment segment are classified as selling expenses.
Marketable securities held by the Company which meet the criteria for classification as trading are carried at fair value. Unrealized
holding gains and losses on securities classified as trading are recorded as a component of Other gains (losses), net in the accompanying condensed consolidated statements of operations.
B. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 applies to all business combinations that the Company enters into after June 30, 2001, and eliminates the pooling-of-interests method of accounting. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under the
new statements, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the statements. Other intangible assets continue to be amortized over their useful
lives. The Company adopted SFAS No. 142 on August 1, 2002 (see note D).
In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations. This statement addresses the accounting treatment for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The
provisions of the statement apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal operation of a long-lived asset. The statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 on August 1, 2002. This statement did not have a material effect on the Companys financial position or results of operations.
On August 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Under the provisions of SFAS No. 144, certain disposal activities that previously did not qualify for discontinued operations accounting will now be required to be reported as discontinued operations. SFAS No. 144
requires that a disposal of a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes from the rest of the entity, shall be reported as discontinued operations
if (a) the operations of the component have been or will be eliminated from the ongoing operations of the entity as a result of the disposition activity, and (b) the entity will not have any significant continuing involvement in the operations of
the component after the disposal transaction. Under SFAS No. 144, the Company is required to test certain long-lived assets or group of assets for recoverability whenever events or changes in circumstances indicate that the Company may not be able
to recover the assets carrying amount. SFAS No. 144 defines impairment as the condition that exists when the carrying amount of a long-lived asset or group exceeds its fair value. When events or changes in circumstances dictate an impairment
review of a long-lived asset or group, the Company will evaluate recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group cover the carrying value at the
evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company will measure any impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue 94-3. The statement requires companies to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the statement include lease termination costs and
certain employee
severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activity. The provisions of this Statement are required to be applied to exit or disposal activities that are initiated after
December 31, 2002. The Company is currently evaluating the impact of SFAS No. 146 to its consolidated financial statements.
5
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
C. OTHER GAINS (LOSSES),
NET
The following table reflects the components of Other gains (losses), net:
|
|
Three Months Ended October
31,
|
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands) |
|
Gain on derivative and sale of hedged Yahoo!, Inc. common stock |
|
$ |
|
|
|
$ |
53,897 |
|
Loss on sales of marketable securities |
|
|
|
|
|
|
(27,525 |
) |
Loss on sale of Equilibrium Technologies, Inc. |
|
|
(3,527 |
) |
|
|
|
|
Loss on divestiture of investment in Signatures SNI, Inc. |
|
|
(14,056 |
) |
|
|
|
|
Loss on mark-to-market adjustment for trading security |
|
|
(31,016 |
) |
|
|
|
|
Loss on impairment of investments in affiliates |
|
|
(6,175 |
) |
|
|
(11,528 |
) |
Loss on sale of Activate.Net Corporation |
|
|
|
|
|
|
(20,743 |
) |
Other, net |
|
|
(271 |
) |
|
|
(2,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(55,045 |
) |
|
$ |
(8,550 |
) |
|
|
|
|
|
|
|
|
|
On October 17, 2002, the Company sold its interests in its
majority-owned subsidiary Equilibrium Technologies, Inc. (Equilibrium) to a group led by the current management of Equilibrium and recorded a pre-tax loss of approximately $3.5 million (see note F).
On November 6, 2002, the Company divested of its equity and debt interests in Signatures SNI, Inc. (Signatures) and recorded a
pre-tax loss of approximately $14.1 million (see note F).
During the three months ended October 31, 2002, the
Company recorded a $31.0 million loss on the mark-to-market adjustment of a trading security (see note L).
During
the three months ended October 31, 2002, the Company recorded impairment charges of approximately $6.2 million for other than temporary declines in the carrying value of certain investments in affiliates. These charges were primarily associated with
investments made by CMGI@Ventures IV, LLC.
On August 1, 2001, the Company settled the final tranche of its
borrowing arrangement that hedged a portion of the Companys investment in Yahoo!, Inc. (Yahoo!) common stock. The Company delivered 581,499 shares of Yahoo! common stock and recognized a pre-tax gain of approximately $53.9 million.
During the three months ended October 31, 2001, the Company sold approximately 7.1 million shares of Primedia,
Inc. (Primedia) common stock for total proceeds of approximately $15.9 million and recorded a pre-tax loss of approximately $27.5 million on these sales.
During the three months ended October 31, 2001, the Company recorded impairment charges of approximately $11.5 million for other than temporary declines in the carrying value of certain investments in
affiliates. These charges were primarily associated with investments made by CMGI@Ventures IV, LLC.
During the
three months ended October 31, 2001, the Company completed the sale of its majority-owned subsidiary, Activate.Net Corporation (Activate), to Loudeye Technologies, Inc. and recorded a pre-tax loss of approximately $20.7 million.
D. IMPAIRMENT OF LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE ASSETS
Through July 31, 2002, the Company recorded impairment charges as a result of managements ongoing business review and impairment
analysis performed under its policy regarding impairment, utilizing the guidance in SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). Where impairment
indicators were identified, management evaluated whether the projected undiscounted cash flows were sufficient to cover the particular long-lived asset being reviewed. If the undiscounted cash flows were insufficient, management then determined the
amount of the impairment
charge by comparing the carrying value of long-lived assets to their fair value. Management determines fair value of goodwill and certain other
intangible assets based on a combination of the discounted cash flow methodology, which
6
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
is based upon converting expected cash flows to present value, and the market approach,
which includes analysis of market price multiples of companies engaged in lines of business similar to the Company. The market price multiples are selected and applied to the Company based on the relative performance, future prospects and risk
profile of the Company in comparison to the guideline companies. Management predominantly utilizes third-party valuation reports in its determination of fair value. Management predominantly determines fair value of other long-lived assets, such as
property and equipment, based on third-party valuation reports.
On August 1, 2002, the Company adopted SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under Statement No. 144, the Company is required to test certain long-lived assets or group of assets for recoverability whenever events or changes in
circumstances indicate that the Company may not be able to recover the assets carrying amount. Statement No. 144 defines impairment as the condition that exists when the carrying amount of a long-lived asset or group exceeds its fair value.
When events or changes in circumstances dictate an impairment review of a long-lived asset or group, the Company will evaluate recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition
of that asset or group cover the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company will measure any impairment loss as the excess of the carrying amount of the
long-lived asset or group over its fair value.
In June 2001, the FASB issued SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible
assets will continue to be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Accordingly, the Company adopted SFAS No. 142 on August 1, 2002. SFAS No. 142 requires the Company to
evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Accordingly, the Company is required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments. In addition, to
the extent an intangible asset is then determined to have an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142.
Under the provisions of SFAS No. 142, the Company is required to perform transitional goodwill impairment tests as of August 1, 2002. To
accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting units carrying amount. To the extent a reporting units carrying
amount exceeds its fair value, an indication exists that the reporting units goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied
fair value of the reporting units goodwill, determined by allocating the reporting units fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with
SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss
resulting from the completion of the first step of the transitional goodwill impairment testing will be recognized as the cumulative effect of a change in accounting principle in the Companys condensed consolidated statements of operations.
As of October 31, 2002, the Company had not yet completed the first step of its transitional testing under the standard. The Company expects to have completed the first step of its transitional goodwill impairment testing by January 31, 2003
and has not determined what effect these tests will have on its operations and financial position. The Company operates in a volatile business environment, and as a result, could have material impairment charges in its transitional analysis and in
future periods.
In accordance with the provisions of SFAS No. 142, the Company has designated reporting units for
purposes of assessing goodwill impairment. The standard defines a reporting unit as the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes, from the other
activities, operations, and assets of the entity. Based on the provisions of the standard, the Company has determined that its reporting units for purposes of goodwill impairment testing are its operating subsidiaries, with the exception of
SalesLink, for which the Company has designated the Literature Distribution Services division and the Supply Chain Management division as separate reporting units. Additionally, the Companys policy will be to perform its annual impairment
testing for all reporting units as of July 31st of each fiscal year.
7
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The goodwill and other intangible assets balances as of October 31, 2002 are as follows:
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
(in thousands) |
Goodwill |
|
$ |
135,584 |
|
$ |
|
|
|
$ |
135,584 |
Identifiable intangible assets: |
|
|
|
|
|
|
|
|
|
|
Developed technology |
|
$ |
15,600 |
|
$ |
(13,245 |
) |
|
$ |
2,355 |
Tradenames |
|
|
18,485 |
|
|
(15,453 |
) |
|
|
3,032 |
Customer lists |
|
|
11,327 |
|
|
(10,269 |
) |
|
|
1,058 |
Non-compete |
|
|
18,080 |
|
|
(14,770 |
) |
|
|
3,310 |
|
|
|
|
|
|
|
|
|
|
|
Total other intangibles |
|
$ |
63,492 |
|
$ |
(53,737 |
) |
|
$ |
9,755 |
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and other intangibles |
|
$ |
199,076 |
|
$ |
(53,737 |
) |
|
$ |
145,339 |
|
|
|
|
|
|
|
|
|
|
|
The July 31, 2002 net workforce-in-place intangible asset balance
of approximately $1.3 million was reclassified to goodwill effective August 1, 2002, as required by SFAS No. 142.
The carrying amount of goodwill by segment as of October 31, 2002 is as follows:
|
|
October 31, 2002
|
|
|
(in thousands) |
eBusiness and Fulfillment |
|
$ |
101,512 |
Enterprise Software and Services |
|
|
34,072 |
|
|
|
|
Total |
|
$ |
135,584 |
|
|
|
|
The estimated amortization expense per fiscal year for the
remainder of the amortization period for amortizable intangible assets is as follows:
|
|
Estimated Amortization Expense
|
|
|
(in thousands) |
Remainder of fiscal year 2003 |
|
$ |
9,022 |
Fiscal year 2004 |
|
|
440 |
Fiscal year 2005 |
|
|
293 |
|
|
|
|
Total |
|
$ |
9,755 |
|
|
|
|
The reconciliation of net loss available to common stockholders
before goodwill and workforce-in-place amortization expense, for the three months ended October 31, 2002 and 2001, is as follows:
|
|
Three months ended
|
|
|
|
October 31, 2002
|
|
|
October 31, 2001
|
|
|
|
(in thousands except per share amounts) |
|
Net loss available to common stockholders as reported |
|
$ |
(93,584 |
) |
|
$ |
(226,694 |
) |
Add back: goodwill and workforce-in-place amortization expense, net of tax |
|
|
|
|
|
|
51,343 |
|
|
|
|
|
|
|
|
|
|
Adjusted net loss available to common stockholders |
|
$ |
(93,584 |
) |
|
$ |
(175,351 |
) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share as reported |
|
$ |
(0.24 |
) |
|
$ |
(0.65 |
) |
Add back: goodwill and workforce-in-place amortization expense, net of tax |
|
|
|
|
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
Adjusted basic and diluted loss per share |
|
$ |
(0.24 |
) |
|
$ |
(0.50 |
) |
|
|
|
|
|
|
|
|
|
During the three months ended October 31, 2002, the Company
recorded impairment charges of approximately $0.2 million from the retirement of software and obsolete computer equipment at its majority-owned subsidiary AltaVista Company (AltaVista).
During the three months ended October 31, 2001, the Company recorded impairment charges of approximately $9.3 million. These charges
included an impairment charge of $6.5 million related to the purchase of certain leased equipment previously held under operating and capital leases by AltaVista, and approximately $2.8 million related to the impairment of customer base and
workforce-in-place intangible assets at Tallan.
8
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
E. RESTRUCTURING CHARGES
The following tables summarize the activity in the restructuring
accrual for the first quarter of fiscal 2003:
|
|
Employee Related Expenses
|
|
|
Contractual Obligations
|
|
|
Asset Impairments
|
|
|
Total
|
|
|
|
(in thousands) |
|
Accrued restructuring balance at July 31, 2002 |
|
$ |
910 |
|
|
$ |
26,656 |
|
|
$ |
|
|
|
$ |
27,566 |
|
Q1 Restructuring |
|
|
470 |
|
|
|
1,425 |
|
|
|
35 |
|
|
|
1,930 |
|
Cash payments |
|
|
(568 |
) |
|
|
(8,639 |
) |
|
|
|
|
|
|
(9,207 |
) |
Non-cash charges |
|
|
|
|
|
|
(106 |
) |
|
|
(35 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at October 31, 2002 |
|
$ |
812 |
|
|
$ |
19,336 |
|
|
$ |
|
|
|
$ |
20,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates that the remaining restructuring accruals
will be settled by March 2004. It is expected that the payments of employee-related expenses will be substantially complete within three months. The remaining contractual obligations primarily relate to facilities and equipment lease obligations.
The net restructuring charges (benefits) for the three months ended October 31, 2002 and 2001, respectively,
would have been allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:
|
|
Three months ended October 31,
|
|
|
|
2002
|
|
2001
|
|
|
|
(in thousands) |
|
Cost of revenue |
|
$ |
76 |
|
$ |
(10,329 |
) |
Research and development |
|
|
94 |
|
|
63 |
|
Selling |
|
|
417 |
|
|
631 |
|
General and administrative |
|
|
1,343 |
|
|
14,768 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,930 |
|
$ |
5,133 |
|
|
|
|
|
|
|
|
|
The Companys restructuring initiatives during the three
months ended October 31, 2002 and 2001, respectively, involved strategic decisions to exit certain businesses and to reposition certain on-going businesses of the Company. Restructuring charges consisted primarily of contract terminations, severance
charges and equipment charges incurred as a result of the cessation of operations of certain subsidiaries and actions taken at several remaining subsidiaries to increase operational efficiencies, improve margins and further reduce expenses.
Severance charges included employee termination costs as a result of workforce reductions. Employees affected by the restructurings were notified both through direct personal contact and by written notification. The contract terminations primarily
consisted of costs to exit facility and equipment leases and to terminate bandwidth and other vendor contracts. The asset impairment charges primarily related to the write-off of property and equipment.
During the three months ended October 31, 2002, the Company recorded total restructuring charges of approximately $1.9 million. Of this
amount, $1.6 million related to restructuring initiatives within AltaVistas software division, including severance costs associated with a workforce reduction, costs related to the closing of sales office locations, and the write-off of
certain fixed assets. Additionally, the Company recorded a restructuring charge of $0.3 million related to facility and equipment lease obligations that the Company assumed in connection with its sale of Equilibrium.
During the three months ended October 31, 2001, the Company recorded total restructuring charges of approximately
$5.1 million. Of this amount, AltaVista incurred restructuring charges of approximately $10.0 million, which were primarily a result of a change in its business strategy from a portal-based business model to an Internet and enterprise search
business model. The restructuring charges were primarily related to severance costs for a workforce reduction of approximately 120 employees, costs associated with the closing of its Irvine, California office location, and the write-off of an
information systems software package. In addition, MyWay incurred approximately $5.9 million in restructuring charges primarily related to the write-off of property and equipment, as well as the termination of customer and vendor contracts. Tallan
incurred restructuring charges of approximately $4.0 million that primarily related to severance costs associated with a reduction in its
9
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
workforce of approximately 72 persons, as well as costs associated with the closing of five office locations. NaviPath incurred
restructuring charges of approximately $4.1 million that primarily related to severance costs, legal, and other professional fees incurred in connection with the cessation of its operations. The Company also recorded approximately $2.2 million in
restructuring charges related to the write-off of property and equipment, and costs to exit facility leases in Europe. Also, during the three months ended October 31, 2001, the Company settled certain vendor and customer contractual obligations for
amounts less than originally estimated. As a result, the Company recorded a restructuring adjustment of approximately $21.1 million to the accrued restructuring balance at July 31, 2001, primarily related to payments by NaviPath to terminate
purchase commitments and service contracts for amounts less than originally estimated.
F. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under the provisions of SFAS No. 144, certain disposal activities that previously did not qualify for discontinued operations accounting will now be required to be
reported as discontinued operations. SFAS No. 144 requires that a disposal of a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes from the rest of the
entity, shall be reported as discontinued operations if (a) the operations of the component have been or will be eliminated from the ongoing operations of the entity as a result of the disposition activity, and (b) the entity will not have any
significant continuing involvement in the operations of the component after the disposal transaction.
On
September 9, 2002, the Company sold all its equity and debt ownership interests in Engage. Under the terms of the Transaction Agreement, CMGI transferred to Engage approximately 148.4 million shares of common stock of Engage held by CMGI,
representing approximately 76% of the issued and outstanding shares of Engage, and cancelled approximately $60 million of debt, including all convertible debt, owed to CMGI by Engage. In consideration of the equity transfer and debt cancellation,
Engage, among other things, (i) paid to CMGI $2.5 million in cash, (ii) agreed to pay to CMGI up to an additional $6.0 million, comprised of a senior secured promissory note due in September 2006 and earnout payments commencing in fiscal year 2004,
and (iii) issued to CMGI a warrant for the purchase of up to 9.9% of the issued and outstanding shares of Engage Common Stock, as of the earlier of the date of first exercise or a merger or sale of Engage (on a fully diluted basis, giving effect to
the exercise or conversion of all then outstanding convertible securities of Engage other than stock options issued to employees and directors of Engage), at an exercise price of $.048 per share. As a result of the divestiture, Engage, which was
previously included within the Enterprise Software and Services segment, has been accounted for as a discontinued operation in accordance with the provisions of SFAS No. 144. Accordingly, Engages operating results have been segregated from
continuing operations and have been reported as discontinued operations in the accompanying condensed consolidated balance sheets and statements of operations and cash flows, and related notes to the condensed consolidated financial statements for
all periods presented. The Company has recorded a loss on the disposal of Engage of approximately $16.6 million (which included a $2.8 million loss from discontinued operations and a $13.8 million loss on the sale). The divestiture of Engage did not
qualify for discontinued operations presentation during the fourth quarter of fiscal 2002 under the applicable guidance in APB Opinion No. 30, which was the authoritative literature in place through July 31, 2002.
On June 12, 2002 (the measurement date), CMGIs board of directors authorized the divestiture of the Companys equity and debt
ownership interests in its subsidiary NaviSite. On September 11, 2002, the Company completed the sale of all its equity and debt ownership interests in its subsidiary, NaviSite to ClearBlue Technologies, Inc. (ClearBlue). In
consideration thereof, the Company received, among other things, 131,579 shares of common stock of ClearBlue. On the measurement date, NaviSite comprised more than 90% of both the total assets and operating losses of the Managed Application Services
segment and NaviSites product offering represented both a major line of business and a distinct class of customer. As a result, during the fourth quarter of the Companys fiscal year ended July 31, 2002, the Company accounted for its
divestiture of NaviSite as discontinued operations in accordance with the provisions of APB No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. At July 31, 2002, the Company expected to record a net gain in the first quarter of fiscal year 2003 on the sale of its debt and equity ownership interests in NaviSite. The estimated gain on
the sale of NaviSite included the results of operations from the measurement date through the date of disposal. The results of operations of NaviSite from the measurement date through July 31, 2002 were deferred and reflected as deferred loss on
disposal of subsidiary on the condensed consolidated balance sheet at July 31, 2002. NaviSites operating results have been segregated from continuing operations and have been reported as discontinued operations in the accompanying condensed
consolidated balance sheets and statements of operations and cash flows, and related notes to the condensed consolidated financial statements for all periods presented. During the three months ended October 31, 2002, the Company recorded a gain of
approximately $2.3 million on the disposal of NaviSite.
10
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Summarized financial information for the discontinued operations of
Engage and NaviSite are as follows:
|
|
Three Months Ended October
31, |
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands)
|
|
Results of operations: |
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
890 |
|
|
$ |
24,661 |
|
Total expenses |
|
|
3,657 |
|
|
|
90,497 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(2,767 |
) |
|
|
(65,836 |
) |
Gain on sale of NaviSite |
|
|
2,291 |
|
|
|
|
|
Loss on sale of Engage |
|
|
(13,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
$ |
(14,340 |
) |
|
$ |
(65,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
July 31, 2002
|
|
|
|
(in thousands) |
|
Financial position: |
|
|
|
|
Current assets |
|
$ |
52,769 |
|
Property and equipment, net |
|
|
16,391 |
|
Other assets |
|
|
7,983 |
|
Total liabilities |
|
|
(92,559 |
) |
|
|
|
|
|
Net liabilities of discontinued operations |
|
$ |
(15,416 |
) |
|
|
|
|
|
Deferred loss on disposal of subsidiary |
|
$ |
31,869 |
|
|
|
|
|
|
On October 17, 2002, the Company sold all of its equity ownership
interests in Equilibrium to a group (the Buyer) led by the current management of Equilibrium. Under the terms of the agreement, the Company sold to the Buyer 100% of the issued and outstanding shares of Equilibrium. In consideration
thereof, the Company received, among other things, (i) a senior secured promissory note due in October 2005 in the principal amount of $1.5 million, (ii) a warrant for the purchase of 19.9% of the issued and outstanding shares of Equilibrium common
stock, as of the earlier of the date of first exercise or a merger or sale of Equilibrium (on a fully diluted basis, giving effect to the exercise or conversion of all then outstanding convertible securities of Equilibrium), at an exercise price of
$.01 per share, and (iii) a royalty-free, perpetual worldwide license to use Equilibriums MediaRich software. As a result of the sale, the Company recorded a pre-tax loss of approximately $3.5 million. As a result of the terms of the warrant
received, the disposition of Equilibrium does not qualify for discontinued operations reporting in accordance with SFAS No. 144.
On November 6, 2002, the Company entered into a Recapitalization Agreement with Signatures SNI, Inc. (Signatures) in which Signatures paid the Company a total of $8.0 million to: (i) redeem all of the capital stock held
by the Company (ii) retire a portion of the outstanding principal balance on the promissory note held by the Company and (iii) retire all of the outstanding accrued interest relating to the promissory note. In addition, the Company contributed the
remaining promissory note principal balance to the capital of Signatures and cancelled the outstanding warrants. As a result of this transaction, during the three months ended October 31, 2002, the Company adjusted its interest in Signatures to
reflect the consideration to be received in connection with the transaction, and recorded a pre-tax loss of approximately $14.1 million.
G. SEGMENT INFORMATION
Based on the information provided to the Companys chief
operating decision-maker for purposes of making decisions about allocating resources and assessing performance, the Companys operations have been classified in two operating segments that are strategic business units offering distinctive
products and services that are marketed through different channels: Enterprise Software and Services and eBusiness and Fulfillment.
In addition to its two current operating segments, the Company continues to report a Portals segment (that consists of the operations of MyWay and iCAST) and a Managed Application Services segment (that consists of the
operations of NaviPath,
ExchangePath, 1stUp, and Activate), as these entities do not meet the aggregation criteria under SFAS No. 131 with respect to the Companys current
reporting segments. The historical results of these companies will continue to be reported in the Portals and Managed Application Services segments, respectively, as will any residual results from operations that exist through the cessation of
operations.
11
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Management evaluates segment performance based on segment net revenue, operating loss and pro forma
operating income (loss), which is defined as the operating income (loss) excluding net charges related to in-process research and development, depreciation, long-lived asset impairment, restructuring and amortization of intangible assets and
stock-based compensation.
Other includes certain corporate infrastructure expenses, which are not
identifiable to the operations of the Companys operating business segments.
Summarized financial
information of the Companys continuing operations by business segment is as follows:
|
|
Three Months ended October 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands) |
|
Net revenue: |
|
|
|
|
|
|
|
|
Enterprise Software and Services |
|
$ |
27,963 |
|
|
$ |
35,615 |
|
eBusiness and Fulfillment |
|
|
162,415 |
|
|
|
132,698 |
|
Managed Application Services |
|
|
136 |
|
|
|
5,453 |
|
Portals (formerly Search and Portals) |
|
|
|
|
|
|
2,813 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,514 |
|
|
$ |
176,579 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Enterprise Software and Services |
|
$ |
(16,721 |
) |
|
$ |
(73,153 |
) |
eBusiness and Fulfillment |
|
|
(16,751 |
) |
|
|
(40,743 |
) |
Managed Application Services |
|
|
136 |
|
|
|
809 |
|
Portals (formerly Search and Portals) |
|
|
|
|
|
|
(7,796 |
) |
Other |
|
|
(15,506 |
) |
|
|
(13,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(48,842 |
) |
|
$ |
(134,725 |
) |
|
|
|
|
|
|
|
|
|
Pro forma operating income (loss): |
|
|
|
|
|
|
|
|
Enterprise Software and Services |
|
$ |
(9,141 |
) |
|
$ |
(18,128 |
) |
eBusiness and Fulfillment |
|
|
(11,301 |
) |
|
|
(8,123 |
) |
Managed Application Services |
|
|
136 |
|
|
|
(13,612 |
) |
Portals (formerly Search and Portals) |
|
|
|
|
|
|
(1,206 |
) |
Other |
|
|
(13,854 |
) |
|
|
(9,867 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(34,160 |
) |
|
$ |
(50,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
Three Months ended October
31,
|
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands) |
|
GAAP operating loss |
|
$ |
(48,842 |
) |
|
$ |
(134,725 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
8,235 |
|
|
|
12,609 |
|
Long-lived asset impairments |
|
|
192 |
|
|
|
9,263 |
|
Restructuring |
|
|
1,930 |
|
|
|
5,133 |
|
Amortization of intangibles and stock-based compensation |
|
|
4,325 |
|
|
|
56,784 |
|
|
|
|
|
|
|
|
|
|
Pro forma operating loss |
|
$ |
(34,160 |
) |
|
$ |
(50,936 |
) |
|
|
|
|
|
|
|
|
|
12
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
H. 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 and convertible preferred stock are included in the
calculation of diluted earnings per share only when the effect of their inclusion would be dilutive. Approximately 2.9 million and 4.5 million weighted average common stock equivalents were excluded from the denominator in the diluted loss per share
calculation for the three months ended October 31, 2002 and 2001, respectively, as their inclusion would be antidilutive. Approximately 9.8 million shares representing the weighted average effect of assumed conversion of Series C Convertible
Preferred Stock were excluded from the denominator in the diluted loss per share calculation for the three months ended October 31, 2001. These shares were repurchased in November 2001 (see note L).
If a subsidiary has dilutive stock options or warrants outstanding, diluted earnings per share is computed by first deducting from net
income (loss), the income attributable to the potential exercise of the dilutive stock options or warrants of the subsidiary. The effect of income attributable to dilutive subsidiary stock equivalents was immaterial for the three months ended
October 31, 2002 and 2001, respectively.
I. COMPREHENSIVE LOSS
The components of comprehensive loss, net of income taxes, are as follows:
|
|
Three Months Ended October
31,
|
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands) |
|
Net loss |
|
$ |
(93,584 |
) |
|
$ |
(224,804 |
) |
|
Net unrealized holding gain (loss) arising during period |
|
|
5,843 |
|
|
|
(34,100 |
) |
Reclassification adjustment for net realized losses included in net loss |
|
|
200 |
|
|
|
9,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,043 |
|
|
|
(24,545 |
) |
Foreign currency translation adjustment |
|
|
(4,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(92,007 |
) |
|
$ |
(249,349 |
) |
|
|
|
|
|
|
|
|
|
J. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
|
|
Three Months Ended October
31,
|
|
|
2002
|
|
2001
|
|
|
(in thousands) |
Cash paid during the period for: |
|
|
|
|
|
|
Interest |
|
$ |
187 |
|
$ |
458 |
|
|
|
|
|
|
|
Income taxes |
|
$ |
214 |
|
$ |
539 |
|
|
|
|
|
|
|
Cash received during the period for: |
|
|
|
|
|
|
Federal income tax refund |
|
$ |
24 |
|
$ |
13,975 |
|
|
|
|
|
|
|
There were no significant non-cash investing activities during the
three months ended October 31, 2002.
During the three months ended October 31, 2001, significant non-cash
investing activities included the following transactions:
In August 2001, the Company settled the final tranche
of the borrowing arrangement that hedged a portion of the Companys investment in the common stock of Yahoo! through the delivery of 581,499 shares of Yahoo! common stock.
In August 2001, the Company issued approximately 5.4 million shares of its common stock as payment for the first quarter fiscal 2002 interest on the Compaq Computer
Corporation (Compaq), now Hewlett-Packard Company (HP), note payable.
In October 2001, the Companys
subsidiary, CMG@Ventures I, LLC, distributed approximately 1.7 million shares of Terra Networks, S.A. to certain of its profit members.
13
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
K. INVENTORIES
Inventories at October 31, 2002 and July 31, 2002 consisted of the following:
|
|
October 31, 2002
|
|
July 31, 2002
|
|
|
(in thousands) |
Raw Materials |
|
$ |
28,433 |
|
$ |
29,152 |
Work-in-process |
|
|
307 |
|
|
104 |
Finished Goods |
|
|
13,080 |
|
|
18,662 |
|
|
|
|
|
|
|
|
|
$ |
41,820 |
|
$ |
47,918 |
|
|
|
|
|
|
|
L. RETIREMENT OF SERIES C CONVERTIBLE PREFERRED STOCK
On June 29, 1999, CMGI completed a $375 million private placement of 375,000 shares of newly issued Series C Redeemable, Convertible
Preferred Stock (Series C Preferred Stock). Each share of Series C Preferred Stock had a stated value of $1,000 per share. The Company paid a semi-annual dividend of 2% per annum, in arrears, on June 30 and December 30 of each year at the
Companys option, in cash or through an adjustment to the liquidation preference of the Series C Preferred Stock. The Series C Preferred Stock was redeemable at the option of the holders upon the occurrence of certain events.
In November 2001, the Company repurchased all of the outstanding shares of its Series C Convertible Preferred Stock pursuant to
privately negotiated stock exchange agreements with the holders of the Series C Preferred Stock (the Holders). Under these agreements, the Company repurchased all of the outstanding shares of its Series C Preferred Stock for aggregate
consideration consisting of approximately $100.3 million in cash, approximately 34.7 million shares of the Companys common stock, and an obligation to deliver, no later than December 2, 2002, approximately 448.3 million shares of PCCW stock.
In addition, due to the delayed delivery obligation with respect to the PCCW shares, the Company agreed to make
cash payments to the Holders, on the dates and in the aggregate amounts as follows: approximately $3.7 million on February 19, 2002, approximately $3.5 million on May 17, 2002, approximately $3.8 million on August 19, 2002, approximately $3.7
million on November 19, 2002 and approximately $0.5 million on December 2, 2002. The obligation to make payments would cease upon delivery of the PCCW shares and any payment due for the period during which the PCCW shares are delivered to the
Holders would be reduced on a pro rata basis.
The carrying value of the consideration exchanged approximated fair
market value at the date of the transaction. The Company has reclassified its investment in PCCW shares from Other assets to Trading security in accordance with SFAS No. 115, and has recorded the liability related to the
obligation to deliver the PCCW stock as a current note payable, both of which are carried at market value. Changes in the fair value of the PCCW stock and the note payable are recorded in the condensed consolidated statements of operations as Other
gains (losses), net and as adjustments to interest expense, respectively. The fair market value adjustment of the note payable for the three months ended October 31, 2002 was $31.0 million, and resulted in a $31.0 million decrease to interest
expense, which was offset by a loss of $31.0 million on the fair value adjustment of the trading security which was included in Other gains (losses), net.
As of October 31, 2002, the Company had made all of the required payments to the Holders. On November 19, 2002 and December 2, 2002, respectively, the Company made its final two cash payments to the
Holders. In addition, on December 2, 2002, the Company fulfilled its obligation to deliver approximately 448.3 million shares of PCCW to the Holders.
M. CONTINGENCIES
The Company and its subsidiaries are subject to legal proceedings and
claims, which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company.
In December 1999, Neil Braun, a former officer of iCAST Corporation, a wholly owned subsidiary of the Company
(iCAST), filed a complaint in United States District Court, Southern District of New York naming the Company, iCAST and David S. Wetherell as defendants. In the complaint, Mr. Braun alleged breach of contract regarding his termination
from iCAST and claimed that he was entitled to acceleration of options to purchase CMGI common stock and iCAST common stock, upon his termination, under contract and promissory estoppel principles. Mr. Braun also claimed that, under quantum meruit
principles, he was entitled to lost compensation. Mr. Braun sought damages of approximately $50 million and requested specific performance of the acceleration and exercise of options. In August 2001, the Court (i) granted summary judgment dismissing
Mr. Wetherell as a defendant and (ii) granted summary judgment, disposing of Mr. Brauns contract claim. In February 2002, the Court granted summary judgment disposing of Mr. Brauns promissory estoppel claim. Trial on the quantum meruit
claim was held in March 2002 and the jury returned a verdict in favor of Mr. Braun and against the Company in the amount of $113,482.24. As to iCAST, the jury found that Mr. Braun had not proven his claim. The Company filed a motion for directed
verdict, which motion sought to set aside the jury verdict against the Company. Such motion was denied. In May 2002, Mr. Braun appealed the Courts dismissal of his contract and promissory estoppel claims against iCAST and the Company. Briefing
on the appeal is complete, however no argument date has yet been set.
14
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In August 2001, Jeffrey Black, a former employee of AltaVista, filed
a complaint in Superior Court of the State of California (Santa Clara County) in his individual capacity as well as in his capacity as a trustee of two family trusts against the Company and AltaVista alleging certain claims arising out of the
termination of Mr. Blacks employment with AltaVista. As set forth in the complaint, Mr. Black is seeking monetary damages in excess of $70 million. The Company and AltaVista each believes that these claims are without merit and plans to
vigorously defend against these claims. In March 2002, the court ordered the entire case to binding arbitration in California. In June 2002, Mr. Black petitioned the California Court of Appeal for a writ prohibiting enforcement of the order
compelling arbitration of his cause of action for wrongful termination in violation of public policy. In July 2002, the Court of Appeal denied Mr. Blacks petition. In August 2002, Mr. Black submitted the matter to the American Arbitration
Association. A date for the arbitration has not yet been set.
On January 28, 2002, Mark Nutritionals, Inc.
(MNI) filed suit against AltaVista in the United States District Court for the Western District of Texas, San Antonio Division. The claims against AltaVista include unfair competition and trademark infringement and dilution, under both
federal law and the laws of the State of Texas. MNI is seeking compensatory damages in the amount of $10.0 million and punitive damages. AltaVista believes that these claims are without merit and plans to vigorously defend against these claims.
AltaVista filed its answer on March 1, 2002, denying the allegations. MNI has filed for Chapter 11 bankruptcy protection. AltaVista is entitled to indemnification by a third party with respect to this matter.
On April 16, 2002, NCR Corporation filed a complaint in the United States District Court for the Northern District of Illinois against
uBid. The complaint alleges that uBid has infringed four patents held by NCR and seeks unspecified monetary damages and injunctive relief. uBid believes that these claims are without merit and plans to vigorously defend against these claims. On May
28, 2002, uBid filed its answer to the complaint, denying the allegations. On December 5, 2002, NCR amended the complaint to add four additional patents. The parties are currently engaged in discovery.
On February 26, 2002, a purported class action lawsuit was filed in the Court of Chancery of the State of Delaware against the Company,
Engage and the individual members of the Board of Directors of Engage (David S. Wetherell, George A. McMillan, Christopher M. Cuddy, Edward M. Bennett and Peter J. Rice). The complaint alleges, among other things, breaches of fiduciary duties by the
Company and the individual defendants, and violations of Delaware law. The complaint requests, among other things, that the court (i) enjoin Engage from effecting a proposed reverse stock split, (ii) enjoin the issuance of shares of Engage common
stock to the Company upon conversion of promissory notes previously issued by Engage to the Company, (iii) award rescissory relief if the reverse stock split and stock issuances are consummated, and (iv) award the plaintiff compensatory damages,
attorneys fees and expenses. On February 28, 2002, the Delaware Court of Chancery denied a request by the plaintiffs for the scheduling of a preliminary injunction hearing, and denied a request to allow expedited discovery in the lawsuit. In
May 2002, the plaintiffs filed an amended complaint. In addition to the requests stated in the original complaint, the amended complaint requests that the court (i) enjoin a proposed merger by and among the Company, a wholly owned subsidiary of the
Company and Engage (the Merger), and (ii) declare the Merger not to be entirely fair to the plaintiffs. On August 2, 2002, this matter was consolidated with the related matters set forth in the following two paragraphs. In light of the
September 9, 2002 transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named
plaintiffs only, this matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter to consider any application for attorneys fees and expenses submitted by plaintiffs or their counsel. On
October 24, 2002, the Court entered the order dismissing the matter.
On May 21, 2002, a purported class action
lawsuit was filed with the Court of Chancery of the State of Delaware against the Company, Engage and the individual members of the Board of Directors of Engage (David S. Wetherell, George A. McMillan, Christopher M. Cuddy, Edward M. Bennett and
Peter J. Rice). The complaint alleges, among other things, breaches of fiduciary duties. The complaint requests, among other things, that the Court (i) enjoin, preliminarily and permanently, the Merger, (ii) rescind the Merger (in the event it is
consummated) or grant the plaintiffs rescissory damages, (iii) direct that the defendants account to plaintiffs for all damages caused to the plaintiffs and any special benefits obtained as a result of alleged unlawful conduct, and (iv) award the
plaintiffs the costs and disbursements (including attorneys fees) relating to this action. On August 2, 2002, this matter was consolidated with the related matters set forth in the following and preceding paragraphs. In light of the September
9, 2002 transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs
only, this matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter to consider any application for attorneys fees and expenses submitted by plaintiffs or their counsel. On October 24,
2002, the Court entered the order dismissing the matter.
15
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On May 21, 2002, another purported class action lawsuit was filed
with the Court of Chancery of the State of Delaware against the Company, Engage and Robert W. Bartlett, Jr., Edward A. Bennett, Christopher M. Cuddy, George A. McMillan, Peter M. Rice, David S. Wetherell and Andrew J. Zimmon (officers and directors
of Engage). The complaint alleges, among other things, breaches of fiduciary duties. The complaint requests, among other things, that the Court (i) enjoin, preliminarily and permanently, the Merger, (ii) rescind the Merger (in the event it is
consummated) or grant the plaintiffs rescissory damages, (iii) direct that the defendants account to plaintiffs for all profits and any special benefits obtained as a result of alleged unlawful conduct, and (iv) award the plaintiffs the costs and
disbursements (including attorneys and experts fees) relating to this action. On August 2, 2002, this matter was consolidated with the related matters set forth in the preceding two paragraphs. In light of the September 9, 2002
transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs only, this
matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter to consider any application for attorneys fees and expenses submitted by plaintiffs or their counsel. On October 24, 2002, the Court
entered the order dismissing the matter.
N. SUBSEQUENT EVENTS
On November 18, 2002, the Companys majority-owned operating company, uBid, Inc. (uBid), announced the closing of its Consumer to Consumer Exchange (C2C) channel as
part its strategy to focus on its Business to Consumer (B2C) channel, as well as its new Electronics Superstore channel. In connection with the closing of its C2C channel, as well as certain other restructuring initiatives, uBid reduced its
workforce by approximately 86 employees, and expects to record asset impairment charges related to certain assets associated with its closed or restructured operations, during the three months ending January 31, 2003.
On November 19, 2002 and December 2, 2002, respectively, the Company made its final two cash payments to the Holders (see note L). In
addition, on December 2, 2002, the Company fulfilled its obligation to deliver approximately 448.3 million shares of PCCW to the Holders.
16
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements other than statements of historical
information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to
identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in this section under the heading Factors
That May Affect Future Results and elsewhere in this report and the risks discussed in the Companys other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect
managements 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.
Basis of Presentation
The Company reports two current operating segments: (i) eBusiness and Fulfillment, and (ii) Enterprise Software and Services. The Other segment represents certain corporate cash and cash equivalents,
available-for-sale and trading securities, certain other assets and liabilities, and marketing and administrative expenses and the Companys venture capital affiliate, CMGI @Ventures.
In addition to its two current operating segments, the Company continues to report a Portals segment (that consists of the operations of MyWay and iCAST) and a Managed
Application Services segment (that consists of the operations of NaviPath, ExchangePath, 1stUp, and Activate), as these entities do not meet the aggregation criteria under SFAS No. 131 with respect to the Companys current reporting segments.
The historical results of these companies will continue to be reported in the Portals and Managed Application Services segments, respectively, as will any residual results from operations that exist through the cessation of operations.
On September 9, 2002, the Company sold all its equity and debt ownership interests in Engage. As a result, for all periods
presented, Engage, which was previously included within the Enterprise Software and Services segment, has been accounted for as a discontinued operation, as Engages operating results and cash flows were clearly distinguishable for all periods.
Engages operating results have been segregated from continuing operations and reported as discontinued operations in the accompanying condensed consolidated statements of operations and cash flows, and related notes to the condensed
consolidated financial statements for all periods presented.
On September 11, 2002, the Company sold all its
equity and debt ownership interests in NaviSite, subject to a plan approved on June 12, 2002. As a result, for all periods presented, NaviSite, which was previously included within the Managed Application Services segment, has been accounted for as
a discontinued operation, as NaviSites product offering represents both a major line of business and a distinct class of customer. NaviSites operating results have been segregated from continuing operations and reported as discontinued
operations in the accompanying condensed consolidated statements of operations and cash flows, and related notes to the condensed consolidated financial statements for all periods presented.
Certain amounts for prior periods in the accompanying condensed consolidated financial statements, and in the discussion below, have been reclassified to conform to current
period presentations.
In accordance with accounting principles generally accepted in the United States of
America, all significant intercompany transactions and balances have been eliminated in consolidation. Accordingly, segment results reported by CMGI exclude the effect of transactions between CMGIs subsidiaries.
17
Results of Operations
Three months ended October 31, 2002 compared to the three months ended October 31, 2001
Net Revenue:
|
|
Three Months Ended October 31, 2002
|
|
% of Total Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Total Net Revenue
|
|
$ Change
|
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
27,963 |
|
15% |
|
$ |
35,615 |
|
20% |
|
$ |
(7,652 |
) |
|
(21)% |
eBusiness and Fulfillment |
|
|
162,415 |
|
85% |
|
|
132,698 |
|
75% |
|
|
29,717 |
|
|
22 % |
Managed Application Services |
|
|
136 |
|
|
|
|
5,453 |
|
3% |
|
|
(5,317 |
) |
|
(98)% |
Portals |
|
|
|
|
|
|
|
2,813 |
|
2% |
|
|
(2,813 |
) |
|
(100)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
190,514 |
|
100% |
|
$ |
176,579 |
|
100% |
|
$ |
13,935 |
|
|
8 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net revenue for the three months ended October 31,
2002, as compared to the same period in the prior year, was the result of a 22% increase in net revenue within the eBusiness and Fulfillment segment, partially offset by a 21% decrease in net revenue in the Enterprise Software and Services segment,
and decreased net revenue in the Managed Application Services and Portals segments as a result of the divestiture and/or cessation of business operations within these segments.
The decrease in net revenue within the Enterprise Software and Services segment was primarily the result of net revenue declines at AltaVista and Tallan. The decrease in
net revenue at AltaVista was the result of a significant decrease in net revenues within AltaVistas software business, due to continued overall softness in corporate IT spending and the resulting revenue decline within AltaVistas
software division. As a result, during the first quarter fiscal year 2003, the Company downsized its software operations. The decrease in net revenue at Tallan was due primarily to continued softness in demand for customized technology solutions,
which contributed to reductions in both average billing rates and billable hours as compared to the same period in the prior fiscal year.
The increase in net revenue within the eBusiness and Fulfillment segment was due to the net revenue contributions of SL Supply Chain Services International Corp. (SL Supply Chain) through which the Company acquired
substantially all of the worldwide assets and operations of Software Logistics Corporation d/b/a iLogistix during the fourth quarter of fiscal year 2002. The net revenue increase from the SL Supply Chain acquisition was partially offset by a
significant decrease in net revenue at uBid as a result of changes in its sales strategy, which included, among other things, the elimination of certain product categories, reductions in the volume of products made available for sale on uBids
website, and an increase in drop shipment sales as a percentage of total sales as compared to the prior year. Additionally, net revenue at SalesLink declined as compared to the prior year due to volume declines in supply chain management services,
primarily as a result of the continued difficult economic climate for many of the major OEMs that comprise a large part of the revenue base for SalesLink.
The decrease in net revenue within the Managed Application Services segment was primarily due to the cessation of operations of NaviPath, and the sale of Activate in fiscal year 2002. The decrease in
net revenue within the Portals segment was primarily due to the cessation of operations of MyWay during fiscal year 2002.
Cost of
Revenue:
|
|
Three Months Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
12,518 |
|
45% |
|
$ |
20,601 |
|
58% |
|
$ |
(8,083 |
) |
|
(39)% |
eBusiness and Fulfillment |
|
|
151,896 |
|
94% |
|
|
120,291 |
|
91% |
|
|
31,605 |
|
|
26 % |
Managed Application Services |
|
|
|
|
|
|
|
15,501 |
|
284% |
|
|
(15,501 |
) |
|
(100)% |
Portals |
|
|
|
|
|
|
|
2,328 |
|
83% |
|
|
(2,328 |
) |
|
(100)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
164,414 |
|
86% |
|
$ |
158,721 |
|
90% |
|
$ |
5,693 |
|
|
4 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Cost of revenue consists primarily of expenses related to the cost of products
purchased for sale or distribution. Additionally, cost of revenue includes expenses related to the content, connectivity and production associated with delivering the Companys products and services. The increase in cost of revenue for the
three months ended October 31, 2002 as compared to the same period in the prior year was attributable to the cost of revenue of SL Supply Chain, which CMGI acquired during the fourth quarter of fiscal year 2002. The cost of revenue increase from the
SL Supply Chain acquisition was largely offset by a decrease in cost of revenue at uBid due to a decline in revenue that resulted from changes in its sales strategy, reduced cost of revenue at SalesLink due to volume declines in supply chain
management services, and decreased cost of revenue as a result the Companys restructuring efforts, which included the sale or cessation of operations of several companies, and actions taken at several of the remaining subsidiaries to increase
operational efficiencies, improve margins and further reduce expenses.
The Companys cost of revenue as a
percentage of net revenue decreased to approximately 86% for the three months ended October 31, 2002 from approximately 90% in the same period in the prior fiscal year, primarily as a result of the cessation of operations within the Managed
Application Services and Portals segments, and reflects a 13% improvement in gross margins within the Enterprise Software and Services segment, partially offset by a 3% decrease in gross margins within the eBusiness and Fulfillment segment.
Cost of revenue as a percentage of net revenue within the Enterprise Software and Services segment decreased to
approximately 45% for the three months ended October 31, 2002, from approximately 58% in the same period of the prior fiscal year, primarily as a result of gross margin improvements at both AltaVista and Tallan. AltaVistas gross margins
increased 15% as compared to the same period of the prior fiscal year as a result of certain changes that AltaVista made to its business strategy during fiscal year 2002 that involved, among other things, changes to its product and service offerings
and reductions in the underlying infrastructure costs associated with delivering those products and services as part its shift from a portal-based business model to an Internet and enterprise search business model. Tallans gross margins
increased 12% as compared to the same period of the prior fiscal year as a result of reductions in its professional services staff.
Cost of revenue as a percentage of net revenue within the eBusiness and Fulfillment segment increased to approximately 94% for the three months ended October 31, 2002 from approximately 91% in the same period of the prior
fiscal year, as a result of lower gross margins at both SalesLink and uBid, as well as the impact of the SL Supply Chain business, which CMGI acquired during the fourth quarter of fiscal year 2002. The gross margins at SalesLink decreased primarily
due to lower sales levels and reduced pricing of its services within the supply chain management and literature distribution businesses, respectively, and increased costs related to a new Enterprise Resource Planning (ERP) system. The decrease in
gross margins at uBid were the result of declines in product margin for certain categories of products sold by uBid on its website. As a result, uBid has made certain changes in its sales strategy, which involved, among other things, the elimination
of certain product categories and reductions in the volume of certain products made available for sale on its website.
The decrease in cost of revenue as a percentage of net revenue within the Managed Application Services segment was due to the cessation of operations of NaviPath, and the sale of Activate in the first quarter of fiscal year 2002. The
decrease in cost of revenue as a percentage of net revenue within the Portals segment was due to the cessation of operations of MyWay during fiscal year 2002.
Research and Development Expenses:
|
|
Three Months Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
8,682 |
|
31% |
|
$ |
11,192 |
|
31% |
|
$ |
(2,510) |
|
(22)% |
Managed Application Services |
|
|
|
|
|
|
|
507 |
|
9% |
|
|
(507) |
|
(100)% |
Portals |
|
|
|
|
|
|
|
1,146 |
|
41% |
|
|
(1,146) |
|
(100)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,682 |
|
5% |
|
$ |
12,845 |
|
7% |
|
$ |
(4,163) |
|
(32)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses consist primarily of personnel
and related costs to design, develop, enhance, test and deploy the Companys products and services either prior to the development efforts reaching technological feasibility or once the product had reached the maintenance phase of its life
cycle. Research and development expenses decreased primarily due to the shift in business focus at AltaVista, the cessation of operations at MyWay, and the sale of Activate in first quarter of fiscal year 2002.
19
The decrease in research and development expenses within the Enterprise Software
and Services segment during the three months ended October 31, 2002, as compared to the same period in the prior fiscal year was primarily the result of decreased research and development expense at AltaVista. The decrease in research and
development expense at AltaVista was primarily the result of reductions in headcount, facilities and equipment costs in connection with the change in AltaVistas business strategy from a portal-based business model to an Internet and enterprise
search business model.
The decrease in research and development expense within the Managed Application Services
segment was the result of the sale of Activate. The decrease in research and development expense within the Portals segment was due to the cessation of operations of MyWay.
Selling Expenses:
|
|
Three Month Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
13,850 |
|
50% |
|
$ |
17,896 |
|
50% |
|
$ |
(4,046) |
|
(23)% |
eBusiness and Fulfillment |
|
|
9,472 |
|
6% |
|
|
13,697 |
|
10% |
|
|
(4,225) |
|
(31)% |
Managed Application Services |
|
|
|
|
|
|
|
1,128 |
|
21% |
|
|
(1,128) |
|
(100)% |
Portals |
|
|
|
|
|
|
|
585 |
|
21% |
|
|
(585) |
|
(100)% |
Other |
|
|
713 |
|
|
|
|
760 |
|
|
|
|
(47) |
|
(6)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,035 |
|
13% |
|
$ |
34,066 |
|
19% |
|
$ |
(10,031) |
|
(29)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses consist primarily of advertising and other general
marketing related expenses, compensation and employee-related expenses, sales commissions, facilities costs, credit card processing fees, tradeshow expenses and travel costs. Certain fulfillment costs, including warehousing costs related to
activities such as receiving goods and the picking and packing of goods for shipment within the Companys eBusiness and Fulfillment segment, are classified as selling expenses. Selling expenses decreased during the three months ended October
31, 2002, as compared to the same period in the prior fiscal year by approximately 29%. The decrease was primarily due to headcount reductions, lower sales commissions as a result of lower net revenue, reductions in marketing campaigns, the sale of
Activate, and the cessation of operations at NaviPath and MyWay in fiscal 2002.
The decrease within the
Enterprise Software and Services segment was primarily the result of reductions in selling expenses at AltaVista. The decrease in selling expense at AltaVista was due to reduced employee related expenses, third party commission costs and significant
reductions in the scope of certain sales and marketing campaigns as a result of the transition of AltaVistas business strategy from a portal-based business model to an Internet and enterprise search business model during fiscal year 2002.
The decrease in selling expenses within the eBusiness and Fulfillment segment was due primarily to reduced credit
card processing fees at uBid as a result of the decline in uBids net revenue, as well as reductions in uBids customer acquisition costs as a result of more efficient highly-targeted marketing strategies.
The decrease in selling expense within the Managed Application Services segment was the result of the sale of Activate and the cessation
of operations of NaviPath. The decrease in selling expense within the Portals segment was the result of the cessation of operations of MyWay.
Selling expense within the Other segment was primarily related to the Companys amended sponsorship arrangement with the New England Patriots, under which the Company receives certain limited
marketing rights in exchange for a series of payments of $1.6 million per year beginning in January of 2003 and ending in July of 2015.
20
General and Administrative Expenses:
|
|
Three Months Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
6,035 |
|
22% |
|
$ |
10,455 |
|
29% |
|
$ |
(4,420 |
) |
|
(42)% |
eBusiness and Fulfillment |
|
|
15,323 |
|
9% |
|
|
8,457 |
|
6% |
|
|
6,866 |
|
|
81 % |
Managed Application Services |
|
|
|
|
|
|
|
4,173 |
|
77% |
|
|
(4,173 |
) |
|
(100)% |
Portals |
|
|
|
|
|
|
|
605 |
|
22% |
|
|
(605 |
) |
|
(100)% |
Other |
|
|
14,420 |
|
|
|
|
10,802 |
|
|
|
|
3,618 |
|
|
33 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,778 |
|
19% |
|
$ |
34,492 |
|
20% |
|
$ |
1,286 |
|
|
4 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of
compensation and other employee related costs, facilities costs, bad debt expense, depreciation expense and fees for professional services. General and administrative expenses for the three months ended October 31, 2002 approximated general and
administrative expenses for the same period in the prior fiscal year as general and administrative expense reductions across several companies were offset by increased general and administrative expenses attributable to the Companys
acquisition of the SL Supply Chain business during the fourth quarter of fiscal year 2002, and increased general and administrative expenses at the Companys corporate headquarters in connection with a charge related to vacant floors of leased
office space.
The decrease in general and administrative expenses within the Enterprise Software and Services
segment was primarily the result of decreases in general and administrative expenses at AltaVista and Tallan as a result of reductions in headcount related expenses due to restructuring initiatives by both companies in fiscal year 2002.
The increase in general and administrative expenses within the eBusiness and Fulfillment segment was primarily
attributable to the Companys acquisition of the SL Supply Chain business during the fourth quarter of fiscal year 2002, and increased information systems costs at uBid in connection with their new ERP system.
The decrease in general and administrative expenses in the Managed Application Services segment was due to the cessation of operations at
NaviPath, and the sale of Activate.
The decrease in the general and administrative expenses within the Portals
segment was the result of the cessation of operations of MyWay.
The general and administrative expenses within
the Other segment includes certain corporate administrative functions such as legal, finance and business development which are not fully allocated to CMGIs subsidiary companies. General and administrative expenses increased compared to the
same period in the prior fiscal year, as the benefits realized from corporate restructuring initiatives in fiscal year 2002 were offset during the first quarter of fiscal year 2003 by a charge related to vacant floors of leased office space at the
Companys corporate headquarters.
Amortization of Intangible Assets and Stock-Based Compensation:
|
|
Three Months Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
1,795 |
|
6% |
|
$ |
25,734 |
|
72% |
|
$ |
(23,939 |
) |
|
(93)% |
eBusiness and Fulfillment |
|
|
2,475 |
|
2% |
|
|
30,996 |
|
23% |
|
|
(28,521 |
) |
|
(92)% |
Other |
|
|
55 |
|
|
|
|
54 |
|
|
|
|
1 |
|
|
2 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,325 |
|
2% |
|
$ |
56,784 |
|
32% |
|
$ |
(52,459 |
) |
|
(92)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets and
stock-based compensation during the three months ended October 31, 2002 consisted primarily of amortization expense related to intangible assets deemed to have finite lives based on the provisions of Statement of Financial Accounting Standards
(SFAS) Nos. 141 and 142, which the Company adopted on August 1, 2002. Amortization of intangible assets and stock-based compensation during the same period in the prior fiscal year consisted primarily of goodwill amortization expense related to
acquisitions made by the Company during fiscal year 2000. Included within amortization of intangible assets and
21
stock-based compensation expenses was approximately $0.1 million and $0.2 million of stock-based compensation for the three months ended October
31, 2002 and 2001, respectively.
The overall decrease in amortization of intangible assets and stock-based
compensation during the three months ended October 31, 2002, as compared to the same period in the prior fiscal year, was primarily the result of the Companys adoption of SFAS Nos. 141 and 142. In accordance with the provisions of these
statements, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to periodic impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives.
Accordingly, during the three months ended October 31, 2002, as required by SFAS Nos. 141 and 142, the Company recorded amortization expense related to those identifiable intangible assets deemed to have finite lives.
The decrease in amortization of intangible assets and stock-based compensation within the Enterprise Software and Services segment during
the three months ended October 31, 2002, as compared to the same period in the prior fiscal year, was primarily the result of the adoption of SFAS Nos. 141 and 142, which requires that goodwill and indefinite lived intangible assets no longer be
amortized, but rather periodically tested for impairment. Amortization expense for the three months ended October 31, 2002 included amortization of developed technology, tradenames, customer lists, and non-compete intangible assets of uBid, Tallan
and Yesmail. Amortization of intangible assets in the same period in the prior fiscal year related principally to goodwill and intangible asset amortization for AltaVista, Tallan, Yesmail, and Equilibrium.
The decrease in amortization of intangible assets and stock-based compensation within the eBusiness and Fulfillment segment during the
three months ended October 31, 2002, as compared to the same period in the prior fiscal year, was primarily the result of the adoption of SFAS Nos. 141 and 142, which requires that goodwill and indefinite lived intangible assets no longer be
amortized, but rather periodically tested for impairment. Amortization expense for the three months ended October 31, 2002 included amortization of developed technology and tradename intangible assets of uBid. Amortization of intangible assets in
the prior fiscal year related principally to goodwill and intangible asset amortization for uBid and SalesLink.
Impairment:
|
|
Three Months Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
192 |
|
1% |
|
$ |
9,263 |
|
26% |
|
$ |
(9,071) |
|
(98)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
192 |
|
|
|
$ |
9,263 |
|
5% |
|
$ |
(9,071) |
|
(98)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through July 31, 2002, the Company recorded impairment charges as a
result of managements ongoing business review and impairment analysis performed under its policy regarding impairment, utilizing the guidance in SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of (SFAS No. 121). Where impairment indicators were identified, management evaluated whether the projected undiscounted cash flows were sufficient to cover the particular long-lived asset being reviewed. If the undiscounted
cash flows were insufficient, management then determined the amount of the impairment charge by comparing the carrying value of long-lived assets to their fair value. Management determines fair value of goodwill and certain other intangible assets
based on a combination of the discounted cash flow methodology, which is based upon converting expected cash flows to present value, and the market approach, which includes analysis of market price multiples of companies engaged in lines of business
similar to the Company. The market price multiples are selected and applied to the Company based on the relative performance, future prospects and risk profile of the Company in comparison to the guideline companies. Management predominantly
utilizes third-party valuation reports in its determination of fair value. Management predominantly determines fair value of other long-lived assets, such as property and equipment, based on third-party valuation reports.
On August 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Under Statement No. 144, the Company is required to test certain long-lived assets or group of assets for recoverability whenever events or changes in circumstances indicate that the Company may not be able to recover the assets carrying
amount. Statement No. 144 defines impairment as the condition that exists when the carrying amount of a long-lived asset or group exceeds its fair value. When events or changes in circumstances dictate an impairment review of a long-lived asset or
group, the Company will evaluate recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group cover the carrying value at the evaluation date. If the undiscounted
cash flows are not sufficient to cover the carrying value, the Company will measure any impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. Accordingly, the Company adopted SFAS No. 142 on August 1, 2002. Under the provisions of SFAS No. 142, the Company is required to perform transitional goodwill impairment tests as of August 1, 2002. The standard
requires that the Company complete the first step of its transitional goodwill impairment testing within six months from the date that the Company initially applies the statement (August 1, 2002). As of October 31, 2002, the Company had not yet
completed the first step of its transitional testing under the standard. The Company expects to have completed the first step of its transitional goodwill impairment testing by January 31, 2003 and has not determined what effect these tests will
have on its operations and financial position. Any transitional impairment loss resulting from the completion of the first step of the transitional goodwill impairment testing will be recognized as the cumulative effect of a change in accounting
principle in the Companys statements of operations. The Company operates in a volatile business environment, and as a result, could have material impairment charges in its transitional analysis and in future periods.
22
In accordance with the provisions of SFAS No. 142, the Company has designated
reporting units for purposes of assessing goodwill impairment. The standard defines a reporting unit as the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes,
from the other activities, operations, and assets of the entity. Based on the provisions of the standard, the Company has determined that its reporting units for purposes of goodwill impairment testing are its operating subsidiaries, with the
exception of SalesLink, for which the Company has designated the Literature Distribution Services division and the Supply Chain Management division as separate reporting units.
During the three months ended October 31, 2002 and 2001, respectively, the Company recorded impairment charges totaling approximately $0.2 million and $9.3 million,
respectively. The decrease in impairment charges in the first quarter of fiscal year 2003 as compared to the same period in the prior fiscal year related to the Enterprise Software and Services segment and was primarily the result of impairment
charges recorded during the first quarter of fiscal year 2002 related to certain goodwill and intangible assets of AltaVista and Tallan. The impairment charge recorded in the first quarter of fiscal year 2003 within the Enterprise Software and
Services segment included a write-down of certain fixed assets of AltaVista in connection with restructuring initiatives within its Software division.
Restructuring:
|
|
Three Months Ended October 31, 2002
|
|
% of Segment Net Revenue
|
|
Three Months Ended October 31, 2001
|
|
% of Segment Net Revenue
|
|
$ Change
|
|
% Change
|
|
|
(in thousands) |
Enterprise Software and Services |
|
$ |
1,612 |
|
6% |
|
$ |
13,627 |
|
38% |
|
$ |
(12,015) |
|
(88)% |
Managed Application Services |
|
|
|
|
|
|
|
(16,665) |
|
306% |
|
|
16,665 |
|
100 % |
Portals |
|
|
|
|
|
|
|
5,945 |
|
211% |
|
|
(5,945) |
|
(100)% |
Other |
|
|
318 |
|
|
|
|
2,226 |
|
|
|
|
(1,908) |
|
(86)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,930 |
|
1% |
|
$ |
5,133 |
|
3% |
|
$ |
(3,203) |
|
(62)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys restructuring initiatives during the three
months ended October 31, 2002 and 2001, respectively, involved strategic decisions to exit certain businesses and to reposition certain on-going businesses of the Company. Restructuring charges consisted primarily of contract terminations, severance
charges and equipment charges incurred as a result of the cessation of operations of certain subsidiaries and actions taken at several remaining subsidiaries to increase operational efficiencies, improve margins and further reduce expenses.
Severance charges included employee termination costs as a result of workforce reductions. Employees affected by the restructurings were notified both through direct personal contact and by written notification. The contract terminations primarily
consisted of costs to exit facility and equipment leases and to terminate bandwidth and other vendor contracts. The asset impairment charges primarily related to the write-off of property and equipment.
During the three months ended October 31, 2001, the restructuring charge in the Enterprise Software and Services segment primarily related
to charges of approximately $10.0 million at AltaVista and $4.0 million at Tallan during the prior fiscal year. The restructuring charge recorded by AltaVista during the first quarter of fiscal year 2002 primarily related to severance costs
associated with a 120 person reduction in its workforce, costs associated with the closing of its Irvine, California office location, and the write-off of an information systems software package. The restructuring charge recorded by Tallan during
the first quarter of fiscal year 2002 primarily related to severance costs associated with a 72 person reduction in its workforce, as well as costs associated with the closing of five office locations. During the first quarter of fiscal year 2003,
AltaVista recorded a $1.6 million restructuring charge related to restructuring initiatives within AltaVistas software division. The restructuring charges included severance costs associated with a reduction in the software divisions
workforce, costs related to the closing of sales office locations, and the write-off of certain fixed assets.
23
During the three months ended October 31, 2001, the restructuring charge in the
Managed Application Services segment primarily related to charges of approximately $4.1 million recorded by NaviPath, offset by a reversal of approximately $21.1 million of previously recorded restructuring charges at NaviPath during the first
quarter of fiscal year 2002. The $4.1 million restructuring charge recorded by NaviPath during the first quarter of fiscal year 2002 primarily related to severance costs and legal and other professional fees incurred in connection with the cessation
of its operations. The restructuring benefit recorded by NaviPath related to the settlement by NaviPath of certain contractual purchase commitments, breakage fees and service contracts for amounts less than originally estimated.
During the three months ended October 31, 2001, the restructuring charge in the Portals segment primarily related to charges of
approximately $5.9 million at MyWay related to the write-off of property and equipment and the termination of customer and vendor contracts during the first quarter of fiscal year 2002.
During the three months ended October 31, 2001, the restructuring charge in the Other segment primarily related to charges of approximately $2.2 million related to the
write-off of property and equipment and costs incurred to exit facility leases in Europe. During the first quarter of fiscal year 2003, the Company recorded restructuring charges of approximately $0.3 million, primarily related to liabilities that
the Company assumed in connection with its sale of Equilibrium.
Other Income/Expense:
Interest income decreased $4.8 million to $1.4 million for the three months ended October 31, 2002 from $6.2 million for the same period
in fiscal year 2002, reflecting decreased interest income associated with lower average cash and cash equivalent balances and lower interest rates in the first quarter of fiscal year 2003 as compared to the same period in the prior fiscal year.
Interest expense decreased $33.6 million to a net benefit of $26.9 million for the three months ended October 31,
2002 from a net expense of $6.7 million for the same period in fiscal year 2002, primarily due to a favorable fair market value adjustment of approximately $31.0 million related to the decrease in value of the obligation to the former holders of the
Series C Preferred Stock (the Holders). In connection with the repurchase of the outstanding shares of its Series C Preferred Stock in November 2001, the Company incurred an obligation to deliver approximately 448.3 million shares of its
PCCW stock holdings to the Holders no later than December 2, 2002. As a result of this transaction, the Company is accounting for the 448.3 million shares of PCCW stock as a trading security and the liability related to the obligation to deliver the
PCCW stock as a current note payable, both of which are carried at market value. Changes in the fair value of the PCCW stock and the note payable are recorded in the condensed consolidated statements of operations as Other gains (losses), net and as
adjustments to interest expense, respectively. The fair market value adjustment of the note payable through October 31, 2002 resulted in a $31.0 million decrease to interest expense, which was offset by a loss of $31.0 million on the fair value
adjustment of the trading security, which was included in Other gains (losses), net. Additionally, the settlement of the underlying debt associated with the Companys borrowing arrangement entered into in connection with a hedge of the
Companys investment in Yahoo! common stock occurred during the first quarter of fiscal year 2002.
Other
gains (losses), net increased $46.4 million, or 540%, to $(55.0) million for the three months ended October 31, 2002 from $(8.6) million in the same period in the prior fiscal year. Other gains (losses), net for the three months ended October 31,
2002 primarily consisted of a pre-tax loss of approximately $31.0 million related to the fair value adjustment on the Companys trading security PCCW, a pre-tax loss of approximately $14.1 million from the divestiture of the Companys debt
and equity interests in Signatures SNI, Inc., a pre-tax loss of approximately $6.2 million related to impairment charges for other-than-temporary declines in the carrying value of certain investments in affiliates, and a pre-tax loss of
approximately $3.5 million on the Companys sale of its majority-owned subsidiary Equilibrium.
Equity in
losses of affiliates, net resulted from the Companys minority ownership in certain investments that are accounted for under the equity method. Under the equity method of accounting, the Companys proportionate share of each
affiliates operating losses and amortization of the Companys net excess investment over its equity in each affiliates net assets is included in equity in losses of affiliates. Equity in losses of affiliates decreased $11.7 million
to $0.5 million for the three months ended October 31, 2002, from $12.2 million for the same period in fiscal year 2002, primarily reflecting a decreased number of investments accounted for under the equity method as compared to the same period in
the prior fiscal year. The Company expects its affiliate companies to continue to invest in the development of their products and services, and to recognize operating losses, which will result in future charges recorded by the Company to reflect its
proportionate share of such losses.
Minority interest was $(2.3) million for the three months ended October 31,
2002, as compared to $9.6 million in the same period in the prior fiscal year. Minority interest for the three months ended October 31, 2002 primarily reflects the minority interest related to ProvisionSoft and certain of the Companys @Venture
investments.
24
Income Tax Expense:
Income tax expense recorded for the three months ended October 31, 2002 was $0.9 million. Exclusive of taxes provided for significant, unusual or extraordinary items that
will be reported separately, the Company provides for income taxes on a year to date basis at an effective rate based upon its estimate of full year earnings. Income tax expense in the first quarter of fiscal year 2003 differs from the amount
computed by applying the U.S. federal income tax rate of 35 percent to pre-tax loss, primarily as a result of non-deductible intangible asset amortization and valuation allowances recognized on deferred tax assets. During the three months ended
October 31, 2002, the Company recorded tax expense of approximately $0.9 million, including a provision for foreign taxes associated with its operations outside of the United States.
Discontinued Operations:
On August 1, 2002, the Company
adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under the provisions of SFAS No. 144, certain disposal activities that previously did not qualify for discontinued operations accounting will
now be required to be reported as discontinued operations. SFAS No. 144 requires that a disposal of a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes
from the rest of the entity, shall be reported as discontinued operations if (a) the operations of the component have been or will be eliminated from the ongoing operations of the entity as a result of the disposition activity, and (b) the entity
will not have any significant continuing involvement in the operations of the component after the disposal transaction.
On September 9, 2002, the Company sold all its equity and debt ownership interests in Engage. Under the terms of the Transaction Agreement, CMGI transferred to Engage approximately 148.4 million shares of common stock of Engage held
by CMGI, representing approximately 76% of the issued and outstanding shares of Engage, and cancelled approximately $60 million of debt, including all convertible debt, owed to CMGI by Engage. In consideration of the equity transfer and debt
cancellation, Engage, among other things, (i) paid to CMGI $2.5 million in cash, (ii) agreed to pay to CMGI up to an additional $6.0 million, comprised of a senior secured promissory note due in September 2006 and earnout payments commencing in
fiscal year 2004, and (iii) issued to CMGI a warrant for the purchase of up to 9.9% of the issued and outstanding shares of Engage Common Stock, as of the earlier of the date of first exercise or a merger or sale of Engage (on a fully diluted basis,
giving effect to the exercise or conversion of all then outstanding convertible securities of Engage other than stock options issued to employees and directors of Engage), at an exercise price of $.048 per share. As a result of the divestiture,
Engage, which was previously included within the Enterprise Software and Services segment, has been accounted for as a discontinued operation in accordance with the provisions of SFAS No. 144. Accordingly, Engages operating results have been
segregated from continuing operations and have been reported as discontinued operations in the accompanying condensed consolidated balance sheets and statements of operations and cash flows, and related notes to the condensed consolidated financial
statements for all periods presented. During the three months ended October 31, 2002, the Company has recorded a loss on the disposal of Engage of approximately $16.6 million (which included a $2.8 million loss from discontinued operations and a
$13.8 million loss on sale).
On June 12, 2002 (the measurement date), CMGIs board of directors authorized
the divestiture of the Companys equity and debt ownership interests in its subsidiary NaviSite. On September 11, 2002, the Company completed the sale of all its equity and debt ownership interests in its subsidiary, NaviSite to ClearBlue. In
consideration thereof, the Company received, among other things, 131,579 shares of common stock of ClearBlue. On the measurement date NaviSite comprised more than 90% of both the total assets and operating losses of the Managed Application Services
segment and NaviSites product offering represented both a major line of business and a distinct class of customer under the guidance in APB No. 30 applicable through July 31, 2002. As a result, during the fourth quarter of the Companys
fiscal year ended July 31, 2002, the Company accounted for its divestiture of NaviSite as discontinued operations in accordance with the provisions of APB No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. At July 31, 2002, the Company expected to record a net gain in the first quarter of fiscal year 2003 on the sale of its debt and equity
ownership interests in NaviSite. The estimated gain on the sale of NaviSite included the results of operations from the measurement date through the date of disposal. The results of operations of NaviSite from the measurement date through July 31,
2002 were deferred and reflected as deferred loss on disposal of subsidiary on the condensed consolidated balance sheet at July 31, 2002. NaviSites operating results have been segregated from continuing operations and have been reported as
discontinued operations in the accompanying condensed consolidated balance sheets and statements of operations and cash flows, and related notes to the condensed consolidated financial statements for all periods presented. During the three months
ended October 31, 2002, the Company recorded a gain of approximately $2.3 million on the disposal of NaviSite.
Liquidity and Capital
Resources
Working capital at October 31, 2002 decreased to approximately $130.1
million compared to $203.9 million at July 31, 2002. At July 31, 2002, working capital included approximately $51.0 million of working capital attributable to discontinued operations. The remainder of the net decrease in working capital is primarily
attributable to a $46.2 million decrease in cash and cash equivalents, and a $6.1 million decrease in inventory. The Companys principal sources of capital during the three months ended October 31, 2002 were related to $2.5 million in cash
proceeds from the divestiture of Engage, and $2.0 million in cash proceeds received from Loudeye, Inc. in connection with the Companys fiscal year 2002 sale of Activate. The Companys principal uses of capital during the three
25
months ended October 31, 2002 were approximately $11.0 million for funding operations, $4.0 million in scheduled payments to the former holders
of the Series C Preferred Stock, and $6.8 million for purchases of property and equipment.
In October 2002, the
Company purchased approximately $10.0 million of commercial paper. These investments had original maturity dates greater than 90 days at acquisition and are therefore classified as available-for-sale securities as of October 31, 2002.
The Company believes that existing working capital and the availability of marketable securities, which could be sold or posted
as collateral for cash loans, will be sufficient to fund its operations, investments and capital expenditures for at least the next twelve months. Should additional capital be needed to fund future investment and acquisition activity, the Company
may seek to raise additional capital through the sale of certain subsidiaries, through public or private offerings of the Companys or its subsidiaries stock, or through debt financing. There can be no assurance, however, that the Company
will be able to raise additional capital on terms that are favorable to the Company, or at all.
Subsequent Events
On November 18, 2002, the Companys majority-owned operating company, uBid, Inc. (uBid), announced the closing of its
Consumer to Consumer Exchange (C2C) channel as part its strategy to focus on its Business to Consumer (B2C) channel, as well as its new Electronics Superstore channel. In connection with the closing of its C2C channel, as well as certain other
restructuring initiatives, uBid reduced its workforce by approximately 86 employees, and expects to record asset impairment charges related to certain assets associated with its closed or restructured operations, during the three months ending
January 31, 2003.
On November 19, 2002 and December 2, 2002, respectively, the Company made its final two cash
payments to the Holders. In addition, on December 2, 2002, the Company fulfilled its obligation to deliver approximately 448.3 million shares of PCCW to the Holders.
Contractual Obligations
The Company leases facilities and
certain other machinery and equipment under various non-cancelable operating leases and executory contracts expiring through June 2015. Future minimum payments as of October 31, 2002 are as follows:
|
|
Operating Leases
|
|
Stadium
|
|
Other Contractual Obligations
|
|
Total
|
|
|
(in thousands) |
For the remainder of fiscal year 2003 |
|
$ |
21,991 |
|
$ |
1,600 |
|
$ |
1,819 |
|
$ |
25,410 |
For the fiscal years ending July 31: |
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
18,083 |
|
|
1,600 |
|
|
1,368 |
|
|
21,051 |
2005 |
|
|
15,940 |
|
|
1,600 |
|
|
518 |
|
|
18,058 |
2006 |
|
|
13,460 |
|
|
1,600 |
|
|
|
|
|
15,060 |
2007 |
|
|
11,495 |
|
|
1,600 |
|
|
|
|
|
13,095 |
Thereafter |
|
|
28,461 |
|
|
12,800 |
|
|
|
|
|
41,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
109,430 |
|
$ |
20,800 |
|
$ |
3,705 |
|
$ |
133,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments have been reduced by future
minimum sub-lease rentals of approximately $7.7 million.
The Company leases facilities and certain machinery and
equipment under non-cancelable capital lease arrangements, which are not included in the table above. The present value of net minimum capital lease obligations is $1.0 million as of October 31, 2002.
Total rent and equipment lease expense charged to continuing operations was approximately $6.3 million as of October 31, 2002.
In August 2000, the Company announced it had acquired the exclusive naming and sponsorship rights to the New
England Patriots new stadium, for a period of fifteen years. In August 2002, the Company finalized an agreement with the owner of the stadium to amend the sponsorship agreement. Under the terms of the amended agreement, the Company
relinquished the stadium naming rights and retained more limited marketing rights in exchange for a series of annual payments of $1.6 million per year beginning in 2003 and ending in 2015.
26
From time to time the Company provides guarantees of payment to vendors doing
business with certain of the Companys subsidiaries. These guarantees require that in the event that the CMGI subsidiary company cannot satisfy its obligations with certain of its vendors, the Company will be required to settle the obligation.
As of October 31, 2002, the Company had outstanding guarantees of subsidiary indebtedness totaling approximately $13.9 million.
Other contractual obligations primarily consist of an agreement between AltaVista and DoubleClick, Inc. (DoubleClick). Under this agreement, AltaVista is contractually obligated to use a portion of DoubleClicks ad-serving
technology through December 31, 2004. AltaVista estimates its remaining contractual obligation to DoubleClick from the period November 1, 2002 through December 31, 2004 will not exceed $2.5 million.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, product returns, bad debts, inventories,
investments, intangible assets, income taxes, restructuring, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.
There can be no assurance that actual results will not differ from those estimates.
The Company has identified
the accounting policies below as the policies most critical to its business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed
throughout Managements Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. Our critical accounting policies are as follows:
|
|
|
Accounting for impairment of long-lived assets |
|
|
|
Accounting for the allowance for doubtful accounts and sales returns |
|
|
|
Excess and obsolete inventory |
Revenue Recognition. The Company derives its revenue from three primary sources: (i) sale of products, both merchandise and software licenses; (ii) services and support revenue, which includes
software maintenance; and (iii) the delivery of advertising impressions and e-mail based direct marketing. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates. For most of its transactions, the Company applies the provisions of
SEC Staff Accounting Bulletin 101 Revenue Recognition. However, revenue from sales of software is recognized in accordance with AICPA Statement of Position (SOP) 98-9, Software Revenue Recognition with Respect to Certain Arrangements.
Revenue from sales of merchandise is recognized upon shipment of the merchandise and verification of the
customers credit card authorization or receipt of cash. All shipping and handling fees billed to customers are recognized as revenue and related costs as costs of revenue when incurred, for products which the Company takes title to or assumes
the risks and rewards of ownership.
Revenue from software product licenses, database services and website traffic
audit reports are generally recognized when (i) a signed non-cancelable software license exists, (ii) delivery has occurred, (iii) the Companys fee is fixed or determinable, and (iv) collection is probable.
Revenue from software maintenance is deferred and recognized ratably over the term of each maintenance agreement, typically twelve months.
Revenue from professional services is recognized as the services are performed, collection is probable and such revenues are contractually nonrefundable. Revenue from multiple element arrangements involving products, services and support elements is
recognized in accordance with SOP 98-9, Software Revenue Recognition with Respect to Certain
27
Arrangements, when vendor-specific objective evidence of fair value does not exist for the delivered element. As required by SOP 98-9,
under the residual method, the fair value of the undelivered elements are deferred and subsequently recognized. The Company establishes sufficient vendor-specific objective evidence of fair value for services and support elements based on the price
charged when these elements are sold separately. Accordingly, software license revenue for products developed is recognized under the residual method in arrangements in which the software is sold with one or both of the other elements. Revenue from
license agreements that require significant customizations and modifications to the software product is deferred and recognized using the percentage of completion method. For license arrangements involving customizations for which the amount of
customization effort cannot be reasonably estimated or when license arrangements provide for customer acceptance, we recognize revenue under the completed contract method of accounting.
The Companys advertising revenue is derived primarily from the delivery of advertising impressions through its own or third-party Web sites. Revenue is recognized in
the period that the advertising impressions are delivered, provided the collection of the resulting receivable is probable. Revenue from e-mail based direct marketing is recognized upon delivery of the e-mail to the target audience that represents
substantial completion of the contract obligation.
Accounting for Impairment of Long-Lived Assets. Through
July 31, 2002, the Company recorded impairment charges as a result of managements ongoing business review and impairment analysis performed under its policy regarding impairment, utilizing the guidance in SFAS No. 121 Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). Where impairment indicators were identified, management evaluated whether the projected undiscounted cash flows were sufficient to cover the
particular long-lived asset being reviewed. If the undiscounted cash flows were insufficient, management then determined the amount of the impairment charge by comparing the carrying value of long-lived assets to their fair value. Management
determines fair value of goodwill and certain other intangible assets based on a combination of the discounted cash flow methodology, which is based upon converting expected cash flows to present value, and the market approach, which includes
analysis of market price multiples of companies engaged in lines of business similar to the Company. The market price multiples are selected and applied to the Company based on the relative performance, future prospects and risk profile of the
Company in comparison to the guideline companies. Management predominantly utilizes third-party valuation reports in its determination of fair value. Management predominantly determines fair value of other long-lived assets, such as property and
equipment, based on third-party valuation reports.
On August 1, 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under Statement No. 144, the Company is required to test certain long-lived assets or group of assets for recoverability whenever events or changes in circumstances
indicate that the Company may not be able to recover the assets carrying amount. Statement No. 144 defines impairment as the condition that exists when the carrying amount of a long-lived asset or group exceeds its fair value. When events or
changes in circumstances dictate an impairment review of a long-lived asset or group, the Company will evaluate recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset
or group cover the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company will measure any impairment loss as the excess of the carrying amount of the long-lived asset or
group over its fair value.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue
to be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Accordingly, the Company adopted SFAS No. 142 on August 1, 2002. SFAS No. 142 requires the Company to evaluate its existing
intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Accordingly, the
Company is required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments. In addition, to the extent an intangible
asset is then determined to have an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142.
Under the provisions of SFAS No. 142, the Company is required to perform transitional goodwill impairment tests as of August 1, 2002. To accomplish this the Company must
identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company
will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting units carrying amount. To the extent a reporting units carrying amount exceeds its fair value,
an indication exists that the reporting units goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting
units goodwill, determined by allocating the reporting units fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its
carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss resulting from the
completion of the first step of the transitional goodwill impairment testing will be recognized as the cumulative effect of a change in accounting principle in the Companys condensed consolidated statements of operations. As of October
31, 2002, the Company had not yet completed the first step of its transitional testing under the standard. The Company expects to have completed the first step of its transitional goodwill impairment testing by January 31, 2003 and has not
determined what effect these tests will have on its operations and financial position. The Company operates in a volatile business environment, and as a result, could have material impairment charges in its transitional analysis and in future
periods.
In accordance with the provisions of SFAS No. 142, the Company has designated reporting units for
purposes of assessing goodwill impairment. The standard defines a reporting unit as the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes, from the other
activities, operations, and assets of the entity. Based on the provisions of the standard, the Company has determined that its reporting units for purposes of goodwill impairment testing are its operating subsidiaries, with the exception of
SalesLink, for which the Company has designated the Literature Distribution Services division and the Supply Chain Management division as separate reporting units. Additionally, the Companys policy will be to perform its annual impairment
testing for all reporting units as of July 31st of each fiscal year.
Restructuring Expenses. The Company assesses the need to record restructuring charges in accordance with Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3), EITF 95-3, Recognition of Liabilities in
28
Connection with a Purchase Business Combination and Staff Accounting Bulletin (SAB) No. 100, Restructuring
and Impairment Charges. In accordance with this guidance, management must execute an exit plan that will result in the incurrence of costs that have no future economic benefit. Also under the terms of EITF 94-3, a liability for the
restructuring charges is recognized in the period management approves the restructuring plan. The Company records liabilities that primarily includes the estimated severance and other costs related to employee benefits and certain estimated
costs to exit equipment and facility lease obligations, bandwidth agreements and other service contracts. These estimates are based on the remaining amounts due under various contractual agreements, adjusted for any anticipated contract cancellation
penalty fees or any anticipated or unanticipated event or changes in circumstances that would reduce these obligations.
Accounting for the Allowance for Doubtful Accounts and Sales Returns. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable.
If there is a deterioration of a major customers credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due to us could be adversely affected. A reserve for sales returns
is established based on historical trends in product returns. If the actual or future returns do not reflect the historical data, our net revenue could be affected.
Loss Contingencies. The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the
likelihood of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a
liability has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. The Company regularly evaluates the current information available to us to determine whether such accruals should be adjusted.
Excess and Obsolete Inventory. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of the inventory and its estimated net realizable value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable
than those projected by management, additional inventory write-downs may be required. Such adjustments are considered permanent adjustments to the cost basis of the inventory.
Recent Accounting Pronouncements
In June 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 applies to all business combinations that the Company
enters into after June 30, 2001, and eliminates the pooling-of-interests method of accounting. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Under the new statements, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the statements. Other intangible assets continue to be amortized over their useful lives. The Company adopted SFAS No. 142 on August 1, 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This
statement addresses the accounting treatment for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of the statement apply to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction, development, or normal operation of a long-lived asset. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The
Company adopted SFAS No. 143 on August 1, 2002. This statement did not have a material effect on the Companys financial position or results of operations.
On August 1, 2002 the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under the provisions of SFAS No. 144 certain disposal
activities that previously did not qualify for discontinued operations accounting will now be required to be reported as discontinued operations. SFAS No. 144 requires that a disposal of a component of an entity comprising operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes from the rest of the entity, shall be reported as discontinued operations if (a) the operations of the component have been or will be eliminated from the ongoing
operations of the entity as a result of the disposition activity, and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Under Statement No. 144, the Company is
required to test certain long-lived assets or group of assets for recoverability whenever events or changes in circumstances indicate that the Company may not be able to recover the assets carrying amount. Statement No. 144 defines impairment
as the condition that exists when the carrying amount of a long-lived asset or group exceeds its fair value. When events or changes in circumstances dictate an impairment review of a long-lived asset or group, the Company will evaluate
recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group cover the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to
cover the carrying value, the Company will measure any impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue 94-3. The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activity. The
provisions of this Statement are required to be applied to exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact of SFAS No. 146 to its consolidated financial statements.
29
Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Companys control. Forward-looking statements in this document and those made
from time to time by the Company through its senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements concerning the expected future revenues or earnings or
concerning projected plans, performance, product development, product release or product shipment, as well as other estimates related to future operations are necessarily only estimates of future results and there can be no assurance that actual
results will not materially differ from expectations. Forward-looking statements represent managements current expectations and are inherently uncertain. CMGI does not undertake any obligation to update forward-looking statements. Factors that
could cause actual results to differ materially from results anticipated in forward-looking statements include, but are not limited to, the following:
CMGI may not be profitable in the future.
During
the fiscal year ended July 31, 2002, CMGI had an operating loss of approximately $487.4 million. During the three months ended October 31, 2002, CMGI had an operating loss of approximately $48.8 million. CMGI anticipates that it will continue to
incur significant operating expenses in the future, including significant costs of revenue and selling, general and administrative and amortization, impairment and restructuring expenses. CMGI also has significant commitments and contingencies,
including with respect to real estate, machinery and equipment leases, continuing stadium sponsorship obligations, and guarantees entered into by CMGI on behalf of itself and its operating companies. As a result, CMGI expects to continue to incur
significant operating expenses and can give no assurance that it will achieve profitability or be capable of sustaining profitable operations. At October 31, 2002, CMGI had a consolidated cash and cash equivalents balance of approximately $193.3
million. Total cash and cash equivalents usage was approximately $46.2 million during the first quarter of fiscal 2003. If CMGI is unable to reach and sustain profitability, it risks depleting its working capital balances and its business will be
materially adversely affected.
CMGI has in the past, and may in the future, sell or divest, or attempt to sell or
divest its interests in certain of its subsidiaries, if, among other reasons, management of CMGI deems the business of the subsidiary to be sufficiently unrelated to CMGIs core businesses or if the subsidiary is underperforming from a
financial or business point of view. Unprofitable non-core businesses and underperforming businesses pose a substantial risk to CMGIs ability to reduce its cash burn or reach profitability, both of which are stated goals of CMGI. CMGIs
inability to sell or divest its interest in such non-core or underperforming subsidiaries, in the desired timeframe or on terms acceptable to CMGI, will adversely affect CMGIs results of operations and could cause such results to be lower than
expected by securities analysts and investors.
CMGI may have problems raising money it needs in the future.
CMGI from time to time seeks opportunities to provide capital to support CMGIs growth through the
selective sale of investments or minority interests in subsidiaries or affiliates to outside investors. In recent years, CMGI has generally financed its operations with proceeds from selling shares of stock of companies in which CMGI had invested
directly or through its @Ventures venture capital affiliates. The aggregate holdings and market value of the shares of stock held by CMGI has declined significantly over the past two plus years, due to market conditions and continued sales. At
October 31, 2002, CMGI held approximately $26.4 million in available-for-sale securities. Market and other conditions largely beyond CMGIs control may affect its ability to engage in future sales of such securities, the timing of any such
sales, and the amount of proceeds therefrom. Even if CMGI is able to sell any such securities in the future, CMGI may not be able to sell at favorable prices or on favorable terms. In addition, this funding source may not be sufficient in the
future, and CMGI may need to obtain funding from outside sources. However, CMGI may not be able to obtain funding from outside sources. In addition, even if CMGI finds outside funding sources, CMGI may be required to issue to such outside sources
securities with greater rights than those currently possessed by holders of CMGIs common stock. CMGI may also be required to take other actions, which may lessen the value of its common stock or dilute its common stockholders, including
borrowing money on terms that are not favorable to CMGI or issuing additional shares of common stock. If CMGI experiences difficulties raising money in the future, its business will be materially adversely affected.
CMGI derives a significant portion of its revenue from a small number of customers and the loss of any of those customers could
significantly damage CMGIs business.
A limited number of customers account for a substantial
portion of CMGIs consolidated net revenue and the loss of any one or more of these customers could cause its revenue to decline below expectations. On July 11, 2002, CMGI acquired the assets of iLogistix, through its wholly-owned subsidiary,
SL Supply Chain. Nearly all of the revenues of SL Supply Chain are accounted for by sales to Hewlett-Packard and Microsoft. CMGI currently does not have any agreements which obligate either customer to buy a minimum amount of products or services
from CMGI or to designate CMGI as its sole supplier of any particular products or services. The loss of a significant amount of business with Hewlett-Packard or Microsoft, or any other key customer, would have a material adverse effect on CMGI. CMGI
believes that it will continue to derive a significant portion of its operating revenue from sales to a small number of customers. There can be no assurance that CMGIs revenue from key customers will not decline in future periods.
If the market for supply chain management services declines, the demand for CMGIs services and its
financial results could suffer.
CMGI derives a substantial portion of its revenue from the supply chain
management services provided by SalesLink and SL Supply Chain. CMGIs business and future growth will depend in large part on the industry trend towards outsourcing supply chain management and other business
30
processes. If this trend does not continue or declines, demand for CMGIs supply chain management services would decline and its financial
results could suffer.
A decline in the technology sector could reduce CMGIs revenue.
A large portion of CMGIs supply chain management revenue comes from clients in the technology
sector which is intensely competitive and highly volatile. A decline in the overall performance of the technology sector could adversely affect the demand for supply chain management services and reduce CMGIs revenues from such clients.
CMGI and its operating companies depend on third-party software, systems and services.
CMGI and its operating companies rely on products and services of third-party providers in their business
operations. For example, uBids business relies on order management software and information systems provided by Oracle and other third parties, as well as on Microsoft.NET enterprise servers to run its auction website. There can be no
assurance that CMGI or its operating companies will not experience operational problems attributable to the installation, implementation, integration, performance, features or functionality of such third-party software, systems and services. Any
interruption in the availability or usage of the products and services provided by third parties could have a material adverse effect on the business or operations of CMGI or its operating companies.
CMGI depends on certain important employees, and the loss of any of those employees may harm CMGIs business.
CMGIs performance is substantially dependent on the performance of its executive officers and other
key employees, as well as management of its operating companies. The familiarity of these individuals with the Internet and supply chain management industries makes them especially critical to CMGIs success. In addition, CMGIs success is
dependent on its ability to attract, train, retain and motivate high quality personnel, especially for its operating companies management teams. The loss of the services of any of CMGIs executive officers or key employees may harm its
business. CMGIs success also depends on its continuing ability to attract, train, retain and motivate other highly qualified technical and managerial personnel. Competition for such personnel is intense.
There may be conflicts of interest among CMGI, CMGIs subsidiaries and their respective officers, directors and stockholders.
Some of CMGIs officers and directors also serve as officers or directors of one or more of
CMGIs subsidiaries. In addition, David S. Wetherell, CMGIs Chairman of the Board, has significant compensatory interests in certain of CMGIs @Ventures venture capital affiliates. As a result, CMGI, CMGIs officers and
directors, and CMGIs subsidiaries and venture capital affiliates may face potential conflicts of interest with each other and with stockholders. Specifically, CMGIs officers and directors may be presented with situations in their
capacity as officers, directors or management of one of CMGIs subsidiaries and venture capital affiliates that conflict with their fiduciary obligations as officers or directors of CMGI or of another subsidiary or affiliate.
CMGIs strategy of expanding its business through acquisitions of other businesses and technologies presents special
risks.
CMGI intends to continue to expand its business in certain areas through the acquisition of
businesses, technologies, products and services from other businesses. Acquisitions involve a number of special problems, including:
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difficulty integrating acquired technologies, operations and personnel with the existing businesses; |
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diversion of management attention in connection with both negotiating the acquisitions and integrating the assets; |
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strain on managerial and operational resources as management tries to oversee larger operations; |
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the funding requirements for acquired companies may be significant; |
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exposure to unforeseen liabilities of acquired companies; |
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increased risk of costly and time-consuming litigation, including stockholder lawsuits; |
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potential issuance of securities in connection with an acquisition with rights that are superior to the rights of holders of CMGIs common stock, or which
may have a dilutive effect on the common stockholders; |
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the need to incur additional debt or use cash; and |
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the requirement to record potentially significant additional future operating costs for the amortization of intangible assets. |
CMGI may not be able to successfully address these problems. Moreover, CMGIs future operating results will depend to a
significant degree on its ability to successfully integrate acquisitions and manage operations while also controlling expenses and cash burn.
CMGI must develop and maintain positive brand name awareness.
CMGI believes that establishing and maintaining its brand name and the brand names of its operating companies is essential to expanding its business and attracting new customers. CMGI also believes that the importance of brand name
recognition will increase in the future as Internet companies continue to differentiate themselves. Promotion and enhancement of CMGIs brand names will depend largely on its ability to provide consistently high-quality products and services.
If CMGI is unable to provide high-quality products and services, the value of its brand names will suffer and CMGIs business prospects may be adversely affected.
CMGIs quarterly results may fluctuate significantly.
CMGIs operating results have fluctuated widely on a quarterly basis during the last several years, and it expects to experience significant fluctuations in future quarterly operating results.
Many factors, some of which are beyond CMGIs control, have contributed to these quarterly fluctuations in the past and may continue to do so. Such factors include:
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demand for its products and services; |
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payment of costs associated with its acquisitions, sales of assets and investments; |
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timing of sales of assets and marketable securities; |
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market acceptance of new products and services; |
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seasonality, especially in the eBusiness and Fulfillment segment; |
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charges for impairment of long-lived assets in future periods; |
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potential restructuring charges in connection with CMGIs continuing restructuring efforts; |
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specific economic conditions in the industries in which CMGI competes; and |
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general economic conditions. |
The emerging nature of the commercial uses of the Internet makes predictions concerning CMGIs future revenues difficult. CMGI believes that period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of its future performance. It is also possible that in some fiscal quarters, CMGIs operating results will be below the expectations of securities analysts and investors. In such
circumstances, the price of CMGIs common stock may decline.
The price of CMGIs common stock has
been volatile and may fluctuate based on the value of its assets.
The market price of CMGIs common
stock has been, and is likely to continue to be, volatile, experiencing wide fluctuations. In recent years, the stock market has experienced significant price and volume fluctuations, which have particularly impacted the market prices of equity
securities of many companies providing Internet-related products and services. Some of these fluctuations appear to be unrelated or disproportionate to the operating performance of such companies. Future market movements may adversely affect the
market price of CMGIs common stock. In addition, should the market price of CMGIs common stock remain below $1.00 per share for an extended period, it risks Nasdaq delisting, which would have an adverse effect on CMGIs business. In
order to maintain compliance with Nasdaq listing standards, CMGI may consider several strategies, including without limitation a reverse stock split.
In addition, a portion of CMGIs assets includes the equity securities of both publicly traded and privately held companies. The market price and valuations of the securities that CMGI holds may
fluctuate due to market conditions and other conditions over which CMGI has no control. Fluctuations in the market price and valuations of the securities that CMGI holds in other companies may result in fluctuations of the market price of
CMGIs common stock and may reduce the amount of working
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capital available to CMGI. On December 2, 2002, CMGI fulfilled its obligation to deliver approximately 448.3 million shares of Pacific Century
CyberWorks Limited to the former holders of CMGIs Series C Convertible Preferred Stock.
CMGI relies
on NaviSite for Web site hosting.
On September 11, 2002, CMGI sold all of its equity and debt ownership
interests in NaviSite to ClearBlue Technologies, Inc. CMGI and certain of its operating companies rely on NaviSite for network connectivity and hosting of servers. If NaviSite fails to perform such services, CMGIs internal business operations
may be interrupted, and the ability of CMGIs operating companies to provide services to customers may also be interrupted. Such interruptions may have an adverse impact on CMGIs business and revenues and its operating companies.
The success of CMGI and its operating companies depends greatly on increased use of the Internet by
businesses and individuals.
The success of CMGI and its operating companies depends greatly on increased
use of the Internet for e-commerce transactions, advertising, marketing, providing services and conducting business. Commercial use of the Internet is currently at an early stage of development and the future of the Internet is not clear. In
addition, it is not clear how effective Internet advertising is or will be, or how successful Internet-based sales will be. The businesses of CMGIs operating companies will suffer if commercial use of the Internet fails to grow in the future.
CMGIs operating companies are subject to intense competition.
The markets for the products and services of CMGIs operating companies are highly competitive and often lack significant barriers to
entry, enabling new businesses to enter these markets relatively easily. Competition in the markets for Internet products and services may intensify in the future. Numerous well-established companies and smaller entrepreneurial companies are
focusing significant resources on developing and marketing products and services that will compete with the products and services of CMGIs operating companies. The market for supply chain management products and services is very competitive,
and the intensity of the competition is expected to continue to increase. Any failure to maintain and enhance the competitive position of CMGIs supply chain management operating companies will limit its ability to maintain and increase market
share, which would result in serious harm to CMGIs business. Increased competition may also result in price reductions, reduced gross margins and loss of market share. In addition, many of the current and potential competitors of CMGIs
operating companies have greater financial, technical, operational and marketing resources than those of CMGIs operating companies. CMGIs operating companies may not be able to compete successfully against these competitors. Competitive
pressures may also force prices for Internet and supply chain management products and services down and such price reductions may reduce the revenues of CMGIs operating companies.
If the United States or other governments regulate the Internet more closely, the businesses of CMGIs operating companies may be harmed.
Because of the Internets popularity and increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as privacy, pricing, taxation, advertising methods and content. The enactment of any additional laws or regulations may impede the growth of the Internet and the Internet-related business of CMGIs operating
companies and could place additional financial burdens on their businesses.
To succeed, CMGIs
operating companies must respond to the rapid changes in technology and distribution channels related to the Internet.
The markets for the Internet and technology products and services of CMGIs operating companies are characterized by:
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rapidly changing technology; |
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evolving industry standards; |
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frequent new product and service introductions; |
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shifting distribution channels; and |
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changing customer demands. |
The success of CMGIs operating companies will depend on their ability to adapt to this rapidly evolving marketplace. They may not be able to adequately adapt their products and services or to acquire new products and
services that can compete successfully. In addition, CMGIs operating companies may not be able to establish and maintain effective distribution channels.
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CMGIs operating companies face security risks.
Consumer concerns about the security of transmissions of confidential information over public telecommunications facilities is
a significant barrier to e-commerce and communications on the Internet. Many factors may cause compromises or breaches of the security systems that CMGIs operating companies or other Internet sites use to protect proprietary information,
including advances in computer and software functionality or new discoveries in the field of cryptography. A significant compromise of security on the Internet would have a negative effect on the use of the Internet for commerce and communications
and negatively impact CMGIs operating companies. Security breaches of their activities or the activities of their customers and sponsors involving the storage and transmission of proprietary information, such as credit card numbers, may expose
CMGIs operating companies to a risk of loss or litigation and possible liability. CMGI cannot assure that the security measures of CMGIs operating companies will prevent security breaches.
The success of the global operations of CMGIs operating companies is subject to special risks and costs.
CMGIs operating companies intend to continue to expand their operations outside of the United States. This international
expansion will require significant management attention and financial resources. The ability of CMGIs Internet-based operating companies to expand their offerings of CMGIs products and services internationally will be limited by the
general acceptance of the Internet in other countries. The operations of CMGIs supply chain management operating companies are subject to numerous and varied regulations worldwide, some of which may have an adverse effect on CMGIs
ability to develop its international operations. In addition, CMGI and its operating companies have limited experience in such international activities. Accordingly, CMGI and its operating companies will need to commit substantial time and
development resources to customizing the products and services of its operating companies for selected international markets and to developing international sales and support channels.
CMGI expects that the export sales of its operating companies will be denominated predominantly in United States dollars. As a result, an increase in the value of the
United States dollar relative to other currencies may make the products and services of its operating companies more expensive and, therefore, potentially less competitive in international markets. As CMGIs operating companies increase their
international sales, their total revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world.
CMGIs operating companies could be subject to infringement claims and other liabilities.
From time to time, CMGIs operating companies have been, and expect to continue to be, subject to third-party claims in the ordinary
course of business, including claims of alleged infringement of intellectual property rights. Any such claims may damage the businesses of CMGIs operating companies by:
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subjecting them to significant liability for damages; |
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resulting in invalidation of their proprietary rights; |
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resulting in costly license fees in order to settle such claims; |
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being time-consuming and expensive to defend even if such claims are not meritorious; and |
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resulting in the diversion of management time and attention. |
In addition, because materials may be downloaded from the Internet and subsequently distributed to others, CMGIs operating companies may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury or other theories based on the nature, content, publication and distribution of such materials.
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CMGI, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
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 Companys available-for-sale securities at October 31, 2002 primarily consisted of investments in companies in the Internet and
technology industries 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 equity component of the Companys available-for-sale securities portfolio as of October 31, 2002, would result in an approximate $3.3 million decrease in the fair value of the Companys 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 Companys current incremental borrowing rates for similar types of borrowing arrangements.
The Company
from time to time 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, derivative positions are used to reduce risk by hedging underlying economic or market exposure. The derivatives the Company uses are straightforward instruments with liquid markets. At October 31, 2002, the Company was primarily
exposed to the London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) interest rate on its outstanding 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.
The Company may consider utilizing derivative instruments to mitigate the risk of foreign currency exchange rate fluctuations in the future.
Item 4. Controls and Procedures
Evaluation
of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this report, the Companys principal executive officer and principal financial officer have concluded that the Companys
disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls. There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were
no significant deficiencies or material weaknesses in the Companys internal controls, and therefore there were no corrective actions taken.
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CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In December 1999, Neil Braun, a former
officer of iCAST Corporation, a wholly owned subsidiary of the Company (iCAST), filed a complaint in United States District Court, Southern District of New York naming the Company, iCAST and David S. Wetherell as defendants. In the
complaint, Mr. Braun alleged breach of contract regarding his termination from iCAST and claimed that he was entitled to acceleration of options to purchase CMGI common stock and iCAST common stock, upon his termination, under contract and
promissory estoppel principles. Mr. Braun also claimed that, under quantum meruit principles, he was entitled to lost compensation. Mr. Braun sought damages of approximately $50 million and requested specific performance of the acceleration and
exercise of options. In August 2001, the Court (i) granted summary judgment dismissing Mr. Wetherell as a defendant and (ii) granted summary judgment, disposing of Mr. Brauns contract claim. In February 2002, the Court granted summary judgment
disposing of Mr. Brauns promissory estoppel claim. Trial on the quantum meruit claim was held in March 2002 and the jury returned a verdict in favor of Mr. Braun and against the Company in the amount of $113,482.24. As to iCAST, the jury found
that Mr. Braun had not proven his claim. The Company filed a motion for directed verdict, which motion sought to set aside the jury verdict against the Company. Such motion was denied. In May 2002, Mr. Braun appealed the Courts dismissal of
his contract and promissory estoppel claims against iCAST and the Company. Briefing on the appeal is complete, however no argument date has yet been set.
In August 2001, Jeffrey Black, a former employee of AltaVista, filed a complaint in Superior Court of the State of California (Santa Clara County) in his individual capacity as well as in his capacity
as a trustee of two family trusts against the Company and AltaVista alleging certain claims arising out of the termination of Mr. Blacks employment with AltaVista. As set forth in the complaint, Mr. Black is seeking monetary damages in excess
of $70 million. The Company and AltaVista each believes that these claims are without merit and plans to vigorously defend against these claims. In March 2002, the court ordered the entire case to binding arbitration in California. In June 2002, Mr.
Black petitioned the California Court of Appeal for a writ prohibiting enforcement of the order compelling arbitration of his cause of action for wrongful termination in violation of public policy. In July 2002, the Court of Appeal denied Mr.
Blacks petition. In August 2002, Mr. Black submitted the matter to the American Arbitration Association. A date for the arbitration has not yet been set.
On January 28, 2002, Mark Nutritionals, Inc. (MNI) filed suit against AltaVista in the United States District Court for the Western District of Texas, San Antonio Division. The claims
against AltaVista include unfair competition and trademark infringement and dilution, under both federal law and the laws of the State of Texas. MNI is seeking compensatory damages in the amount of $10.0 million and punitive damages. AltaVista
believes that these claims are without merit and plans to vigorously defend against these claims. AltaVista filed its answer on March 1, 2002, denying the allegations. MNI has filed for Chapter 11 bankruptcy protection. AltaVista is entitled to
indemnification by a third party with respect to this matter.
On April 16, 2002, NCR Corporation filed a
complaint in the United States District Court for the Northern District of Illinois against uBid. The complaint alleges that uBid has infringed four patents held by NCR and seeks unspecified monetary damages and injunctive relief. uBid believes that
these claims are without merit and plans to vigorously defend against these claims. On May 28, 2002, uBid filed its answer to the complaint, denying the allegations. On December 5, 2002, NCR amended the complaint to add four additional patents. The
parties are currently engaged in discovery.
On February 26, 2002, a purported class action lawsuit was filed in
the Court of Chancery of the State of Delaware against the Company, Engage and the individual members of the Board of Directors of Engage (David S. Wetherell, George A. McMillan, Christopher M. Cuddy, Edward M. Bennett and Peter J. Rice). The
complaint alleges, among other things, breaches of fiduciary duties by the Company and the individual defendants, and violations of Delaware law. The complaint requests, among other things, that the court (i) enjoin Engage from effecting a proposed
reverse stock split, (ii) enjoin the issuance of shares of Engage common stock to the Company upon conversion of promissory notes previously issued by Engage to the Company, (iii) award rescissory relief if the reverse stock split and stock
issuances are consummated, and (iv) award the plaintiff compensatory damages, attorneys fees and expenses. On February 28, 2002, the Delaware Court of Chancery denied a request by the plaintiffs for the scheduling of a preliminary injunction
hearing, and denied a request to allow expedited discovery in the lawsuit. In May 2002, the plaintiffs filed an amended complaint. In addition to the requests stated in the original complaint, the amended complaint requests that the court (i) enjoin
a proposed merger by and among the Company, a wholly owned subsidiary of the Company and Engage (the Merger), and (ii) declare the Merger not to be entirely fair to the plaintiffs. On August 2, 2002, this matter was consolidated with the
related matters set forth in the following two paragraphs. In light of the September 9, 2002 transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October 18, 2002, all parties submitted to the Court
a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs only, this matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter to consider any application for
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attorneys fees and expenses submitted by plaintiffs or their counsel. On October 24, 2002, the Court entered the order dismissing the matter.
On May 21, 2002, a purported class action lawsuit was filed with the Court of Chancery of the State of Delaware against the Company,
Engage and the individual members of the Board of Directors of Engage (David S. Wetherell, George A. McMillan, Christopher M. Cuddy, Edward M. Bennett and Peter J. Rice). The complaint alleges, among other things, breaches of fiduciary duties. The
complaint requests, among other things, that the Court (i) enjoin, preliminarily and permanently, the Merger, (ii) rescind the Merger (in the event it is consummated) or grant the plaintiffs rescissory damages, (iii) direct that the defendants
account to plaintiffs for all damages caused to the plaintiffs and any special benefits obtained as a result of alleged unlawful conduct, and (iv) award the plaintiffs the costs and disbursements (including attorneys fees) relating to this
action. On August 2, 2002, this matter was consolidated with the related matters set forth in the following and preceding paragraphs. In light of the September 9, 2002 transaction in which the Company divested all of its equity and debt ownership
interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs only, this matter as moot. The stipulated order further provides that the Court shall
retain jurisdiction over the matter to consider any application for attorneys fees and expenses submitted by plaintiffs or their counsel. On October 24, 2002, the Court entered the order dismissing the matter.
On May 21, 2002, another purported class action lawsuit was filed with the Court of Chancery of the State of Delaware against the Company,
Engage and Robert W. Bartlett, Jr., Edward A. Bennett, Christopher M. Cuddy, George A. McMillan, Peter M. Rice, David S. Wetherell and Andrew J. Zimmon (officers and directors of Engage). The complaint alleges, among other things, breaches of
fiduciary duties. The complaint requests, among other things, that the Court (i) enjoin, preliminarily and permanently, the Merger, (ii) rescind the Merger (in the event it is consummated) or grant the plaintiffs rescissory damages, (iii) direct
that the defendants account to plaintiffs for all profits and any special benefits obtained as a result of alleged unlawful conduct, and (iv) award the plaintiffs the costs and disbursements (including attorneys and experts fees)
relating to this action. On August 2, 2002, this matter was consolidated with the related matters set forth in the preceding two paragraphs. In light of the September 9, 2002 transaction in which the Company divested all of its equity and debt
ownership interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs only, this matter as moot. The stipulated order further provides that the Court
shall retain jurisdiction over the matter to consider any application for attorneys fees and expenses submitted by plaintiffs or their counsel. On October 24, 2002, the Court entered the order dismissing the matter.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or
incorporated by reference in this report.
(b) Reports on Form 8-K
On September 10, 2002, the Company filed a Current Report on Form 8-K dated September 9, 2002 to report under Item 5
(Other Events) that the Company had divested all of its equity and debt ownership interests in Engage, Inc. No financial statements were filed with such report.
On September 12, 2002, the Company filed a Current Report on Form 8-K dated September 11, 2002 to report under Item 5 (Other Events) that the Company had
sold all of its equity and debt ownership interests in NaviSite, Inc. No financial statements were filed with such report.
On October 3, 2002, the Company filed Amendment No. 1 to Current Report on Form 8-K/A to amend the Companys Current Report on Form 8-K dated September 9, 2002 to report under Item 2 (Acquisition or Disposition of
Assets) that the Company had divested all of its equity and debt ownership interests in Engage, Inc. The following financial statements were filed with such report:
Unaudited pro forma condensed balance sheet of CMGI, Inc. as of April 30, 2002.
Unaudited pro forma condensed statement of operations of CMGI, Inc. for the nine months ended April 30, 2002.
Unaudited pro forma condensed statement of operations of CMGI, Inc. for the twelve months ended July 31, 2001.
On October 29, 2002, the Company filed a Current Report on Form 8-K dated October 29, 2002 to report under Item 9 (Regulation FD Disclosure) that the Company had submitted
to the Securities and Exchange Commission the Statements Under Oath of Principal Executive Officer and Principal Financial Officer in accordance with the Commissions Order dated June 27, 2002 (File No. 4-460). No financial statements were
filed with such report.
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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.
Date: December 16, 2002
CMGI, Inc. |
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By: |
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/S/ THOMAS
OBERDORF |
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Thomas Oberdorf |
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Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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I, George A. McMillan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CMGI, Inc.;
2. Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such
disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants
board of directors:
a) all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants
internal controls; and
6. The registrants other certifying officer and I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 16, 2002
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/S/ GEORGE A.
MCMILLAN |
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George A. McMillan |
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President and Chief Executive Officer |
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CERTIFICATION
I, Thomas Oberdorf, certify that:
1. I have reviewed this quarterly report on Form 10-Q
of CMGI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrants
other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and
report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
6. The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: December 16, 2002
By: |
|
/S/ THOMAS
OBERDORF
|
|
|
Thomas Oberdorf Chief
Financial Officer and Treasurer |
41
Item |
|
Description |
|
10.1 |
|
FY 2003 Bonus Plan for CMGI Corporate. |
|
10.2 |
|
Form of FY 2003 Bonus Plan for Operating Companies. |
|
10.3 |
|
First Amendment to Loan and Security Agreement, dated as of August 27, 2002, by and among SalesLink Corporation, InSolutions Incorporated, On-Demand
Solutions, Inc., Pacific Direct Marketing Corp., and SalesLink Mexico Holding Corp., as Borrowers, and LaSalle Bank National Association, as a Lender and as Agent for the Lenders. |
|
10.4 |
|
Consent and Second Amendment to Loan and Security Agreement, dated as of October 30, 2002, by and among SalesLink Corporation, InSolutions Incorporated,
On-Demand Solutions, Inc., Pacific Direct Marketing Corp., and SalesLink Mexico Holding Corp., as Borrowers, and LaSalle Bank National Association, as a Lender and as Agent for the Lenders. |
42
EXHIBIT 10.1
FY 2003 Bonus Plan for CMGI Corporate
Plan Objective:
To attract, motivate and retain key talent based on CMGI consolidated business
performance in addition to individual performance.
Eligibility:
Select managers and senior individual contributors who are employees of CMGI and
who have been identified as having an impact on the overall business goals and
objectives of CMGI.
Measurements & Financial Objectives:
The following are the measurements for the bonus plan and the associated
financial objectives and budget that will be used to determine business
performance:
Measurement Weighting
----------- ---------
1. CMGI Consolidated Business Performance
Financial Objectives:
. Revenue 25%
. Pro-Forma Operating Income/Loss 25%
. Cash Usage 25%
2. Individual Performance
. Based on achievement against individual goals & objectives 25%
Pro-Forma Operating Income/Loss is defined as Operating Income/Loss
excluding in-process research & development expenses, depreciation,
amortization, long-lived asset impairment and restructuring charges.
Actual business performance will be based on the annual achievement of
the defined financial objectives against the FY 2003 Plan, as approved
by the CMGI Board of Directors. CMGI reserves the right to modify the
budget and financial objectives as necessary based on business changes
associated with mergers, acquisitions, divestitures, shutdowns or other
business situations which require approval from the CMGI Board of
Directors. CMGI also reserves the right to adjust the budget based on
changes in corporate allocations.
Program Funding:
The bonus payout pool will be determined by CMGI consolidated business
performance. Exact funding for the bonus pool for CMGI Corporate will
be driven by the ability of CMGI to meet or exceed its budgeted
financial objectives as approved by CMGI's Board of Directors.
Overall business performance generally has a direct correlation to
individual performance. However, the bonus plan provides for discretion
in recognizing individual accomplishments against goals and objectives,
in addition to business performance. All employees enrolled in the FY
2003 Bonus Plan must have clearly documented goals and objectives in
order to be eligible for the Individual Performance measurement. Any
bonus payments for individual performance will be based on
accomplishments against documented individual goals & objectives,
management discretion and overall bonus pool funding.
Payout Table:
The table below will be used to determine the bonus pool based on final
CMGI consolidated business performance. A minimum performance threshold
of 80% must be achieved for pool funding associated with each specific
financial objective. The maximum pool funding based on business
performance is 200%. Every 1% increase or decrease in performance
equals 2.5% increase or decrease in funding.
- --------------------------------------------------------------------------------
Business Performance *80% 80% 90% 100% 110% 120% 130% ****140%
- --------------------------------------------------------------------------------
Pool Funding 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------------------------------------------------------------------
* Denotes less than
**** Denotes greater than or equal to
Timing of Payment:
Any earned bonus payments will be measured on an annual basis and paid
annually. Payments will be determined after all companies have
submitted their actual performance against FY 2003 Plan.
Employment Status:
In order to be eligible to receive any bonus payment under this Plan,
participants must be actively employed by CMGI at the time annual bonus
payments are made, which will be as soon as administratively possible
following the close of the fiscal year. If a participant is a new hire
during the year or had a bonus change during the year, he or she will
be eligible for a pro-rated bonus payment based on time worked during
the plan year. If a participant voluntarily leaves CMGI prior to the
time the bonus payments are made, he/she will be ineligible to receive
any bonus payment. If an employee is involuntarily terminated by CMGI,
for reasons other than cause, prior to the time the bonus payments are
made, he/she may, in certain circumstances, be eligible for
consideration for a pro-rated bonus payment based on management
discretion and time worked during the plan year. If a participant
transfers to any other CMGI controlled subsidiary, he/she will be
eligible for a pro-rated bonus payment based on management discretion
and for the time worked during the plan year.
Administration:
This plan shall be administered by the CMGI Board of Directors. The
CMGI Board of Directors reserves the right to apply its discretion to
bonus plan eligibility, overall bonus funding and payment of bonuses.
The CMGI Board of Directors reserves the right to amend or terminate
this plan at any time. The CMGI Board of Directors reserves the right
to modify the financial objectives and FY 2003 Plan at any time based
on business changes during the year. This plan shall be governed by and
construed in accordance with the laws of the Commonwealth of
Massachusetts.
EXHIBIT 10.2
Form of
FY 2003 Bonus Plan for (Operating Company)
Plan Objective:
To attract, motivate and retain key talent based on CMGI consolidated business
performance, (Operating Company) business performance and individual
performance.
Eligibility:
Select managers and senior individual contributors who are employees of
(Operating Company) and who have been identified as having an impact on the
overall business goals and objectives of (Operating Company) and CMGI.
Measurements & Financial Objectives:
The following are the measurements for the bonus plan and the associated
financial objectives and budget that will be used to determine business
performance:
Measurement Weighting
----------- ---------
1. CMGI Consolidated Business Performance 25%
Financial Objectives:
. Revenue
. Pro-Forma Operating Income/Loss
. Cash Usage
.
2. (Operating Company) Business Performance
Financial Objectives:
. Pro-Forma Operating Income/Loss 25%
. Cash Usage 25%
3. Individual Performance 25%
. Based on 1-2 accomplishments against documented Goals & Objectives
Pro-Forma Operating Income/Loss is defined as Operating Income/Loss excluding
in-process research & development expenses, depreciation, amortization,
long-lived asset impairment and restructuring charges.
Actual business performance will be based on the annual achievement of the
defined financial objectives against the FY 2003 Plan, as approved by (Operating
Company) Board of Directors and CMGI's Board of Directors, respectively. The
(Operating Company) Board of Directors reserve the right to modify the budget
and financial objectives as necessary based on business changes associated with
mergers, acquisitions, divestitures, shutdowns or other business situations,
which also requires approval from the CMGI Board of Directors. (Operating
Company) Board of Directors also reserves the right to adjust the budget based
on changes in corporate allocations.
Program Funding
The bonus payout pool will be determined by CMGI consolidated business
performance and (Operating Company) business performance. Exact funding for
the bonus pool for (Operating Company) will be driven by the ability of
(Operating Company) and CMGI to meet or exceed its budgeted financial
objectives as approved by (Operating Company)'s Board of Directors and
CMGI's Board of Directors, respectively.
Overall business performance generally has a direct correlation to
individual performance. However, the bonus plan provides for discretion in
recognizing individual accomplishments against goals and objectives, in
addition to business performance. All employees enrolled in the FY 2003
Bonus Plan must have clearly documented goals and objectives in order to be
eligible for the Individual Performance measurement. Any bonus payments for
individual performance will be based on accomplishments against documented
individual goals and objectives, management discretion and overall bonus
pool funding.
Payout Table:
The table below will be used to determine the bonus pool based on final
CMGI consolidated business performance and (Operating Company) business
performance. A minimum performance threshold of 80% must be achieved for
pool funding associated with each specific financial objective. The maximum
pool funding based on business performance is 200%. Every 1% increase or
decrease in performance equals 2.5% increase or decrease in funding.
- --------------------------------------------------------------------------------
Business Performance *80% 80% 90% 100% 110% 120% 130% ****140%
- --------------------------------------------------------------------------------
Pool Funding 0% 50% 75% 100% 125% 150% 175% 200%
- --------------------------------------------------------------------------------
* Denotes less than
**** Denotes greater than or equal to
Timing of Payment:
Any earned bonus payments will be measured on an annual basis and paid
annually. Payments will be determined after all companies have submitted
their actual performance against FY 2003 Plan.
Employment Status:
In order to be eligible to receive any bonus payment under this Plan,
participants must be actively employed by (Operating Company) at the time
annual bonus payments are made, which will be as soon as administratively
possible following the close of the fiscal year. If a participant is a new
hire during the year or had a bonus change during the year, he or she will
be eligible for a pro-rated bonus payment based on time worked during the
plan year. If a participant voluntarily leaves (Operating Company) prior to
the time the bonus payments are made, he/she will be ineligible to receive
any bonus payment. If an employee is involuntarily terminated by (Operating
Company), for reasons other than cause, prior to the time the bonus
payments are made, he/she may, in certain circumstances, be eligible for
consideration for a pro-rated bonus payment based on management discretion
and time worked during the plan year. If a participant transfers to any
other CMGI controlled subsidiary, he/she will be eligible for a pro-rated
bonus payment based on (Operating Company) management discretion and for
the time worked during the plan year.
Administration:
This plan shall be administered by the (Operating Company) Board of Directors.
The (Operating Company) Board of Directors reserves the right to apply its
discretion to bonus plan eligibility, overall bonus funding and payment of
bonuses. The (Operating Company) Board of Directors reserves the right to amend
or terminate this plan at any time. The (Operating Company) also reserves the
right to modify the financial objectives and FY 2003 Budget at any time based on
business changes during the year. This plan shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
Exhibit 10.3
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"),
dated August 27, 2002, is entered into among SALESLINK CORPORATION, a Delaware
corporation, INSOLUTIONS INCORPORATED, a Delaware corporation, ON-DEMAND
SOLUTIONS, INC., a Massachusetts corporation, PACIFIC DIRECT MARKETING CORP., a
California corporation, SALESLINK MEXICO HOLDING CORP., a Delaware corporation
(each herein called a "Borrower" and collectively, the "Borrowers"), the lenders
party hereto (herein collectively called the "Lenders" and each individually
called a "Lender") and LASALLE BANK NATIONAL ASSOCIATION, as a Lender and as
Agent for the Lenders.
W I T N E S S E T H:
WHEREAS, Borrowers and Lenders are parties to a Loan and Security
Agreement, dated October 30, 2001 (the "Existing Loan Agreement" and as the
Existing Loan Agreement is amended and modified by this Amendment, the "Amended
Loan Agreement"); and
WHEREAS, Borrowers have requested that Lenders amend the Existing Loan
Agreement in certain respects and the Lenders are willing to amend the Existing
Loan Agreement in certain respects as provided herein.
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
SECTION 1
DEFINED TERMS
1.1 Definitions. When used in this Agreement, the following terms
shall have the following meanings:
"SL Supply" shall mean SL Supply Chain Services International
Corp., a Delaware corporation.
"SL Supply Reimbursement Agreement" shall mean that certain
Reimbursement Agreement dated as of August 27, 2002 between SalesLink
and SL Supply.
"SL Supply Collateral Assignment" shall mean that certain
Collateral Assignment of Reimbursement Agreement dated as of August 27,
2002 by SalesLink in favor of Agent.
1.2 Other Definitions. Terms defined in the Existing Loan
Agreement and not otherwise defined herein are used herein as therein defined.
SECTION 2
AMENDMENTS TO EXISTING LOAN AGREEMENT
2.1 Addition of Definition. Section 1.1 of the Existing Loan
Agreement is hereby amended by adding the following definition, in proper
alphabetical order:
"SL Supply" shall mean SL Supply Chain Services International
Corp., a Delaware corporation.
2.2 Amendment to Letter of Credit Sublimit. The definition of
"Letter of Credit Sublimit" in Section 1.1 of the Existing Loan Agreement is
hereby amended by deleting the reference to the amount "$4,000,000" and
substituting therefor "$7,500,000."
2.3 Amendment to Letter of Credit Issuance Restrictions. Section
2.13(A)(ii) of the Existing Loan Agreement is hereby amended by deleting the
section in its entirety and substituting therefor the following:
"In no event shall: (a) the aggregate amount of the Letter of
Credit Obligations at any time exceed the Letter of Credit Sublimit;
(b) the sum at any time of (1) the aggregate amount of Letter of Credit
Obligations and (2) the aggregate principal balance of all outstanding
Loans issued pursuant to the Revolving Credit Facility exceed the
lesser of the then current Availability and the Borrowing Base; (c) the
expiration date of any Letter of Credit (including, without limitation,
Letters of Credit issued with an automatic "evergreen" provision
providing for renewal absent advance notice by Borrowers or the Issuing
Lender), or the date for payment of any draft presented thereunder and
accepted by the Issuing Lender, be later than the Letter of Credit
Expiry Date; provided, however, that the expiration date of a Letter of
Credit issued by Borrowers at the request or on the behalf of SL Supply
shall not have an expiration date later than one year after its
issuance and shall not include an automatic or "evergreen" provision
providing for renewal of such Letter of Credit."
2.4 Amendment to Use of Proceeds Covenant. Section 7.2(H) of the
Existing Loan Agreement is hereby amended by deleting the section in its
entirety and substituting therefore the following:
"Use of Proceeds. Use proceeds of the Loans as follows: (a)
the proceeds of Loans under the Revolving Credit Facility shall be used
to refinance certain existing debt, to finance working capital of
Borrowers and their Subsidiaries and to issue Letters of Credit to
vendors of SL Supply but in no event may proceeds of any Loan made
under the Revolving Credit Facility be (i) used to finance operations
of Borrowers or any of their Subsidiaries outside of the United States
or (ii) invested, lent or otherwise contributed to any Subsidiary of
any of the Borrowers, including, without limitation SalesLink de
Mexico, S. de R.L. de
2
C.V., a Mexico corporation, in either case until such time as Agent
shall have received evidence satisfactory to it, in its reasonable
discretion, of the creation, perfection and the relative priority of a
security interest in the Property of such Borrower or Subsidiary
located outside of the United States including, such Borrower's or
Subsidiary's Inventory and Accounts located outside of the United
States together with an opinion of counsel to that effect acceptable to
Agent in its reasonable discretion and (b) the proceeds of Term Loan
shall be used to refinance certain existing debt and to recover Capital
Expenditures made by Borrowers; but in no event may proceeds of any
Loan made under the Term Loan be used to finance operations of
Borrowers or any Subsidiaries outside of the United States or invested,
lent or otherwise contributed to any Subsidiary of any of the
Borrowers, including, without limitation SalesLink de Mexico, S. de
R.L. de C.V., a Mexico corporation. In no event may proceeds of any
Loan made either under the Revolving Credit Facility or the Term Loan
be invested, lent or otherwise contributed to Twin Solutions LLC; and"
2.4 Amendment to Negative Covenant Regarding Loans. Section 7.3(D)
of the Existing Loan Agreement is hereby amended by deleting the section in its
entirety and substituting therefore the following:
"Loans. Make any loans or other advances of money (other than
salary) to any other Borrower, or any Affiliate, officers, directors,
employees or agents of Affiliates or such Borrower or to any other
Person, except for (i) such loans or advances to employees in the
ordinary course of business consistent with past practice, loans or
advances to any other Borrower that are subordinated to the Liabilities
on terms satisfactory to Agent and (ii) the issuance of Letters of
Credit to the vendors of SL Supply;"
SECTION 3
REPRESENTATIONS AND WARRANTIES
Each Borrower hereby jointly and severally represents and warrants to
Lenders that:
3.1 Due Authorization, etc. The execution and delivery of this
Amendment, the SL Supply Reimbursement Agreement and the SL Supply Collateral
Assignment and the performance of such Borrower's obligations under the Amended
Loan Agreement are duly authorized by all necessary corporate action, do not
require any filing or registration with or approval or consent of any
governmental agency or authority, do not and will not conflict with, result in
any violation of or constitute any default under any provision of its articles
of incorporation or by-laws of that of any of its Subsidiaries or any material
agreement or other document binding upon or applicable to it or any of its
Subsidiaries (or any of their respective properties) or any material law or
governmental regulation or court decree or order applicable to it or any of its
Subsidiaries, and will not result in or require the creation or imposition of
any Lien in any of its properties or the properties of any of its Subsidiaries
pursuant to the provisions of any agreement binding upon or applicable to it or
any of its Subsidiaries.
3
3.2 Validity. This Amendment, the SL Supply Reimbursement
Agreement and the SL Supply Collateral Assignment have been duly executed and
delivered by such Borrower and by SL Supply and, together with the Amended Loan
Agreement, are the legal, valid and binding obligations of such Borrower and SL
Supply to the extent such Borrower is a party thereto, enforceable against such
Borrower in accordance with their respective terms subject, as to enforcement
only, to bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforceability of the rights of creditors generally.
3.3 Representations and Warranties. The representations and
warranties contained in Section 6 of the Existing Loan Agreement are true and
correct on the date of this Amendment, except to the extent (a) that such
representations and warranties solely relate to an earlier date or (b) changed
by circumstances permitted by the Amended Loan Agreement.
SECTION 4
CONDITIONS PRECEDENT
The amendment to the Existing Loan Agreement set forth in Section 2 of
this Amendment shall become effective upon satisfaction of all of the following
conditions precedent:
4.1 Receipt of Documents. Agent shall have received all of the
following, each in form and substance satisfactory to Agent:
(a) Amendment. A counterpart original of this Amendment duly
executed by Borrowers.
(b) Secretary's Certificate. A certificate of the secretary
or an assistant secretary of each Borrower dated the date of the
execution of this Amendment or such other date as shall be acceptable
to Agent, substantially in the form of Exhibit A to this Amendment.
(c) Certificate. A certificate dated the date of each
Borrower's execution of this Amendment and signed by the President or a
Vice President of such Borrower, substantially in the form of Exhibit B
to this Amendment.
(d) SL Supply Reimbursement Agreement. The SL Supply
Reimbursement Agreement in the form of Exhibit C to this Amendment,
duly executed by the parties thereto.
(e) SL Supply Collateral Assignment. The SL Supply
Collateral Assignment in the form of Exhibit D to this Amendment, duly
executed by the parties thereto.
(f) Other. Such other documents as Agent may reasonably
request.
4
4.2 Other Conditions. No Event of Default or Default shall have
occurred and be continuing.
SECTION 5
MISCELLANEOUS
5.1 Warranties and Absence of Defaults. In order to induce Lenders
to enter into this Agreement, each Borrower jointly and severally hereby
warrants to Lenders, as of the date of the actual execution of this Amendment,
(a) no Event of Default or Default has occurred which is continuing as of such
date and (b) the representations and warranties in Section 3 of this Amendment
are true and correct.
5.2 Documents Remain in Effect. Except as amended and modified by
this Amendment, the Existing Loan Agreement and the other documents executed
pursuant to the Existing Loan Agreement remain in full force and effect and each
Borrower hereby ratifies, adopts and confirms its representations, warranties,
agreements and covenants contained in, and obligations and liabilities under,
the Existing Loan Agreement and the other documents executed pursuant to the
Existing Loan Agreement.
5.3 Reference to Loan Agreement. On and after the effective date
of this Amendment, each reference in the Amended Loan Agreement to "this
Agreement," "hereunder," "hereof," "herein" or words of like import, and each
reference to the "Loan Agreement" in any Note and in any Loan Documents, or
other agreements, documents or other instruments executed and delivered pursuant
to the Amended Loan Agreement, shall mean and be a reference to the Amended Loan
Agreement.
5.4 Headings. Headings used in this Amendment are for convenience
of reference only, and shall not affect the construction of this Amendment.
5.5 Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
5.6 Expenses. Borrowers agree to pay on demand all costs and
expenses of Lenders (including reasonable fees, charges and disbursements of
Lenders' attorneys) in connection with the preparation, negotiation, execution,
delivery and administration of this Amendment and all other instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. In addition, Borrowers agree to pay, and save Lenders
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Amendment, the borrowings
under the Amended Loan Agreement, and the execution and delivery of any
instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. All obligations provided in this Section
5.6 shall survive any termination of this Amendment or the Amended Loan
Agreement.
5
5.7 Governing Law. This Amendment shall be a contract made under
and governed by the internal laws of the State of Illinois. Wherever possible,
each provision of this Amendment shall be interpreted in such manner as to be
effective and valid under applicable laws, but if any provision of this
Amendment shall be prohibited by or invalid under such laws, such provisions
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Amendment.
5.8 Successors. This Amendment shall be binding upon Borrowers,
Lenders and their respective successors and assigns, and shall inure to the
benefit of Borrowers, Lenders and the successors and assigns of Lenders.
[signature page attached]
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and delivered at
Chicago, Illinois as of the date first above written.
BORROWERS:
---------
SALESLINK CORPORATION,
a Delaware corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President and CEO
INSOLUTIONS INCORPORATED,
a Delaware corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
ON-DEMAND SOLUTIONS, INC.,
a Massachusetts corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
PACIFIC DIRECT MARKETING CORP.,
a California corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
SALESLINK MEXICO HOLDING CORP.,
a Delaware corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
7
LENDERS:
-------
LASALLE BANK NATIONAL ASSOCIATION,
as a Lender and as Agent
By: /s/ Meghan C. Blake
-------------------
Name: Meghan C. Blake
Title: Vice President
CITIZEN'S BANK OF MASSACHUSETTS,
as a Lender
By: /s/ Ralph L. Letner
-------------------
Name: Ralph L. Letner
Title: Vice President
8
Exhibit 10.4
CONSENT AND SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS CONSENT AND SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of October 30, 2002, is entered into among SALESLINK
CORPORATION, a Delaware corporation ("SalesLink"), INSOLUTIONS INCORPORATED, a
Delaware corporation, ON-DEMAND SOLUTIONS, INC., a Massachusetts corporation,
PACIFIC DIRECT MARKETING CORP., a California corporation, SALESLINK MEXICO
HOLDING CORP., a Delaware corporation (each herein called a "Borrower" and
collectively, the "Borrowers"), the lenders party hereto (herein collectively
called the "Lenders" and each individually called a "Lender") and LASALLE BANK
NATIONAL ASSOCIATION, as a Lender and as Agent for the Lenders.
W I T N E S S E T H:
WHEREAS, Borrowers and Lenders are parties to a Loan and Security
Agreement, dated October 30, 2001, as amended by that certain First Amendment to
Loan and Security Agreement dated as of August 27, 2002 (the "Existing Loan
Agreement" and as the Existing Loan Agreement is amended and modified by this
Amendment, the "Amended Loan Agreement");
WHEREAS, SalesLink proposes to enter into a Guaranty in the form
attached hereto as Exhibit A (the "Guaranty") in favor of LG Electronics and its
subsidiaries (the "Creditor") pursuant to which SalesLink would guarantee up to
$1,500,000 in indebtedness (the "Guaranteed Indebtedness") that Creditor may
extend to SL Supply Chain Services International Corp., and its subsidiaries
(including SalesLink International C.V., SalesLink International B.V. and
Logistix Singapore Supply Chain Management Pte. Ltd.);
WHEREAS, Section 7.3(H) of the Existing Loan Agreement contains a
covenant that restricts the Borrowers from guaranteeing or otherwise, in any
way, becoming liable with respect to the obligations or liabilities of any other
Person (the "Limitation on Guarantees");
WHEREAS, agreeing to the Guaranty by SalesLink will cause a violation
of the Limitation on Guarantees;
WHEREAS, the Borrowers have requested that the Lenders consent to the
Guarantee, notwithstanding the Limitation on Guarantees and modify the Existing
Loan Agreement in certain respects; and
WHEREAS, the Lenders are willing to consent to the Guarantee and modify
the Existing Loan Agreement in certain respects.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, it is agreed that:
SECTION 1
DEFINED TERMS
Terms defined in the Existing Loan Agreement and not otherwise defined
herein are used herein as therein defined.
SECTION 2
CONSENT
The Lenders hereby consent to SalesLink agreeing to and executing and
delivering the Guaranty, notwithstanding the Limitation on Guarantees and
anything else to the contrary contained in the Existing Loan Agreement or the
Ancillary Agreements.
SECTION 3
AMENDMENTS
3.1 Amendment to Definitions.
(a) Section 1.1 of the Existing Loan Agreement is hereby
amended by adding the following definitions, in proper alphabetical
order:
"Creditor" shall mean LG Electronics and its subsidiaries.
"Guaranteed Indebtedness" shall mean up to $1,500,000 in
indebtedness of SL Supply Chain Services International Corp., and its
subsidiaries (including SalesLink International C.V., SalesLink
International B.V. and Logistix Singapore Supply Chain Management Pte.
Ltd.) guaranteed by SalesLink Corporation under the Guaranty.
"Guaranty" shall mean that certain Guaranty by SalesLink
Corporation in favor of Creditor, dated as of October 30, 2002.
3.2 Notices. A new Section 7.2(J) is hereby inserted into the
Existing Loan Agreement as follows:
"(J) SalesLink shall give Agent prompt notice of any request
for payment under the Guaranty or any other correspondence from the
Creditor. Each such notice shall identify the amount of the requested
payment and the reason for the requested payment. Agent shall promptly
notify each Lender of receipt of such a notice."
-2-
3.3 Modification of Guaranty. A new Section 7.3(O) is hereby
inserted into the Existing Loan Agreement as follows:
"(O) SalesLink and the other Borrowers agree that none of
them shall amend, modify or extend the Guaranty or increase the
Guaranteed Indebtedness without the prior written consent of the
Lenders."
3.4 Amendment to Permitted Date. Exhibit B-1 to the Existing
Credit Agreement is hereby amended by adding the following item:
"3. The Guaranty."
SECTION 4
REPRESENTATIONS AND WARRANTIES
Each Borrower hereby jointly and severally represents and warrants to
Lenders that:
4.1 Due Authorization, etc. The execution and delivery of this
Amendment and the performance of such Borrower's obligations under the Amended
Loan Agreement are duly authorized by all necessary corporate action, do not
require any filing or registration with or approval or consent of any
governmental agency or authority, do not and will not conflict with, result in
any violation of or constitute any default under any provision of its articles
of incorporation or by-laws of that of any of its Subsidiaries or any material
agreement or other document binding upon or applicable to it or any of its
Subsidiaries (or any of their respective properties) or any material law or
governmental regulation or court decree or order applicable to it or any of its
Subsidiaries, and will not result in or require the creation or imposition of
any Lien in any of its properties or the properties of any of its Subsidiaries
pursuant to the provisions of any agreement binding upon or applicable to it or
any of its Subsidiaries.
4.2 Validity. This Amendment has been duly executed and delivered
by such Borrower and, together with the Amended Loan Agreement, are the legal,
valid and binding obligations of such Borrower to the extent such Borrower is a
party thereto, enforceable against such Borrower in accordance with their
respective terms subject, as to enforcement only, to bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforceability of the
rights of creditors generally.
4.3 Representations and Warranties. The representations and
warranties contained in Section 6 of the Existing Loan Agreement are true and
correct on the date of this Amendment, except to the extent (a) that such
representations and warranties solely relate to an earlier date or (b) changed
by circumstances permitted by the Amended Loan Agreement.
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SECTION 5
CONDITIONS PRECEDENT
The consent set forth in Section 2 and the amendments set forth in
Section 3 of this Amendment shall become effective upon satisfaction of all of
the following conditions precedent:
5.1 Receipt of Documents. Agent shall have received all of the
following, each in form and substance satisfactory to Agent:
(a) Amendment. A counterpart original of this Amendment
duly executed by Borrowers. and
(b) Other. Such other documents as Agent may reasonably
request.
5.2 Other Conditions. No Event of Default or Default shall have
occurred and be continuing.
SECTION 6
MISCELLANEOUS
6.1 Warranties and Absence of Defaults. In order to induce Lenders
to enter into this Amendment, each Borrower jointly and severally hereby
warrants to Lenders, as of the date of the actual execution of this Amendment,
(a) no Event of Default or Default has occurred which is continuing as of such
date and (b) the representations and warranties in Section 4 of this Amendment
are true and correct.
6.2 Documents Remain in Effect. Except as amended and modified by
this Amendment, the Existing Loan Agreement and the other documents executed
pursuant to the Existing Loan Agreement remain in full force and effect and each
Borrower hereby ratifies, adopts and confirms its representations, warranties,
agreements and covenants contained in, and obligations and liabilities under,
the Existing Loan Agreement and the other documents executed pursuant to the
Existing Loan Agreement.
6.3 Reference to Loan Agreement. On and after the effective date
of this Amendment, each reference in the Amended Loan Agreement to "this
Agreement," "hereunder," "hereof," "herein" or words of like import, and each
reference to the "Loan Agreement" in any Note and in any Loan Documents, or
other agreements, documents or other instruments executed and delivered pursuant
to the Amended Loan Agreement, shall mean and be a reference to the Amended Loan
Agreement.
6.4 Headings. Headings used in this Amendment are for convenience
of reference only, and shall not affect the construction of this Amendment.
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6.5 Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
6.6 Expenses. Borrowers agree to pay on demand all costs and
expenses of Lenders (including reasonable fees, charges and disbursements of
Lenders' attorneys) in connection with the preparation, negotiation, execution,
delivery and administration of this Amendment and all other instruments or
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith. In addition, Borrowers agree to pay, and save Lenders
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Amendment, the borrowings
under the Amended Loan Agreement, and the execution and delivery of any
instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. All obligations provided in this Section
6.6 shall survive any termination of this Amendment or the Amended Loan
Agreement.
6.7 Governing Law. This Amendment shall be a contract made under
and governed by the internal laws of the State of Illinois. Wherever possible,
each provision of this Amendment shall be interpreted in such manner as to be
effective and valid under applicable laws, but if any provision of this
Amendment shall be prohibited by or invalid under such laws, such provisions
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Amendment.
6.8 Successors. This Amendment shall be binding upon Borrowers,
Lenders and their respective successors and assigns, and shall inure to the
benefit of Borrowers, Lenders and the successors and assigns of Lenders.
6.9 No Additional Consent. The consent contained in Section 2
hereof shall not be deemed to be an additional consent or waiver nor shall it
establish a custom or course of dealing among Agent, Lenders and Borrowers.
[signature page attached]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and delivered at
Chicago, Illinois as of the date first above written.
BORROWERS:
---------
SALESLINK CORPORATION,
a Delaware corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President and CEO
INSOLUTIONS INCORPORATED,
a Delaware corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
ON-DEMAND SOLUTIONS, INC.,
a Massachusetts corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
PACIFIC DIRECT MARKETING CORP.,
a California corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
SALESLINK MEXICO HOLDING CORP.,
a Delaware corporation
By: /s/ Bryce C. Boothby, Jr.
-------------------------
Name: Bryce C. Boothby, Jr.
Title: President
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LENDERS:
-------
LASALLE BANK NATIONAL ASSOCIATION,
as a Lender and as Agent
By: /s/ David M. Bacon
-------------------------
Name: David M. Bacon
Title: Loan Officer
CITIZEN'S BANK OF MASSACHUSETTS,
as a Lender
By: /s/ Ralph L. Letner
-------------------------
Name: Ralph L. Letner
Title: Vice President
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