<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended April 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22846
CMGI, INC.
----------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 BRICKSTONE SQUARE, FIRST FLOOR 01810
ANDOVER, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(978) 684-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No ___
---
Number of shares outstanding of the issuer's common stock, as of June 11, 1998
COMMON STOCK, PAR VALUE $.01 PER SHARE 45,780,240
-------------------------------------- ----------
Class Number of shares outstanding
<PAGE>
CMGI, INC.
FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
Part I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
April 30, 1998 (Restated) and July 31, 1997 3
Consolidated Statements of Operations
Three and nine months ended April 30, 1998 (Restated) and 1997 4-5
Consolidated Statements of Cash Flows
Nine months ended April 30, 1998 (Restated) and 1997 6
Notes to Interim Consolidated Financial Statements (Restated) 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-25
Part II. OTHER INFORMATION
Item 2. Changes in Securities 26
Item 6. Exhibits and Reports on Form 8-K 26-27
SIGNATURE 28
</TABLE>
This Quarterly Report on Form 10-Q/A ("Report") amends and supersedes, to the
extent set forth herein, the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 1998 previously filed on June 15, 1998. As more
particularly set forth below, the following financial and related information
has been updated in connection with the filing of the restated financial
statements included herein. Additionally, all share amounts of the Registrant's
common stock contained in this Report have been retroactively adjusted to
reflect a 2-for-1 stock split effected by the Registrant in the form of a stock
dividend on January 11, 1999.
Page 2
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
---- ----
(Unaudited
ASSETS and Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,670 $ 59,762
Available-for-sale securities 1,200 5,945
Accounts and license fees receivable, less allowance for doubtful accounts 14,309 26,055
Prepaid expenses 2,656 5,738
Net current assets of discontinued operations 937 1,225
Other current assets 9,039 5,875
------------ -------------
Total current assets 76,811 104,600
Property and equipment, net 8,712 6,630
Investments in affiliates 59,263 9,160
Cost in excess of net assets of subsidiaries acquired, net of accumulated
amortization 33,430 16,680
Net non-current assets of discontinued operations 1,319 5,482
Other assets 4,361 3,696
------------ -------------
$ 183,896 $ 146,248
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 23,200 $ 22,494
Current installments of long-term debt 3,514 3,221
Accounts payable 8,533 9,830
Accrued expenses 12,012 16,405
Deferred revenues 3,851 13,665
Other current liabilities 3,946 431
------------ -------------
Total current liabilities 55,056 66,046
Long-term debt, less current installments 6,880 9,550
Long-term deferred revenues -- 5,100
Deferred income taxes 15,422 8,481
Other long-term liabilities 4,586 2,104
Minority interest 12,841 25,519
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued -- --
Common stock, $.01 par value. Authorized 100,000,000 shares; issued and
outstanding 45,376,228 shares at April 30, 1998 and 38,638,172 shares at
July 31, 1997 454 386
Additional paid-in capital 74,338 16,590
Deferred compensation (2,073) --
Net unrealized gain on available-for-sale securities -- 852
Retained earnings 16,392 11,620
------------ -------------
Total stockholders' equity 89,111 29,448
------------ -------------
$ 183,896 $ 146,248
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net revenues $ 18,145 $ 16,602 $ 55,970 $ 40,200
Operating expenses:
Cost of revenues 17,230 9,755 45,180 22,903
Research and development 3,849 4,444 14,409 13,161
In-process research and development 9,250 -- 10,125 1,312
Selling 6,203 7,348 21,951 23,898
General and administrative 5,114 3,376 13,641 10,496
-------- -------- --------- --------
Total operating expenses 41,646 24,923 105,306 71,770
-------- -------- --------- --------
Operating loss (23,501) (8,321) (49,336) (31,570)
-------- -------- --------- --------
Other income (expense):
Interest income 573 833 1,712 2,482
Interest expense (775) (505) (2,261) (970)
--------
Gain on sale of Lycos, Inc. common stock 24,850 -- 41,938 --
Gain on sale of Premiere Technologies, Inc. common
stock -- -- 4,174 --
Gain on sale of investment in TeleT Communications
-- -- -- 3,616
Gain on sale of NetCarta Corporation -- -- -- 15,111
Gain on stock issuance by Lycos, Inc. 24,294 -- 24,208 --
Equity in losses of affiliates (4,247) (1,924) (8,763) (4,013)
Minority interest -- 492 (28) 3,939
-------- -------- --------- --------
44,695 (1,104) 60,980 20,165
-------- -------- --------- --------
Income (loss) from continuing operations before
income taxes 21,194 (9,425) 11,644 (11,405)
Income tax expense (benefit) 13,125 (1,176) 11,770 1,209
-------- -------- --------- --------
Income (loss) from continuing operations 8,069 (8,249) (126) $(12,614)
Discontinued operations, net of income taxes:
Loss from operations of lists and database services
segment (147) (2,027) (79) (4,393)
Gain on sale of data warehouse product rights -- -- 4,978 --
-------- -------- --------- --------
Net income (loss) $ 7,922 $(10,276) $ 4,773 $(17,007)
======== ======== ========= ========
</TABLE>
Page 4
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (CONTINUED)
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.19 $ (0.22) $ -- $ (0.34)
Loss from discontinued operations of lists and
database services segment -- (0.05) -- (0.12)
Gain on sale of data warehouse product rights -- -- 0.12 --
----------- --------- ------- ---------
Net income (loss) $ 0.19 $ (0.27) $ 0.12 $ (0.46)
=========== ========= ======= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.17 $ (0.22) $ -- $ (0.34)
Loss from discontinued operations of lists and
database services segment -- (0.05) -- (0.12)
Gain on sale of data warehouse product rights -- -- 0.12 --
----------- --------- ------- ---------
Net income (loss) $ 0.17 $ (0.27) $ 0.12 $ (0.46)
=========== ========= ======= =========
Shares used in computing earnings (loss) per share:
Basic 42,836 38,488 40,426 37,308
=========== ========= ======= =========
Diluted 46,344 38,488 40,426 37,308
=========== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended April 30,
--------------------------------
1998 1997
---- ----
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (126) $ (12,614)
Adjustments to reconcile loss from continuing operations to net cash
used for continuing operations:
Depreciation and amortization 4,481 2,869
Deferred income taxes 6,680 (703)
Non-operating gains, net (70,320) (18,727)
Equity in losses of affiliates 8,763 4,013
Minority interest 28 (3,939)
In-process research and development 10,125 1,312
Changes in operating assets and liabilities, excluding effects from
acquisitions and divestitures of subsidiaries:
Accounts and license fees receivable (4,256) (7,118)
Prepaid expenses and other current assets (7,210) (7,362)
Accounts payable and accrued expenses 3,387 9,959
Deferred revenues 2,619 4,886
Refundable and accrued income taxes, net 8,539 (2,523)
Other assets and liabilities (235) 61
-------------- -----------
Net cash used for operating activities of continuing operations (37,525) (29,886)
Net cash used for operating activities of discontinued operations (2,675) (3,960)
-------------- -----------
Net cash used for operating activities (40,200) (33,846)
-------------- -----------
Cash flows from investing activities:
Additions to property and equipment--continuing operations (4,103) (3,821)
Additions to property and equipment--discontinued operations (114) (1,412)
Proceeds from sale of data warehouse product rights--discontinued
operations 9,543 --
Proceeds from sales of CMG@Ventures investments 53,899 19,018
Investments in affiliates and acquisitions of subsidiaries (13,913) (18,782)
Proceeds from sales or maturities of available-for-sale securities -- 11,056
Reduction in cash due to deconsolidation of Lycos, Inc. (41,017) --
Other 217 (832)
-------------- -----------
Net cash provided by investing activities 4,512 5,227
-------------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable, net of repayments 706 12,600
Proceeds from issuance of long-term debt -- 5,500
Repayments of long-term debt (2,377) --
Sale of common and treasury stock, net 23,095 7,723
Purchase of treasury stock -- (984)
Proceeds from issuance of stock by subsidiary 477 --
Other 2,695 2,135
-------------- -----------
Net cash provided by financing activities 24,596 26,974
-------------- -----------
Net decrease in cash and cash equivalents (11,092) (1,645)
Cash and cash equivalents at beginning of period 59,762 63,387
-------------- -----------
Cash and cash equivalents at end of period $ 48,670 $ 61,742
============== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by CMGI, Inc. ("CMGI" or "the Company", formerly CMG Information Services, Inc.)
in accordance with generally accepted accounting principles. In the opinion of
management, these consolidated financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. While the Company believes
that the disclosures presented are adequate to make the information not
misleading, these consolidated financial statements should be read in
conjunction with the audited financial statements and related notes for the year
ended July 31, 1997 which are contained in the Company's Annual Report on Form
10-K. The results for the three and nine month periods ended April 30, 1998 are
not necessarily indicative of the results to be expected for the full fiscal
year. Certain prior year amounts in the consolidated financial statements have
been reclassified in accordance with generally accepted accounting principles to
conform with current year presentation.
B. Restatement Related to In-Process Research and Development Expense
The accompanying consolidated financial statements have been restated to reflect
the impact of adjustments made by Lycos, Inc. (Lycos) to its previously reported
in-process research and development charges associated with Lycos' acquisitions
of Tripod, Inc. and WiseWire Corporation during CMGI's third quarter of fiscal
1998. The accompanying consolidated financial statements have also been restated
to reflect a change in the original accounting for the purchase price allocation
related to CMGI's acquisition of Accipiter, Inc. (Accipiter) in the third fiscal
quarter of 1998.
Lycos reduced the amount of its charges for in-process research and development
in connection with the above noted acquisitions and, correspondingly, increased
the amounts allocated to intangible assets by $71.3 million. During the periods
effected, CMGI's ownership in Lycos ranged from approximately 46% to
approximately 35%, and CMGI accounted for its investment in Lycos under the
equity method of accounting, whereby CMGI's portion of the net operating
performance of Lycos was reflected in equity in losses of affiliates.
Additionally, during such periods CMGI recorded gains on sales of portions of
its Lycos stock holdings, and recorded gains on issuances of stock by Lycos. As
a result of the Lycos restatements, CMGI has accordingly restated previously
reported equity in losses of Lycos, gains on sales of Lycos stock and gains on
issuance of stock by Lycos for CMGI's fiscal quarter ended April 30, 1998.
Lycos' reduction of previously recorded in-process research and development
charges resulted in higher gains on Lycos stock issuances recorded by the
Company, thereby increasing CMGI's book basis in its Lycos investment and
resulting in lower gains on sales of Lycos stock and reduced gains on Lycos
stock issuances in subsequent quarters. Related higher amortization charges
recorded by Lycos in subsequent quarters resulted in higher equity in loss of
affiliates amounts recorded by CMGI.
Upon consummation of the Accipiter acquisition in the third fiscal quarter of
1998, CMGI, in its consolidated financial statements, reported an expense of
approximately $18.0 million representing acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. On May 7, 1999, CMGI announced a voluntary restatement
of the in-process research and development charge related to the Accipiter
acquisition to address valuation methodologies suggested by the SEC in a letter
dated September 9, 1998 to the American Institute of Certified Public
Accountants SEC Regulations Committee and as clarified through subsequent
practice. Upon consideration of this guidance and additional practice that has
developed since the SEC letter was first made public, the $18.0 million charge
as previously reported has been reduced to $9.2 million and amounts allocated to
goodwill and other intangible assets have been increased from $11.5 million to
$20.3 million.
Page 7
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Restatement Related to In-Process Research and Development Expense
(continued)
The effect of the restatement on previously reported consolidated financial
statements as of and for the three and nine months ended April 30, 1998 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Statements of Operations:
Three Months Ended Nine Months Ended
April 30, 1998 April 30, 1998
-------------- --------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Cost of revenues $ 17,203 $ 17,230 $ 45,153 $ 45,180
In-process research and development expenses 18,060 9,250 18,935 10,125
General and administrative expenses 4,987 5,114 13,514 13,641
Operating loss (32,157) (23,501) (57,992) (49,336)
Gain on sale of Lycos, Inc. common stock 26,092 24,850 43,180 41,938
Gain on stock issuance by Lycos, Inc. 4,082 24,294 3,996 24,208
Equity in losses of affiliates (3,908) (4,247) (8,424) (8,763)
Income (loss) from continuing operations before income
taxes (6,093) 21,194 (15,643) 11,644
Income tax expense 5,454 13,125 4,099 11,770
Income (loss) from continuing operations (11,547) 8,069 (19,742) (126)
Net income (loss) (11,694) 7,922 (14,843) 4,773
Basic income (loss) from continuing operations per share (0.27) 0.19 (0.49) --
Basic net income (loss) per share (0.27) 0.19 (0.37) 0.12
Diluted income (loss) from continuing operations per
share (0.27) 0.17 (0.49) --
Diluted net income (loss) per share (0.27) 0.17 (0.37) 0.12
</TABLE>
<TABLE>
<CAPTION>
Balance Sheets:
April 30, 1998
--------------
As Reported Restated
----------- --------
<S> <C> <C>
Investments in affiliates $ 34,775 $ 59,263
Cost in excess of net assets of subsidiaries acquired,
net of accumulated amortization 26,616 33,430
Other assets 2,519 4,361
Total assets 150,752 183,896
Non-current deferred income tax liabilities 7,751 15,422
Minority interest 6,984 12,841
Retained earnings (deficit) (3,224) 16,392
Total stockholders' equity 69,495 89,111
</TABLE>
NOTE: All "As Reported" and "As Restated" amounts in the above table have
been retroactively adjusted to reflect the presentation of the Company's
lists and database services segment as discontinued operations and to
reflect a two-for-one stock split effected in the form of a stock
dividend by the Company on January 11, 1999.
Page 8
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
C. Deconsolidation of Lycos, Inc.
During the second fiscal quarter ended January 31, 1998, the Company sold
340,000 shares of Lycos stock on the open market and distributed 216,034 Lycos
shares to the profit members of CMG@Ventures I LLC (formerly CMG@Ventures L.P.).
Through the sale and distribution of Lycos shares by CMGI along with the impact
of increased Lycos outstanding shares, the Company's ownership percentage in
Lycos was reduced from just in excess of 50% at October 31, 1997, to below 50%
beginning in November, 1997, and to 35% as of April 30, 1998. As such, starting
in November 1997, the Company began accounting for its remaining investment in
Lycos under the equity method of accounting, rather than the consolidation
method. Prior to these events, the operating results of Lycos were consolidated
within the operating results of the Company's investment and development
segment, and the assets and liabilities of Lycos were consolidated with those of
CMG's other majority-owned subsidiaries in the Company's consolidated balance
sheets. The Company's historical quarterly consolidated operating results for
the fiscal year ended July 31, 1997 and the fiscal quarter ended October 31,
1997 included Lycos sales and operating losses as follows:
<TABLE>
<CAPTION>
(in thousands)
Fiscal Quarter Ended
--------------------
Oct. 31, 1996 Jan. 31, 1997 Apr. 30,1997 Jul. 31, 1997 Oct. 31, 1997
-------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 3,663 $ 5,004 $ 5,853 $ 7,753 $9,303
======= ======= ======= ======= ======
Operating loss $(3,341) $(2,553) $(1,753) $(1,102) $ (433)
======= ======= ======= ======= ======
</TABLE>
The Company's historical consolidated balance sheets as of July 31, 1997 and
October 31, 1997 included Lycos current assets and liabilities and total assets
and liabilities as follows:
<TABLE>
<CAPTION>
Jul. 31, 1997 Oct. 31, 1997
--------------- ---------------
<S> <C> <C>
Current assets $60,745 $63,935
======= =======
Total assets $65,419 $67,694
======= =======
Current liabilities $22,615 $25,822
======= =======
Total liabilities $27,772 $29,259
======= =======
</TABLE>
The following table contains the summarized financial information for Lycos
subsequent to deconsolidation in November, 1997:
<TABLE>
<CAPTION>
(in thousands)
Condensed Statement of Operations:
Quarter Quarter
Ended Ended
January 31, April 30,
---------- --------
1998 1998
---- ----
<S> <C> <C>
Net revenues $ 12,603 $ 15,129
======== ========
Operating loss $ (263) $(92,046)
======== ========
Net income $ 301 $(91,522)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Balance Sheet:
January 31, April 30,
1998 1998
---- ----
<S> <C> <C>
Current assets $ 65,569 $ 79,372
Noncurrent assets 6,132 45,247
--------- ---------
Total assets $ 71,701 $ 124,619
========= =========
Current liabilities $ 26,609 $ 40,145
Noncurrent liabilities 6,009 27,265
Stockholders' equity 39,083 57,209
--------- ---------
Total liabilities and stockholders' equity $ 71,701 $ 124,619
========= =========
</TABLE>
Page 9
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Sale of Engage Data Warehouse Products, Restructuring of Engage
Technologies and Discontinued Operations
From its inception in August, 1995, through July 31, 1997, the Company's wholly-
owned subsidiary, Engage Technologies, Inc. (Engage) focused on providing
traditional mailing list maintenance and database services (through its ListLab
division), and on developing data mining, querying, analysis and targeting
software products for use in large database applications. As such, the results
of Engage's operations were classified in the Company's list and database
services segment through July 31, 1997. During the first quarter of fiscal 1998,
Engage sold certain rights to its Engage.Fusion(TM) and Engage.Discover(TM) data
warehouse products to Red Brick Systems, Inc. (Red Brick) for $9.5 million and
238,160 shares of Red Brick common stock, and recorded a pre-tax gain of
$8,437,000 on the sale. These highly advanced products had been developed to
accelerate the design and creation of very large data warehouses and perform
high-end data query and analysis. Engage retained the exclusive right to sell
Engage.Fusion and Engage.Discover to interactive media markets as part of its
Engage Product Suite. Additionally, during the first quarter of fiscal year
1998, Engage transferred its ListLab division to the Company's recently formed
subsidiary, CMG Direct Corporation (CMG Direct). With the sale of these rights
and transfer of its ListLab division, Engage has narrowed its focus to the
Internet software solutions market, where it seeks to help companies
individually distinguish, understand and interact with anonymous prospects and
customers in personalized marketing, sales, and service relationships via the
Internet. As a result of this repositioning, beginning in fiscal year 1998, the
operating results of Engage are now classified in the Company's investment and
development segment.
On March 11, 1999, the Company announced the signing of a binding agreement to
sell its wholly-owned subsidiary, CMG Direct to Marketing Services Group, Inc.
At the time, CMG Direct comprised the Company's entire lists and database
services segment. As a result, the operations of the Company's lists and
database services segment have been reflected as income (loss) from discontinued
operations in the accompanying consolidated financial statements. The gain on
sale of certain data warehouse product rights by Engage in the first quarter of
fiscal 1998 has also been reflected as discontinued operations. These data
warehouse products were developed by Engage during fiscal 1996 and 1997, when
Engage was included in the Company's lists and database services segment. CMG
Direct's net assets, which included accounts receivable, prepaid expenses, net
property and equipment, net goodwill, other assets, accounts payable, accrued
expenses and other liabilities are reported as net current and non-current
assets of discontinued operations at April 30, 1998. Certain prior period
amounts in the consolidated financial statements have been reclassified in
accordance with generally accepted accounting principles to reflect the
Company's lists and database services segment as discontinued operations.
The 238,160 shares of Red Brick common stock received from the sale of Engage's
data warehouse products are subject to a one year restriction on
transferability, and have been classified in available-for-sale securities, with
a carrying value of $1,200,000, net of market value discount to reflect the
holding period requirement. The estimated fair value of these shares
approximates their carrying value as of April 30, 1998.
E. TWo-For-One Common Stock Split
On May 11, 1998 and January 11, 1999, the Company effected two-for-one common
stock splits in the form of stock dividends. Accordingly, the consolidated
financial statements have been retroactively adjusted for all periods presented
to reflect these events.
Page 10
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Sales and Distributions of Lycos and Premiere Technologies Stock
During the first nine months of fiscal 1998, CMG@Ventures I LLC (formerly
CMG@Ventures L.P.) distributed 2,333,334 of its shares of Lycos, Inc. (Lycos)
common stock to the Company, and 452,943 shares to CMG@Ventures I LLC's profit
members. During fiscal 1998, the Company filed with the SEC on Form 144 its
intent to sell 1,004,915 of its shares of Lycos stock on the open market. During
the first quarter of fiscal 1998, the Company sold 219,915 of its Lycos shares
for proceeds of $7,149,000 and recognized a pre-tax gain of $6,324,000 on the
sales. The Company sold an additional 340,000 of its Lycos shares during the
second quarter of fiscal 1998 for proceeds of $11,649,000 and recognized a pre-
tax gain of $10,764,000 on the sales. During the third quarter of fiscal 1998,
the Company sold 445,000 of its Lycos shares for proceeds of $27,546,000 and
recognized a pre-tax gain of $24,850,000 on the sales. The gains on the
Company's sales of Lycos shares are reported net of the associated interest
attributed to CMG@Ventures I LLC's profit members.
During the first quarter of fiscal year 1998, CMG@Ventures I LLC distributed
224,795 of its shares of Premiere Technologies, Inc. (Premiere) common stock to
the Company, and allocated 58,538 Premiere shares to CMG@Ventures I LLC's profit
members. The Company sold its 224,795 shares during the first quarter for
proceeds of $7,555,000, realizing a net gain of $4,174,000 on the sale.
G. Sale of CMGI Common Stock
Pursuant to a stock purchase agreement entered into as of December 19, 1997, the
Company sold 2,012,008 shares of its common stock to Intel Corporation (Intel)
on December 19, 1997, representing 4.9% of CMGI's total outstanding shares of
common stock following the sale. The CMGI shares sold to Intel were priced at
$5.435 per share, with proceeds to CMGI totaling $10,937,000. The CMGI shares
purchased by Intel are not registered under the Securities Act of 1933, as
amended. Under the terms of the agreement, Intel is entitled to two demand
registration rights as well as piggyback registration rights. Additionally,
Intel is subject to "stand still" provisions, whereby it is prohibited for a
period of three years, without the consent of CMGI, (i) from increasing its
ownership in CMGI above ten percent of CMGI's outstanding shares, (ii) from
exercising any control or influence over CMGI, and (iii) from entering into any
voting agreement with respect to its CMGI shares.
Pursuant to a stock purchase agreement entered into as of February 15, 1998, the
Company sold 1,250,000 shares of its common stock to Sumitomo Corporation
("Sumitomo") on February 27, 1998. The CMGI shares sold to Sumitomo were priced
at $8.00 per share, with proceeds to CMGI totaling $10,000,000. The CMGI shares
purchased by Sumitomo are not registered under the Securities Act of 1933, as
amended, and carry a one year restriction on transfer or sale. Under the terms
of the agreement and following the one-year period, Sumitomo is entitled to two
demand registration rights as well as piggyback registration rights.
Additionally, Sumitomo is subject to "stand still" provisions, whereby it is
prohibited for a period of three years, without the consent of CMGI, from (i)
increasing its ownership in CMGI above ten percent of CMGI's outstanding shares,
(ii) proposing or soliciting any person to propose a business combination with,
or change of control of, CMGI, (iii) making, proposing or soliciting any person
to propose a tender offer for CMGI stock, and (iv) entering into any voting
agreement with respect to its CMGI shares.
Page 11
<PAGE>
Cmgi, Inc. And Subsidiaries
Notes To Interim Consolidated Financial Statements
(Continued)
H. Acquisitions and Investments
During the first quarter of fiscal 1998, the Company, through its limited
liability company subsidiaries, CMG@Ventures I LLC and CMG@Ventures II LLC
(together CMG@Ventures), invested a total of $3,016,000 to acquire an initial
11% minority ownership interest in Chemdex Corporation (Chemdex), a developer of
an online marketplace for life science products, an initial 22% interest in
Speech Machines plc (Speech Machines), a developer of productivity-enhancing
technologies using advanced speech recognition applications, and to participate
in a follow on equity round of financing raised by GeoCities. During the first
quarter of fiscal 1998, the Company's investment in Chemdex was carried at cost
in CMGI's financial statements. The Company's investment in Speech Machines is
accounted for under the equity method. The GeoCities financing round included
participation from outside investors, and afterwards, the Company's ownership in
GeoCities remained unchanged at 41%. Also in the first quarter of fiscal year
1998, the Company, through CMG@Ventures, exercised 96,000 Lycos options for an
investment of $192,000, and provided $500,000 of bridge loan financing to
Parable LLC. CMGI had initially purchased its 96,000 Lycos options in fiscal
1997 for $456,000.
In addition, the Company formed a new wholly-owned subsidiary, THE PASSWORD
Internet Publishing Corporation (THE PASSWORD), during the first quarter of
fiscal 1998. THE PASSWORD uses the core ECHO (TM) technology developed by
InfoMation Publishing Corporation, to provide an Internet service which packages
content, commerce and community around highly specific, special interests. The
results of operations of THE PASSWORD are included in the Company's investment
and development segment.
During the second quarter of fiscal 1998, CMG@Ventures invested a total of
$2,800,000 in additional equity rounds of Sage Enterprises, Inc. (Sage
Enterprises), Speech Machines and Chemdex. As a result of these investments, the
Company's ownership interests in Sage Enterprises, Speech Machines and Chemdex
increased to 29%, 29% and just in excess of 20%, respectively. As a result of
the Company's ownership interest in Chemdex increasing from 11% to just in
excess of 20%, the Company began accounting for its investment in Chemdex on the
equity method during the second quarter. CMG@Ventures also provided bridge loan
financing totaling $1,071,000 to Parable LLC and Reel.com LLC during the second
quarter of fiscal 1998. Also in the second quarter of fiscal 1998, GeoCities
raised $25,000,000 in additional equity financing from SOFTBANK Holdings, Inc.
As a result of the additional shares issued by GeoCities, CMG@Ventures'
ownership interest in GeoCities decreased from 41% to 35%.
The acquisition accounting and valuation for the total of $1,800,000 invested in
Speech Machines by the Company during the first and second quarters of fiscal
1998 resulted in a total of $875,000 being identified as in-process research and
development, which has been expensed because technological feasibility had not
been reached at the dates the investments were made.
During the third quarter of fiscal 1998, CMG@Ventures participated in follow-on
rounds raised by KOZ and Sage Enterprises, investing a total of $2,164,000,
which resulted in a net reduction of ownership in KOZ from 15% to 14%, and no
change in CMG@Ventures' 29% ownership in Sage Enterprises. CMG@Ventures also
invested a total of $2,117,000 in a new round raised by Parable, including the
conversion of $1,222,000 of previously provided bridge loans, resulting in a net
reduction in CMG@Ventures ownership in Parable from 46% to 42%. Also during the
third quarter, CMG@Ventures invested $2 million to acquire an initial 14%
ownership in Select Technologies, a traditional ticketing software company that
is developing software for a distributed transaction network for purchasing
tickets over the Internet, and invested $1 million to acquire an initial 7%
ownership in Critical Path. Critical Path supplies carrier-class email hosting
to ISPs, Web hosting companies, supersites, and corporate customers.
CMG@Ventures also provided $447,000 in additional bridge loan financing to
Reel.com during the third quarter.
Page 12
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Acquisitions and Investments (Continued)
During April, 1998, the Company acquired Accipiter, Inc. (Accipiter), a company
specializing in Internet advertising management solutions, in exchange for
2,527,384 shares of the Company's common stock. The shares issued by the Company
in the acquisition of Accipiter are not registered under the Securities Act of
1933 and are subject to restrictions on transferability for periods ranging from
six to twenty-four months. The total purchase price for Accipiter was valued at
$30,178,000, including costs of acquisition of approximately $198,000. The value
of the Company's shares included in the purchase price was recorded net of a 15%
market value discount, based on an independent appraisal, to reflect the
restrictions on transferability.
Approximately $2.2 million of deferred compensation was recorded at the time of
acquisition relating to approximately 43,000 of the Company's common shares
issued to employee stockholders of Accipiter which are being held in escrow.
These shares are excluded from the purchase price because their ultimate
issuance is contingent upon the retention of the employees and the achievement
of certain performance criteria by Accipiter during the escrow period. Deferred
compensation expense will be recognized over the two-year period of the escrow
agreement.
The acquisition of Accipiter has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon their fair values at the
date of acquisition. Of the purchase price, $18,023,000 was allocated to
goodwill, which will be amortized on a straight line basis over five years and
$9,200,000 was allocated to in-process research and development which has been
charged to operations during the quarter ended April 30, 1998.
<TABLE>
<S> <C>
The net purchase price was allocated as follows:
Working capital, including cash acquired $ 811,000
Property, plant and equipment 262,000
Other assets 2,000
In-process research and development 9,200,000
Goodwill 18,023,000
Developed technology 1,600,000
Other identifiable intangible assets 280,000
-----------
Purchase price $30,178,000
===========
</TABLE>
I. Notes Payable
On January 20, 1998, the Company renewed its collateralized corporate borrowing
for an additional term of one year and increased the outstanding principal
amount under this facility from $10,000,000 to $20,000,000. This borrowing is
secured by 1,255,789 of the Company's shares of Lycos common stock, with
interest payable quarterly at a rate of LIBOR plus 1.75%. Under this agreement,
the Company could become subject to additional collateral requirements under
certain circumstances. The Company has entered into an interest rate swap
arrangement that effectively fixed the interest rate on this $20 million debt at
a rate of 7.40% beginning April 20, 1998 through January 20, 1999. At July 31,
1997, the Company's credit agreements included a $10 million corporate line of
credit facility, which has subsequently lapsed, and the Company has not pursued
renewal. Notes payable at April 30, 1998 also includes $3,200,000 owed by the
Company's subsidiary, SalesLink Corporation, under its line of credit facility.
Page 13
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Earnings Per Share
During the quarter ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No.
128 required the Company to change the method formerly used to compute earnings
per share and to restate all prior periods presented. Basic earnings per share
is computed based on the weighted average number of common shares outstanding
during the period. Weighted average common equivalent shares outstanding during
the period, using the "treasury stock method", are included in the calculation
of diluted earnings per share only when the effect of their inclusion would be
dilutive. Accordingly, since the Company reported a loss from continuing
operations for the nine months ended April 30, 1998 and the three and nine month
periods ended April 30, 1997, common equivalent shares have not been included in
the calculation of diluted earnings per share for these periods.
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 and nine months ended
April 30, 1998 and 1997.
The following table sets forth the reconciliation of the denominators for the
earnings per share calculations per SFAS No. 128:
<TABLE>
<CAPTION>
(in thousands)
Three months ended April 30, Nine months ended April 30,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common shares 42,836 38,488 40,426 37,308
outstanding - basic
Weighted average number of dilutive common stock
equivalents outstanding 3,508 -- -- --
------ ------ ------ ------
Weighted average number of common shares
outstanding -- diluted 46,344 38,488 40,426 37,308
====== ====== ====== ======
</TABLE>
K. Consolidated Statements of Cash Flows Supplemental Information
<TABLE>
<CAPTION>
Nine months ended April 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $2,034 $ 757
====== =====
Income taxes $ 517 $ 799
====== =====
</TABLE>
Page 14
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
L. Segment Information
The Company's continuing operations are classified in two primary business
segments: (i) investment and development and (ii) fulfillment services. The
Company's lists and database services segment is reported as discontinued
operations (see Note D). Summarized financial information by business segment
for continuing operations is as follows:
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Investment and development $ 2,208,000 $ 6,015,000 $ 14,539,000 $ 15,454,000
Fulfillment services 15,937,000 10,587,000 41,431,000 24,746,000
------------ ----------- ------------ ------------
$ 18,145,000 $16,602,000 $ 55,970,000 $ 40,200,000
============ =========== ============ ============
Operating income (loss):
Investment and development $(25,048,000) $(9,481,000) $(53,093,000) $(34,827,000)
Fulfillment services 1,547,000 1,160,000 3,757,000 3,257,000
------------ ----------- ------------ ------------
$(23,501,000) $(8,321,000) $(49,336,000) $(31,570,000)
============ =========== ============ ============
</TABLE>
M. Subsequent Events
In June, 1998, Lycos completed a secondary public offering of 2,250,000 shares
of its common stock, consisting of 2,000,000 shares sold by Lycos and 250,000
shares sold by CMGI. Total proceeds to Lycos and CMGI, net of underwriting
discounts and commissions, were $95,260,000 and $11,907,500, respectively. In
addition to a significant gain on the sale of its Lycos shares in the offering,
CMGI expects to record a significant gain on the issuance of stock by Lycos in
the offering during its fourth quarter ended July 31, 1998.
In May, 1998, CMG @Ventures invested a total of $4.6 million, including the
conversion of $796,000 of bridge loans, to participate in a financing round
raised by Reel.com and to acquire shares from other Reel.com shareholders. As a
result of this investment, CMG@Ventures ownership in Reel.com increased from 31%
to 36%. CMG@Ventures also invested an additional $3 million as part of a $16
million equity round raised by Silknet, which resulted in CMG@Ventures
maintaining its 23% ownership interest in Silknet. Also, CMG@Ventures invested
$1.9 million in an additional financing round raised by Chemdex. CMG@Ventures'
ownership in Chemdex was reduced from just in excess of 20% to 16% and, as a
result, beginning in the fourth quarter, the Company will no longer apply the
equity method of accounting for its investment in Chemdex.
In June, 1998, CMG@Ventures invested $2 million for an initial 24% ownership
interest in Mother Nature's General Store, Inc., a leading e-commerce company in
the vitamin, natural supplement market.
On June 15, 1998, the Company announced that it had entered into a definitive
agreement to acquire InSolutions Incorporated (InSolutions), a provider of
turnkey services, which include supply chain management, inventory management,
manufacturing assembly, CD-ROM duplication services and demonstration disks. The
acquisition is preliminarily valued at $17 million. Upon completion of the
acquisition, InSolutions will become a wholly-owned subsidiary of the Company
and its operating results will be included in the Company's fulfillment services
segment. The transaction will be accounted for as a purchase.
Page 15
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in this
section and elsewhere in this report, and the risks discussed in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section included in the Company's Annual Report on Form 10-K for the
year ended July 31, 1997.
Restatement Related to In-Process Research and Development Expense
The accompanying consolidated financial statements have been restated to
reflect the impact of adjustments made by Lycos, Inc. (Lycos) to its previously
reported in-process research and development charges associated with Lycos'
acquisitions of Tripod, Inc. and WiseWire Corporation during CMGI's third
quarter of fiscal 1998. The accompanying consolidated financial statements have
also been restated to reflect a change in the original accounting for the
purchase price allocation related to CMGI's acquisition of Accipiter, Inc.
(Accipiter) in the third fiscal quarter of 1998.
Lycos reduced the amount of its charges for in-process research and
development in connection with the above noted acquisitions and,
correspondingly, increased the amounts allocated to intangible assets by $71.3
million. During the periods effected, CMGI's ownership in Lycos ranged from
approximately 46% to approximately 35%, and CMGI accounted for its investment in
Lycos under the equity method of accounting, whereby CMGI's portion of the net
operating performance of Lycos was reflected in equity in losses of affiliates.
Additionally, during such periods CMGI recorded gains on sales of portions of
its Lycos stock holdings, and recorded gains on issuances of stock by Lycos. As
a result of the Lycos restatements, CMGI has accordingly restated previously
reported equity in losses of Lycos, gains on sales of Lycos stock and gains on
issuance of stock by Lycos for CMGI's fiscal quarter ended April 30, 1998.
Lycos' reduction of previously recorded in-process research and development
charges resulted in higher gains on Lycos stock issuances recorded by the
Company, thereby increasing CMGI's book basis in its Lycos investment and
resulting in lower gains on sales of Lycos stock and reduced gains on Lycos
stock issuances in subsequent quarters. Related higher amortization charges
recorded by Lycos in subsequent quarters resulted in higher equity in loss of
affiliates amounts recorded by CMGI.
Upon consummation of the Accipiter acquisition in the third fiscal quarter
of 1998, CMGI, in its consolidated financial statements, reported an expense of
approximately $18.0 million representing acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. On May 7, 1999, CMGI announced a voluntary restatement
of the in-process research and development charge related to the Accipiter
acquisition to address valuation methodologies suggested by the SEC in a letter
dated September 9, 1998 to the American Institute of Certified Public
Accountants SEC Regulations Committee and as clarified through subsequent
practice. Upon consideration of this guidance and additional practice that has
developed since the SEC letter was first made public, the $18.0 million charge
as previously reported has been reduced to $9.2 million and amounts allocated to
goodwill and other intangible assets have been increased from $11.5 million to
$20.3 million.
Page 16
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The effect of the restatement on previously reported consolidated financial
statements as of and for the three and nine months ended April 30, 1998 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Statements of Operations:
Three Months Ended Nine Months Ended
April 30, 1998 April 30, 1998
-------------- --------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Cost of revenues $ 17,203 $ 17,230 $ 45,153 $ 45,180
In-process research and development expenses 18,060 9,250 18,935 10,125
General and administrative expenses 4,987 5,114 13,514 13,641
Operating loss (32,157) (23,501) (57,992) (49,336)
Gain on sale of Lycos, Inc. common stock 26,092 24,850 43,180 41,938
Gain on stock issuance by Lycos, Inc. 4,082 24,294 3,996 24,208
Equity in losses of affiliates (3,908) (4,247) (8,424) (8,763)
Income (loss) from continuing operations before income
taxes (6,093) 21,194 (15,643) 11,644
Income tax expense 5,454 13,125 4,099 11,770
Income (loss) from continuing operations (11,547) 8,069 (19,742) (126)
Net income (loss) (11,694) 7,922 (14,843) 4,773
Basic income (loss) from continuing operations per share (0.27) 0.19 (0.49) --
Basic net income (loss) per share (0.27) 0.19 (0.37) 0.12
Diluted income (loss) from continuing operations per
share (0.27) 0.17 (0.49) --
Diluted net income (loss) per share (0.27) 0.17 (0.37) 0.12
</TABLE>
<TABLE>
<CAPTION>
Balance Sheets:
April 30, 1998
--------------
As Reported Restated
----------- --------
<S> <C> <C>
Investments in affiliates $ 34,775 $ 59,263
Cost in excess of net assets of subsidiaries acquired,
net of accumulated amortization 26,616 33,430
Other assets 2,519 4,361
Total assets 150,752 183,896
Non-current deferred income tax liabilities 7,751 15,422
Minority interest 6,984 12,841
Retained earnings (deficit) (3,224) 16,392
Total stockholders' equity 69,495 89,111
</TABLE>
NOTE: All "As Reported" and "As Restated" amounts in the above table have
been retroactively adjusted to reflect the presentation of the Company's
lists and database services segment as discontinued operations and to
reflect a two-for-one stock split effected in the form of a stock
dividend by the Company on January 11, 1999.
Page 17
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Deconsolidation of Lycos, Inc, Beginning November, 1997
During the second fiscal quarter ended January 31, 1998, the Company sold
340,000 shares of Lycos stock on the open market and distributed 216,034 Lycos
shares to the profit members of CMG@Ventures I LLC (formerly CMG@Ventures,
L.P.). Through the sale and distribution of Lycos shares, the Company's
ownership percentage in Lycos was reduced from just in excess of 50% at October
31, 1997, to below 50% beginning in November, 1997. As such, starting in
November, 1997, the Company began accounting for its remaining investment in
Lycos under the equity method of accounting, rather than the consolidation
method. Prior to these events, the operating results of Lycos were consolidated
within the operating results of the Company's investment and development
segment, and the assets and liabilities of Lycos were consolidated with those of
CMGI's other majority-owned subsidiaries in the Company's consolidated balance
sheets. The Company's historical quarterly consolidated operating results for
the fiscal year ended July 31, 1997 and the fiscal quarter ended October 31,
1997 included Lycos sales and operating losses as follows:
<TABLE>
<CAPTION>
(in thousands)
Fiscal Quarter ended
---------------------
Oct. 31, 1996 Jan. 31, 1997 Apr. 30,1997 Jul. 31, 1997 Oct. 31, 1997
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 3,663 $ 5,004 $ 5,853 $ 7,753 $9,303
======= ======= ======= ======= ======
Operating loss $(3,341) $(2,553) $(1,753) $(1,102) $ (433)
======= ======= ======= ======= ======
</TABLE>
The Company's historical consolidated Balance Sheets as of July 31, 1997
and October 31, 1997 included Lycos current assets and liabilities and total
assets and liabilities as follows:
<TABLE>
<CAPTION>
Jul. 31, 1997 Oct. 31, 1997
------------- -------------
<S> <C> <C>
Current assets $60,745 $63,935
======= =======
Total assets $65,419 $67,694
======= =======
Current liabilities $22,615 $25,822
======= =======
Total liabilities $27,772 $29,259
======= =======
</TABLE>
Sale of Engage Data Warehouse Products, Restructuring of Engage Technologies and
Discontinued Operations
From its inception in August, 1995, through July 31, 1997, the Company's
wholly-owned subsidiary, Engage Technologies, Inc. (Engage) focused on providing
traditional mailing list maintenance and database services (through its ListLab
division), and on developing data mining, querying, analysis and targeting
software products for use in large database applications. As such, the results
of Engage's operations were classified in the Company's list and database
services segment. During the first quarter of fiscal 1998, Engage sold certain
rights to its Engage.Fusion(TM) and Engage.Discover(TM) data warehouse products
to Red Brick Systems, Inc. (Red Brick) for $9.5 million and 238,160 shares of
Red Brick common stock. These highly advanced products had been developed to
accelerate the design and creation of very large data warehouses and perform
high-end data query and analysis. Engage retained the exclusive right to sell
Engage.Fusion and Engage.Discover to interactive media markets as part of its
Engage Product Suite. Additionally, during the first quarter of fiscal year
1998, Engage transferred its ListLab division to the Company's recently formed
subsidiary, CMG Direct Corporation (CMG Direct). With the sale of these rights
and transfer of its ListLab division, Engage narrowed its focus to the Internet
software solutions market, where it seeks to help companies individually
distinguish, understand and interact with anonymous prospects and customers in
personalized marketing, sales, and service relationships via the Internet. As a
result of this repositioning, beginning in fiscal year 1998, the operating
results of Engage are now classified in the Company's investment and development
segment.
On March 11, 1999, the Company announced the signing of a binding agreement
to sell its wholly-owned subsidiary, CMG Direct to Marketing Services Group,
Inc. At the time, CMG Direct comprised the Company's entire lists and database
services segment. As a result, the operations of the Company's lists and
database services segment have been reflected as income (loss) from discontinued
operations in the accompanying consolidated financial statements. The gain on
sale of certain data warehouse product rights by Engage in the first quarter of
fiscal 1998 has also been reflected as discontinued operations. These data
warehouse products were developed by Engage during fiscal 1996 and 1997, when
Engage was included in the
Page 18
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Company's lists and database services segment. CMG Direct's net assets, which
included accounts receivable, prepaid expenses, net property and equipment, net
goodwill, other assets, accounts payable, accrued expenses and other liabilities
are reported as net current and non-current assets of discontinued operations at
April 30, 1998. Certain prior period amounts in the consolidated financial
statements have been reclassified in accordance with generally accepted
accounting principles to reflect the Company's lists and database services
segment as discontinued operations.
Three months ended April 30, 1998 compared to three months ended April 30, 1997
Net revenues for the Company's third fiscal quarter ended April 30, 1998
increased $1,543,000, or 9%, to $18,145,000 from $16,602,000 for the quarter
ended April 30, 1997. The net increase reflects an increase of $5,350,000 for
the Company's fulfillment services segment, partially offset by a decrease of
$3,807,000 in the Company's investment and development segment. The increase in
fulfillment services segment revenues primarily reflects the addition of new
customers and additional turnkey business from existing customers. The
investment and development segment decrease primarily reflects the impact of
deconsolidating Lycos, which comprised $5,853,000 of prior year third quarter
net revenues, offset by the impact of consolidating Vicinity's results beginning
in the fourth quarter of fiscal year 1997, and the addition of early stage
revenues from Engage, NaviSite, Planet Direct and ADSmart. Investment and
development segment fiscal 1998 net revenues also include the addition of
approximately one month's operating results for Accipiter, which was acquired
April 9, 1998. The Company believes that its portfolio of companies will
continue to develop and introduce their products commercially, actively pursue
increased revenues from new and existing customers, and look to expand into new
market opportunities. Therefore, absent the impact of the change in accounting
for Lycos, the Company expects to report future revenue growth.
Cost of revenues increased $7,475,000, or 77%, to $17,230,000 in the third
quarter of fiscal 1998 from $9,755,000 for the corresponding period in fiscal
1997, reflecting increases of $4,319,000 and $3,156,000 in the fulfillment
services and investment and development segments, respectively. In the
fulfillment services segment, cost of revenues increased as a result of revenue
increases, and increased as a percentage of net revenues to 77% in the third
quarter of fiscal 1998 from 76% in the third quarter of fiscal 1997, due to a
shift in mix of services from literature fulfillment towards lower margin
turnkey business. The increase in the investment and development segment
primarily resulted from the commencement of operations at the Company's
NaviSite, Engage, Planet Direct and ADSmart subsidiaries, and the impact of
consolidating Vicinity beginning in fourth quarter fiscal 1997, offset by the
impact of deconsolidating Lycos. Lycos comprised $1,219,000 of prior year third
quarter cost of revenues. The start up of Internet operations at NaviSite,
Engage, Planet Direct and ADSmart, with minimal revenues during early stages, is
the primary reason cost of revenues as a percentage of revenues in the
investment and development segment increased from 29% in the third quarter of
fiscal 1997 to 222% in the third quarter of fiscal 1998.
Research and development expenses decreased $595,000, or 13%, to $3,849,000
in the quarter ended April 30, 1998 from $4,444,000 in the prior year's third
quarter, reflecting a decrease of $595,000 in the investment and development
segment. Investment and development segment results include a $1,167,000
reduction from deconsolidating Lycos and reduced development costs associated
with the progression of Planet Direct from initial development stages towards
commercial operations. Partially offsetting such reductions, investment and
development segment results include increases associated with the inclusion of
Engage, expenditures for the development of NaviSite's NaviNet technology
platform, and the impact of consolidating Vicinity's results beginning in the
fourth quarter of fiscal year 1997. In addition, the Company recorded $9,250,000
of in-process research and development expense during the third quarter of
fiscal 1998, principally related to its acquisition of Accipiter on April 9,
1998 (See further discussion in "In-Process Research and Development Charge
Related to Acquisition of Accipiter, Inc." below). The Company anticipates it
will continue to devote substantial resources to product development and that,
absent the impact of the Company's change in accounting for Lycos, these costs
may substantially increase in future periods.
Page 19
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling expenses decreased $1,145,000, or 16% to $6,203,000 in the third
quarter ended April 30, 1998 from $7,348,000 for the corresponding period in
fiscal 1997, primarily reflecting a decrease of $1,379,000 in the investment and
development segment. Investment and development segment results include a
$4,540,000 reduction from deconsolidating Lycos and reduced marketing expenses
at Blaxxun. These decreases were partially offset by increased sales and
marketing expenses related to several product launches, continued growth of
sales and marketing infrastructures, and the addition of Engage to this segment.
Selling expenses decreased as a percentage of net revenues to 34% in the third
quarter of fiscal 1998 from 44% for the corresponding period in fiscal 1997,
primarily reflecting the impacts of the deconsolidation of Lycos and of
increased revenues in the Company's fulfillment services segment. As the
Company's subsidiaries continue to introduce new products and expand sales, the
Company expects to incur significant promotional expenses, as well as expenses
related to the hiring of additional sales and marketing personnel and increased
advertising expenses, and anticipates that, absent the impact of the Company's
change in accounting for Lycos, these costs will substantially increase in
future periods.
General and administrative expenses increased $1,738,000, or 51%, to
$5,114,000 in the third quarter of fiscal 1998 from $3,376,000 for the
corresponding period in fiscal 1997. The investment and development segment
experienced a net increase of $1,328,000, reflecting increases due to the
building of management infrastructures in several of the Company's Internet
investments and the additions of Engage and Accipiter to this segment, offset by
a $682,000 reduction from deconsolidating Lycos. General and administrative
expenses in the fulfillment services segment increased by $410,000 in comparison
with last year's third quarter, reflecting the addition of management and
infrastructure in support of growth in the segment. General and administrative
expenses increased as a percentage of net sales to 28% in the third quarter of
fiscal 1998 from 20% in the third quarter of fiscal 1997. Absent the impact of
the Company's change in accounting for its investment in Lycos, the Company
anticipates that its general and administrative expenses will continue to
increase significantly as the Company's subsidiaries, particularly in the
investment and development segment, continue to grow and expand their
administrative staffs and infrastructures.
Gain on sale of Lycos, Inc. common stock reflects the Company's net gain
realized on the sale of 445,000 shares of Lycos stock. Gain on stock issuance by
Lycos, Inc. resulted primarily from the issuance of stock by Lycos for the
acquisitions of Tripod and Wise Wire. Interest income decreased $260,000
compared with the third quarter of fiscal 1997, reflecting a $479,000 decrease
from the deconsolidation of Lycos, partially offset by increased income
associated with higher average corporate cash equivalent balances during the
quarter. Interest expense increased $270,000 compared with the third quarter of
fiscal 1997, primarily due to higher average corporate borrowings related to the
Company's $10 million collateralized corporate note payable which was issued in
January, 1997 and increased to $20 million in January, 1998.
Equity in losses of affiliates resulted from the Company's ownership in
certain investments that are accounted for under the equity method. Under the
equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates for the quarter ended
April 30, 1998 include the results from the Company's minority ownership in
Parable, Silknet, GeoCities, Reel.com, Speech Machines, Lycos, Chemdex, and Sage
Enterprises. Equity in losses of affiliates for the quarter ended April 30, 1997
included the results from the Company's minority ownership in Vicinity
Corporation, Ikonic Interactive, Inc., Parable, Silknet, and GeoCities. The
Company expects its portfolio companies to continue to invest in development of
their products and services, and to recognize operating losses, which will
result in future charges recorded by the Company to reflect its proportionate
share of such losses.
Page 20
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Minority interest decreased to zero in the third quarter of fiscal 1998
from $492,000 in the corresponding period of fiscal 1997, primarily reflecting
the deconsolidation of Lycos results beginning in the second quarter of fiscal
year 1998.
Income tax expense in the third quarter of fiscal 1998 was $13,125,000.
Exclusive of taxes provided for significant, unusual or extraordinary items that
will be reported separately, the Company provides for income taxes on a year to
date basis at an effective rate based upon its estimate of full year earnings.
In determining the Company's effective rate for the third quarter of fiscal
1998, in-process research and development, gain on sale of Lycos, Inc. common
stock and gain on stock issuance by Lycos, Inc. were excluded. The Company's
effective tax rate differs materially from the federal statutory rate primarily
due to valuation allowances provided on certain deferred tax assets, the
provision for state income taxes, and non-deductible goodwill amortization and
in-process research and development charges.
Loss from discontinued operations of lists and database services segment,
net of income taxes, decreased $1,880,000 to ($147,000) in the third quarter of
fiscal 1998 from ($2,027,000) in the third quarter of fiscal 1997 as a result of
the transfer of Engage to the Company's investment and development segment.
Nine months ended April 30, 1998 compared to nine months ended April 30, 1997
Net revenues increased $15,770,000, or 39%, to $55,970,000 for the nine
months ended April 30, 1998 from $40,200,000 for the corresponding period in
fiscal 1997. The net increase reflects an increase of $16,685,000 in the
Company's fulfillment services segment, partially offset by a decrease of
$915,000 for the Company's investment and development segment. The increase in
fulfillment services segment revenues reflects the acquisition of Pacific Link
on October 24, 1996 and the subsequent addition of new customers and new turnkey
business from existing customers. The investment and development segment results
include $5,197,000 less consolidated revenues from the three months Lycos was
consolidated in fiscal 1998 compared with the nine months for which Lycos
revenues were included in prior year. Largely offsetting such decreases was the
impact of consolidating Vicinity's results beginning in the fourth quarter of
fiscal year 1997, and commencement of operations at the Company's NaviSite,
Engage, Planet Direct and ADSmart subsidiaries. The Company believes that its
portfolio of companies will continue to develop and introduce their products
commercially, actively pursue increased revenues from new and existing
customers, and look to expand into new market opportunities. Therefore, absent
the impact of the change in accounting for Lycos, the Company expects to report
future revenue growth.
Cost of revenues increased $22,277,000, or 97%, to $45,180,000 for the nine
months ended April 30, 1998 from $22,903,000 for the corresponding period in
fiscal 1997, reflecting increases of $14,070,000 and $8,207,000 in the
fulfillment services and investment and development segments, respectively. In
the fulfillment services segment, cost of revenues increased as a result of
revenue increases, and increased as a percentage of net revenues to 77% in the
first nine months of fiscal 1998 from 72% in the corresponding period in fiscal
1997, due to a shift in mix of services from literature fulfillment towards
lower margin turnkey business. The increase in the investment and development
segment primarily resulted from the commencement of operations at the Company's
NaviSite, Engage, Planet Direct and ADSmart subsidiaries, and the impact of
consolidating Vicinity beginning in fourth quarter fiscal 1997, partially offset
by $1,258,000 lower cost of sales resulting from deconsolidating Lycos beginning
in the second quarter of fiscal year 1998. The start up of Internet operations
at NaviSite, Engage, Planet Direct and ADSmart, with minimal revenues during
early stages, is the primary reason cost of revenues as a percentage of revenues
in the investment and development segment increased from 33% in the first nine
months of fiscal 1997 to 91% in the first nine months of fiscal 1998.
Page 21
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Research and development expenses increased $1,248,000, or 9%, to
$14,409,000 in the nine months ended April 30, 1998 from $13,161,000 for the
corresponding fiscal 1997 period, primarily reflecting an increase of $1,280,000
in the Company's investment and development segment. Investment and development
segment results include increases associated with the inclusion of Engage,
expenditures for the development of NaviSite's NaviNet technology platform, the
impact of consolidating Vicinity's results beginning in the fourth quarter of
fiscal year 1997, and increased development costs for InfoMation and The
Password. Partially offsetting such increases, investment and development
segment results include a $1,675,000 reduction from deconsolidating Lycos,
reduced development costs associated with the progression of Planet Direct,
ADSmart and Blaxxun from initial development stages towards commercial
operations, and reductions associated with NetCarta Corporation, whose results
were included during the first half of fiscal year 1997, but have been excluded
since the sale of NetCarta to Microsoft in January, 1997. In addition, the
Company recorded $10,125,000 of in-process research and development expense
during the first nine months of fiscal 1998 related to the Company's acquisition
of Accipiter (See further discussion in "In-Process Research and Development
Charge Related to Acquisition of Accipiter, Inc." below) and investments in
Speech Machines, Chemdex and Sage Enterprises compared to $1,312,000 in the
first nine months of fiscal 1997 related to investments in Parable and Silknet.
The Company anticipates it will continue to devote substantial resources to
product development and that, absent the impact of the Company's change in
accounting for Lycos, these costs may substantially increase in future periods.
Selling expenses decreased $1,947,000, or 8% to $21,951,000 for the nine
months ended April 30, 1998 from $23,898,000 for the corresponding period in
fiscal 1997. The net decrease reflects a decrease of $2,676,000 in the Company's
investment and development segment, partially offset by an increase of $729,000
for the Company's fulfillment services segment. Investment and development
segment results include a $8,433,000 reduction from deconsolidating Lycos,
reduced marketing expenses at Blaxxun, and reductions associated with NetCarta
Corporation, FreeMark, and GeoCities, whose results were included during part of
fiscal year 1997, but have not been included in fiscal 1998. These decreases
were partially offset by increased sales and marketing expenses related to
several product launches, continued growth of sales and marketing
infrastructures, the addition of Engage to this segment, and the impact of
consolidating Vicinity's results beginning in the fourth quarter of fiscal year
1997. The fulfillment services segment increase primarily reflects the
acquisition of Pacific Link on October 24, 1996. Selling expenses decreased as a
percentage of net revenues to 39% in the first nine months of fiscal 1998 from
59% for the corresponding period in fiscal 1997, primarily reflecting the
impacts of the deconsolidation of Lycos and of increased revenues in the
Company's fulfillment services segment. As the Company's subsidiaries continue
to introduce new products and expand sales, the Company expects to incur
significant promotional expenses, as well as expenses related to the hiring of
additional sales and marketing personnel and increased advertising expenses, and
anticipates that, absent the impact of the Company's change in accounting for
Lycos, these costs will substantially increase in future periods.
General and administrative expenses increased $3,145,000, or 30% to
$13,641,000 for nine months ended April 30, 1998 from $10,496,000 for the
corresponding period in fiscal 1997. The net increase reflects increases of
$1,727,000 and $1,418,000 in the Company's investment and development, and
fulfillment services segments, respectively. Investment and development segment
results include increases due to the building of management infrastructures in
several of the Company's Internet investments, the addition of Engage and
Accipiter to this segment, and the impact of consolidating Vicinity's results
beginning in the fourth quarter of fiscal year 1997. Such increases were
partially offset by a $1,056,000 reduction from deconsolidating Lycos, cost
reductions at Blaxxun, and reductions associated with NetCarta Corporation,
FreeMark, and GeoCities, whose results were included during part of fiscal year
1997, but have not been included in fiscal 1998. The fulfillment services
segment increase reflects the acquisition of Pacific Link on October 24, 1996
and the addition of management and infrastructure in support of growth in the
segment. General and administrative expenses decreased as a percentage of net
revenues to 24% in the first nine months of fiscal 1998 from 26% for the
corresponding period in fiscal 1997, primarily reflecting the impact of
increased revenues in the Company's fulfillment services segment. Absent the
impact of the Company's change in accounting for Lycos, the Company anticipates
that its general and administrative expenses will continue to increase
significantly as the Company's subsidiaries, particularly in the investment and
development segment, continue to grow and expand their administrative staffs and
infrastructures.
Page 22
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Gain on sale of Lycos, Inc. common stock reflects the Company's net gain
realized on the sale of 1,004,900 shares of Lycos stock. Gain on sale of
Premiere Technologies, Inc. common stock reflects the Company's net gain
realized on the sale of 224,795 shares of Premiere Technologies, Inc. stock.
Gain on stock issuance by Lycos, Inc. resulted primarily from the issuance of
stock by Lycos for the acquisitions of Tripod and Wise Wire. Gain on sale of
NetCarta Corporation in fiscal year 1997 reflects the Company's pre-tax gain on
sale of CMG @Ventures' NetCarta subsidiary on January 31, 1997. Gain on sale of
investment in TeleT Communications in fiscal 1997 resulted when the Company sold
its equity interest in TeleT to Premiere in exchange for $550,000 and 320,833
shares of Premiere stock in September 1996. Interest income decreased $770,000
compared with the first nine months of fiscal 1997, reflecting a $1,063,000
decrease from the deconsolidation of Lycos, partially offset by increased income
associated with higher average corporate cash equivalent balances compared with
prior year. Interest expense increased $1,291,000 compared with the first nine
months of fiscal 1997, primarily due to borrowings incurred to finance the
Company's acquisition of Pacific Link on October 24, 1996, and the impact of
higher average corporate borrowings related to the Company's $10 million
collateralized corporate note payable which was issued in January, 1997 and
increased to $20 million in January, 1998.
Equity in losses of affiliates resulted from the Company's ownership in
certain investments that are accounted for under the equity method. Under the
equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates for the nine months
ended April 30, 1998 include the results from the Company's minority ownership
in Ikonic Interactive, Inc., Parable, Silknet, GeoCities, Reel.com, Speech
Machines, Chemdex, and Sage Enterprises, and the results from Lycos beginning in
November, 1997. Equity in losses of affiliates for the nine months ended April
30, 1997 included the results from the Company's minority ownership in TeleT,
Vicinity Corporation, Ikonic Interactive, Inc., Parable, Silknet, and GeoCities.
The Company expects its portfolio companies to continue to invest in development
of their products and services, and to recognize operating losses, which will
result in future charges recorded by the Company to reflect its proportionate
share of such losses.
Minority interest decreased to ($28,000) in the first nine months of fiscal
1998 from $3,939,000 in the corresponding period of fiscal 1997, primarily
reflecting the deconsolidation of Lycos results beginning in the second quarter
of fiscal year 1998, and the impact associated with FreeMark and GeoCities,
whose results were included within the Company's consolidated statements of
operations during a portion of the first nine months of fiscal year 1997, but
excluded in fiscal year 1998.
Income tax expense in the first nine months of fiscal 1998 was $11,770,000.
Exclusive of taxes provided for significant, unusual or extraordinary items that
will be reported separately, the Company provides for income taxes on a year to
date basis at an effective rate based upon its estimate of full year earnings.
In determining the Company's effective rate for the first nine months of fiscal
1998, in-process research and development, gain on sale of Lycos, Inc. common
stock, gain on stock issuance by Lycos, Inc., and gain on sale of Premiere
Technologies, Inc. common stock were excluded. The Company's effective tax rate
differs materially from the federal statutory rate primarily due to valuation
allowances provided on certain deferred tax assets, the provision for state
income taxes, and non-deductible goodwill amortization and in-process research
and development charges.
Loss from discontinued operations of lists and database services segment,
net of income taxes, decreased $4,314,000 to ($79,000) in the nine months ended
April 30, 1998 from ($4,393,000) in the nine months ended April 30, 1997 as a
result of the transfer of Engage to the Company's investment and development
segment. Gain on sale of data warehouse product rights occurred when the
Company's subsidiary, Engage, sold certain rights to its Engage.Fusion(TM) and
Engage.Discover(TM) data warehouse products to Red Brick for $9.5 million and
238,160 shares of Red Brick common stock.
Page 23
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
In-Process Research and Development Expense Related to Acquisition of Accipiter,
Inc.
CMGI acquired Accipiter on April 8, 1998 for total purchase consideration
of $30.2 million. The portion of the purchase price allocated to in-process
research and development was $9.2 million, or approximately 31% of the total
purchase price. In August, 1998, Accipiter was merged with Engage, a subsidiary
of the Company. At the acquisition date, Accipiter's major in-process project
was the development of AdManager version 4.0, which was intended to provide the
ad serving functionality that customers were requiring as the use of the
Internet rapidly increased and customer Web sites became more complex. In
general, previous AdManager releases did not provide for the fault tolerance,
redundancy and scalability that customers began to seek after AdManager versions
1.0 and 2.0 were released. Accordingly, customers' long-term product needs
required Accipiter to substantially redesign the AdManager architecture (later
released as version 4.0) to develop new technologies in the areas of: (1) fault
tolerance and scalability, (2) an object-oriented user interface, (3)
application programming interfaces and (4) a new report engine.
At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. The initial
development effort had commenced in late 1997. At the acquisition date, the new
AdManager technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the Accipiter purchase, the
AdManager version 4.0 project was approximately 71% complete.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including developed technology, assembled
workforce, working capital and fixed assets. The cash flows are then discounted
to present value at an appropriate rate. Discount rates are determined by an
analysis of the risks associated with each of the identified intangible assets.
The discount rate used for in-process research and development was 24.5%, a
slight premium over the estimated weighted-average cost of capital of 24%, and
the discount rate used for developed technology was 21%.
The resulting net cash flows to which the discount rate was applied are
based on management's estimates of revenues, cost of revenues, research and
development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are based
on the assumptions set forth below.
Accipiter recorded revenue in 1997 of less than $1 million. Because of the
absence of meaningful historical revenue of Accipiter, management projected
revenue for the initial year of the forecast period based on its assessment of
future market potential and the ability of Accipiter to successfully launch its
new product offering. After the initial year of the forecast period, revenue was
predicted to grow at rates comparable to the growth of Internet users and online
activity and the impact such growth would have on Internet advertising. These
projections are based on management's estimates of the significant growth in the
number of companies engaged in e-commerce (which is supported by independent
market data), the need for e-commerce companies to serve ads over the Internet,
expected trends in technology (such as increased speed of the Internet, reduced
hardware costs and the resulting increase in new Internet users to whom ads will
be served) and the nature and expected timing of new product introductions by
Engage and its competitors. These estimates also include growth related to the
use of certain Accipiter technologies in conjunction with Engage's products, the
marketing and distribution of the resulting products through Engage's sales
force and the benefits of Engage's incremental financial support and stability.
Engage's estimated cost of sales as a percentage of revenue is expected to
be slightly lower than Accipiter's (classified as support and royalties by
Accipiter) on a stand-alone basis (16% in 1997), as certain fixed costs included
in cost of sales are spread over a larger revenue base and provide for the
realization of efficiencies due to economies of scale through combined
operations. Due to these savings, the estimated cost of sales as a percentage of
revenue is expected to decrease by 1% each year from Accipiter's historical
percentage, to a low of 11% in the fifth forecast year.
Page 24
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Engage's selling, general and administrative costs are expected to be
higher than Accipiter's on an absolute basis, but lower as a percentage of
revenue. Due to the small revenue base in 1997 and the impact of significant
costs associated with building a corporate infrastructure and building a
workforce for future operations, Accipiter's selling, general and administrative
costs in 1997, as a percent of revenue, are not representative of the expected
costs for the combined operations of Engage and Accipiter. Efficiencies due to
economies of scale through combined operations, such as consolidated marketing
and advertising programs, are expected to be realized immediately.
Liquidity and Capital Resources
Working capital at April 30, 1998 decreased to $21.8 million compared to
$38.6 million at July 31, 1997, predominately as a result of deconsolidating
Lycos. The Company's July 31, 1997 and October 31, 1997 consolidated working
capital included Lycos working capital of $38.1 million at each date. The
Company's principal sources of capital during the first nine months of fiscal
1998 were $46,344,000 received from the sale of 1,004,900 shares of Lycos stock,
$10,937,000 received from the sale of 2,012,008 CMGI common shares to Intel
Corporation, $10 million received from the sale of 1,250,000 CMGI common shares
to Sumitomo Corporation, $9,543,000 from the sale of Engage's data warehouse
product rights, and $7,555,000 received from the sale of 224,795 shares of
Premiere stock. The Company's principal use of capital during the first nine
months of fiscal 1998 were $40,200,000 for funding of operations, primarily
those of start-up activities in the Company's investment and development
segment. Additionally, $13,913,000 was used for investments in affiliates and
acquisitions of subsidiary, including Chemdex, Speech Machines, GeoCities,
Parable, Reel.com, Sage Enterprises, KOZ, Select Technologies, Critical Path and
Accipiter. During the first nine months of fiscal 1998, $4,217,000 was also
expended for purchases of property and equipment, and $2,377,000 was expended
for net repayments of long-term debt. Additionally, at April 30, 1998, the
Company had approximately $66 million of remaining future noncancelable minimum
payments under operating leases for its facilities and certain other equipment.
During April, 1998, the Company completed the acquisition of Accipiter in
exchange for 2,527,384 shares of the Company's common stock. The shares issued
by the Company are not registered under the Securities Act of 1933 and are
subject to restrictions on transferability for periods ranging from six to
twenty-four months. The purchase price was valued at approximately $30.2
million, including acquisition costs, of which approximately $18.0 million was
allocated to goodwill, which will be amortized on a straight-line basis over
five years. $9.2 million of the purchase price was allocated to in-process
research and development which was charged to operations in the quarter ended
April 30, 1998. The Company anticipates that Accipiter technology products will
be integrated with other preexisting and newly developed CMGI products
(principally the solutions developed by Engage Technologies), creating a single
source approach focused on developing high value Web advertising and marketing
solutions.
At July 31, 1997, the Company's credit agreements included a $10 million
corporate line of credit facility, which has subsequently lapsed, and the
Company has not pursued renewal. The Company's subsidiary, SalesLink, has a $4.5
million line of credit agreement, which expires on October 1, 1998. SalesLink's
line of credit had an outstanding balance of $3,200,000 at April 30, 1998 and an
additional $800,000 reserved in support of outstanding letters of credit for
operating leases.
The Company intends to continue to fund existing and future Internet and
interactive media investment and development efforts, and to actively seek new
CMG@Ventures investment opportunities. The Company believes that existing
working capital and cash proceeds available from the future sale of additional
Lycos stock will be sufficient to fund its operations, investments and capital
expenditures for the foreseeable future. Should additional capital be needed to
fund future investment and acquisition activity, the Company may seek to raise
additional capital through public or private offerings of the Company's or its
subsidiaries' stock, or through debt financings.
Management has reviewed the Company's systems relating to the year 2000
concerns and believes that the costs for compliance will not be material to the
Company.
Page 25
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 2. Changes in Securities
---------------------
On December 19, 1997, the Company sold 2,012,008 shares of its common
stock to Intel Corporation. The shares were priced at $5.4359375 with proceeds
to the Company totaling $10,937,150. The shares purchased by Intel Corporation
are not registered under the Securities Act of 1933, as amended.
On February 27, 1998, the Company sold 1,250,000 shares of its common
stock to Sumitomo Corporation. The shares were priced at $8.00 per share, with
proceeds to CMGI totaling $10,000,000. The shares purchased by Sumitomo
Corporation are not registered under the Securities Act of 1933, as amended, and
carry a one year restriction on transfer or sale.
On April 9, 1998, the Company issued 2,527,384 shares of its common
stock to shareholders of Accipiter, Inc. in consideration for the acquisition of
all of the issued and outstanding shares of capital stock of Accipiter, Inc. The
shares issued by the Company are not registered under the Securities Act of
1933, as amended and carry restrictions on transfer or sale for periods ranging
from six to twenty-four months.
The shares issued in the above mentioned transactions were issued in
private placements in reliance upon the exemption provided by section 4 (2) of
the Securities Act of 1933.
ITEM 6. Exhibits and Reports on Form 8-k
---------------------------------
(a) Exhibits
The following exhibits are filed herewith or incorporated by
reference pursuant to Rule 12b-32 promulgated under the Securities Exchange Act
of 1934, as amended:
<TABLE>
<CAPTION>
EXHIBIT NO. Title Method of Filing
- ------------ ----- ----------------
<S> <C> <C>
3 (i) (1) Amendment to the Restated Certificate of Incorporation Incorporated by reference to Exhibit 3 (i) (1) to
the Registrant's quarterly report on Form 10-Q for
the quarter ended April 30, 1996.
3 (i) (2) Restated Certificate of Incorporation Incorporated by reference from Registration
Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518).
3 (ii) Restated By-Laws Incorporated by reference from Registration
Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518).
4 Specimen stock certificate representing Incorporated by reference from Registration
the common stock Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518).
10.1 CMG @Ventures I, LLC Limited Liability Company Agreement, Previously filed.
dated December 18, 1997.
10.2 Lease, dated January 6, 1998, between the 425 Medford Previously filed.
Nominee Trust and SalesLink Corporation for premises at
425 Medford Street, Boston, Massachusetts.
</TABLE>
Page 26
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
(Continued)
ITEM 6. Exhibits and Reports on Form 8-k (Continued)
---------------------------------------------
(b) Exhibits (continued)
<TABLE>
<CAPTION>
EXHIBIT NO. Title Method of Filing
---------- ----- ----------------
<S> <C> <C>
10.3 CMG Information Services, Inc. Guaranty of SalesLink Previously filed.
Corporation Lease for 425 Medford Street, Boston,
Massachusetts.
10.4 Supplement No. 2 to the Registrant's Lease for 100 Previously filed.
Brickstone Square, Andover, Massachusetts.
10.5 Supplement No. 3 to the Registrant's Lease for 100 Previously filed.
Brickstone Square, Andover, Massachusetts.
27.1 Restated Financial Data Schedule for the nine months ended Filed herewith.
April 30, 1998
</TABLE>
(b) Reports on Form 8-K.
On March 19, 1998, the Company filed a report on Form 8-K dated
February 27, 1998 in conjunction with the sale by the Company of 1,250,000
shares of its common stock to Sumitomo Corporation.
On April 23, 1998, the Company filed a report on Form 8-K dated
April 8, 1998 in conjunction with the acquisition of all the issued and
outstanding shares of capital stock of Accipiter, Inc. in exchange for
approximately 2,528,000 shares of the Company's common stock.
Page 27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
--------------------------
Date: May 26, 1999 Andrew J. Hajducky III, CPA
Chief Financial Officer
Page 28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q/A OF CMGI, INC. FOR THE QUARTER ENDED APRIL 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 48,670
<SECURITIES> 1,200
<RECEIVABLES> 14,309
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 76,811
<PP&E> 8,712
<DEPRECIATION> 0
<TOTAL-ASSETS> 183,896
<CURRENT-LIABILITIES> 55,056
<BONDS> 0
0
0
<COMMON> 454
<OTHER-SE> 88,657
<TOTAL-LIABILITY-AND-EQUITY> 183,896
<SALES> 55,970
<TOTAL-REVENUES> 55,970
<CGS> 45,180
<TOTAL-COSTS> 45,180
<OTHER-EXPENSES> 60,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,261
<INCOME-PRETAX> 11,644
<INCOME-TAX> 11,770
<INCOME-CONTINUING> (126)
<DISCONTINUED> 4,899
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,773
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
