<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 October 31, 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 December 11,
1998
Common Stock, par value $.01 per share 46,166,050
-------------------------------------- ----------
Class Number of shares outstandinG
<PAGE>
CMGI, INC.
FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
October 31, 1998 (Restated) and July 31, 1998 (Restated) 3
Consolidated Statements of Operations
Three months ended October 31, 1998 (Restated) and 1997 4-5
Consolidated Statements of Cash Flows
Three months ended October 31, 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 16-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</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 October 31, 1998 previously filed on December 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
(unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
---- ----
(Unaudited and (Restated)
ASSETS Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,639 $ 61,537
Available-for-sale securities 92,287 5,764
Accounts receivable, trade, less allowance for doubtful accounts 26,302 21,431
Inventories 9,547 8,250
Prepaid expenses 2,923 2,991
Net current assets of discontinued operations 1,084 482
Other current assets 1,991 2,364
----------- ---------
Total current assets 140,773 102,819
Property and equipment, net 12,725 13,403
Investments in affiliates 131,574 82,616
Cost in excess of net assets of subsidiaries acquired, net of accumulated 54,361 55,770
amortization
Net non-current assets of discontinued operations 1,135 1,246
Other assets 7,978 3,964
----------- ---------
$ 348,546 $ 259,818
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 24,800 $ 27,656
Current installments of long-term debt 16,966 16,594
Accounts payable 16,946 10,809
Accrued income taxes -- 10,085
Accrued expenses 20,528 18,731
Deferred revenues 10,292 4,932
Deferred income taxes 14,056 --
Other current liabilities 890 1,228
----------- ---------
Total current liabilities 104,478 90,035
Long-term debt, less current installments 1,001 1,373
Deferred income taxes 28,312 15,536
Other long-term liabilities 4,482 4,428
Minority interest 37,472 15,310
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 46,146,872
shares at October 31, 1998 and 46,067,886 shares at July 31, 1998 462 461
Additional paid-in capital 92,191 91,029
Net unrealized loss on available-for-sale securities (525) (436)
Deferred compensation (1,109) (1,442)
Retained earnings 81,782 43,524
----------- ---------
Total stockholders' equity 172,801 133,136
----------- ---------
$ 348,546 $ 259,818
=========== =========
</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 October 31,
--------------------------------------
1998 1997
------------------ ------------------
(Restated)
<S> <C> <C>
Net revenues $ 37,405 $ 22,595
Operating expenses:
Cost of revenues 35,625 13,675
Research and development 5,353 6,047
Selling 8,238 10,537
General and administrative 8,317 4,534
------------------ ------------------
Total operating expenses 57,533 34,793
------------------ ------------------
Operating loss (20,128) (12,198)
------------------ ------------------
Other income (deductions):
Interest income 559 843
Interest expense (1,068) (770)
Gain on sale of Lycos, Inc. common stock 1,879 6,324
Gain on sale of available-for-sale securities -- 4,174
Gain (loss) on stock issuance by Lycos, Inc. 20,374 (94)
Gain on stock issuance by GeoCities 24,132 --
Gain on sale of investment in Sage Enterprises, Inc. 19,057 --
Gain on sale of investment in Reel.com, Inc. 23,158 --
Equity in losses of affiliates (3,359) (1,529)
Minority interest 101 (28)
------------------ ------------------
84,833 8,920
------------------ ------------------
Income (loss) from continuing operations before income taxes 64,705 (3,278)
Income tax expense (benefit) 26,316 (1,019)
------------------ ------------------
Income (loss) from continuing operations 38,389 (2,259)
Discontinued operations, net of income taxes:
Loss from operations of lists and database services segment (131) (34)
Gain on sale of data warehouse product rights -- 4,978
------------------ ------------------
Net income $ 38,258 $ 2,685
================== ==================
</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 October 31,
--------------------------------------
1998 1997
------------------ ------------------
(Restated)
<S> <C> <C>
Basic earnings per share:
Income (loss) from continuing operations $ 0.83 $ (0.06)
Loss from discontinued operations of lists and database services
segment -- --
Gain on sale of data warehouse product rights -- 0.13
------------------ ------------------
Net income $ 0.83 $ 0.07
================== ==================
Diluted earnings per share:
Income (loss) from continuing operations $ 0.77 $ (0.06)
Loss from discontinued operations of lists and database services
segment -- --
Gain on sale of data warehouse product rights -- 0.13
------------------ ------------------
Net income $ 0.77 $ 0.07
================== ==================
Weighted average shares outstanding:
Basic 46,082 38,716
================== ==================
Diluted 49,932 38,716
================== ==================
</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>
Three months ended October 31,
--------------------------------------
1998 1997
------------------ ------------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 38,389 $ (2,259)
Adjustments to reconcile income (loss) from continuing operations to
net cash used for continuing operations:
Depreciation and amortization 2,809 1,522
Deferred income taxes 29,196 (1,183)
Non-operating gains, net (88,600) (10,404)
Equity in losses of affiliates 3,359 1,529
Minority interest (101) 28
Changes in operating assets and liabilities, excluding effects of
acquired companies:
Trade accounts receivable (4,871) (1,495)
Inventories (1,297) (1,607)
Prepaid expenses 68 (1,387)
Accounts payable and accrued expenses 7,764 1,486
Deferred revenues 5,360 1,308
Refundable and accrued income taxes, net (11,517) 3,672
Other assets and liabilities (167) (6)
------------------ ------------------
Net cash used for operating activities of continuing operations (19,608) (8,796)
Net cash used for operating activities of discontinued operations (617) (3,574)
------------------ ------------------
Net cash used for operating activities (20,225) (12,370)
------------------ ------------------
Cash flows from investing activities:
Additions to property and equipment- continuing operations (2,177) (1,979)
Additions to property and equipment- discontinued operations (5) (38)
Purchase of available-for-sale securities (31,123) --
Proceeds from sale of available-for-sale securities -- 7,555
Proceeds from sale of data warehouse product rights -- 9,543
Proceeds from sale of Lycos, Inc. common stock 2,520 7,149
Investments in affiliates (4,827) (3,516)
Other 1,793 (126)
------------------ ------------------
Net cash provided by (used for) investing activities (33,819) 18,588
------------------ ------------------
Cash flows from financing activities:
Net repayments of notes payable (2,856) (10,000)
Repayments of long-term debt -- (697)
Net proceeds from issuance of common stock 261 425
Net proceeds from issuance of stock by subsidiaries 1,945 477
Other (204) 1,061
------------------ ------------------
Net cash used for financing activities (854) (8,734)
------------------ ------------------
Net decrease in cash and cash equivalents (54,898) (2,516)
Cash and cash equivalents at beginning of period 61,537 59,762
------------------ ------------------
Cash and cash equivalents at end of period $ 6,639 $ 57,246
================== ==================
</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 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, the accompanying consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 1998 which are contained in the Company's Annual Report
on Form 10-K/A filed with the Securities and Exchange Commission ("the SEC") on
May 26, 1999. The results for the three month period ended October 31, 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., WiseWire Corporation, GuestWorld, Inc. and WhoWhere? Inc.
during CMGI's third and fourth quarters of fiscal 1998 and first quarter of
fiscal 1999. The accompanying consolidated financial statements have also been
restated to reflect a change in the original accounting for the purchase price
allocation related to CMGI's acquisition of Accipiter, Inc. (Accipiter) in the
third fiscal quarter of 1998.
Lycos reduced the amount of its charges for in-process research and development
in connection with the above noted acquisitions and, correspondingly, increased
the amounts allocated to intangible assets by $89.4 million. During the periods
effected, CMGI's ownership in Lycos ranged from approximately 46% to
approximately 22%, and CMGI accounted for its investment in Lycos under the
equity method of accounting, whereby CMGI's portion of the net operating
performance of Lycos was reflected in equity in losses of affiliates.
Additionally, during such periods CMGI recorded gains on sales of portions of
its Lycos stock holdings, and recorded gains on issuances of stock by Lycos. As
a result of the Lycos restatements, CMGI has accordingly restated previously
reported equity in losses of Lycos, gains on sales of Lycos stock and gains on
issuance of stock by Lycos for CMGI's fiscal quarters ended April 30, 1998, July
31, 1998 and October 31, 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 months ended October 31, 1998 and as of July
31, 1998 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Statements of Operations:
Three Months Ended
October 31, 1998
-------------------------
As Reported Restated
----------- --------
<S> <C> <C>
Cost of revenues $ 35,545 $ 35,625
General and administrative expenses 7,936 8,317
Operating loss (19,667) (20,128)
Gain on sale of Lycos, Inc. common stock 2,018 1,879
Gain on stock issuance by Lycos, Inc. 19,182 20,374
Equity in losses of affiliates (2,589) (3,359)
Income from continuing operations before income taxes 64,883 64,705
Income tax expense 26,199 26,316
Income from continuing operations 38,684 38,389
Net income 38,553 38,258
Basic income from continuing operations per share 0.84 0.83
Basic net income per share 0.84 0.83
</TABLE>
Balance Sheets:
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
---------------- -------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Investments in affiliates $115,057 $131,574 $ 66,187 $ 82,616
Cost in excess of net assets of subsidiaries acquired,
net of accumulated amortization 48,238 54,361 49,301 55,770
Other assets 6,367 7,978 2,238 3,964
Total assets 324,295 348,546 235,194 259,818
Non-current deferred income tax liabilities 23,187 28,312 10,528 15,536
Minority interest 33,402 37,472 11,045 15,310
Retained earnings 66,726 81,782 28,173 43,524
Total stockholders' equity 157,745 172,801 117,785 133,136
</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.
C. Discontinued Operations
On March 11, 1999, the Company announced the signing of a binding agreement to
sell its wholly-owned subsidiary, CMG Direct Corporation (CMG Direct) to
Marketing Services Group, Inc. (MSGI). At the time, CMG Direct comprised the
Company's entire lists and database services segment. As a result, the
operations of the Company's lists and database services segment have been
reflected as income (loss) from discontinued operations. The gain on sale of
certain data warehouse product rights by the Company's subsidiary, Engage
Technologies, Inc. (Engage) in the first quarter of fiscal 1998 has also been
reflected as discontinued operations. These data warehouse products were
developed by Engage during fiscal 1996 and 1997, when Engage was included in the
Company's lists and database services segment. CMG Direct's net assets, which
included accounts receivable, prepaid expenses, net property and equipment, net
goodwill, other assets, accounts payable, accrued expenses and other liabilities
are reported as net current and non-current assets of discontinued operations at
October 31, 1998.
Page 8
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Two-For-One Common Stock Split
On January 11, 1999, the Company effected a two-for-one common stock
split in the form of a stock dividend. Accordingly, the consolidated
financial statements have been retroactively adjusted for all periods
presented to reflect this event.
E. Deconsolidation of Lycos, Inc.
During the first quarter of fiscal year 1998, the Company owned in excess of 50%
of Lycos, Inc. (Lycos) and accounted for its investment under the consolidation
method. Through the subsequent sale and distribution of Lycos shares, the
Company's ownership percentage in Lycos was reduced to below 50% beginning in
November, 1997. As such, beginning in November, 1997, the Company began
accounting for its remaining investment in Lycos under the equity method of
accounting, rather than the consolidation method. Prior to these events, the
operating results of Lycos were consolidated within the operating results of the
Company's investment and development segment, and the assets and liabilities of
Lycos were consolidated with those of CMGI's other majority-owned subsidiaries
in the Company's consolidated balance sheets. The Company's historical
quarterly consolidated operating results for the fiscal quarter ended October
31, 1997 included Lycos sales of $9,303,000 and operating losses of $433,000.
The following table contains summarized financial information for Lycos for the
quarter ended October 31, 1998, as restated to reflect Lycos' adjustments to in-
process research and development charges and amortization of acquisition related
intangible assets (See Note B):
(in thousands)
Condensed Statement of Operations:
<TABLE>
<CAPTION>
Quarter
Ended
October 31,
-----------
1998
----
<S> <C>
Net revenues $ 24,784
================
Operating loss $ (15,612)
================
Net loss $ (3,596)
================
</TABLE>
Condensed Balance Sheet:
<TABLE>
<CAPTION>
October 31,
1998
----------------
<S> <C>
Current assets $ 203,041
Non-current assets 272,991
----------------
Total assets $ 476,032
================
Current liabilities $ 53,694
Non-current liabilities 29,873
Stockholders' equity 392,465
----------------
Total liabilities and stockholders' equity $ 476,032
================
</TABLE>
F. Sale of CMG@Ventures Investments and Investment in Hollywood
Entertainment
In August, 1998, the Company's subsidiary, CMG@Ventures II, LLC (CMG@Ventures
II) converted its holdings in Sage Enterprises, Inc. (Sage Enterprises) into
225,558 shares of Amazon.com, Inc. (Amazon.com) common stock as part of a merger
wherein Amazon.com acquired Sage Enterprises. CMG@Ventures II invested $4.5
million in Sage Enterprises beginning in June, 1997. The Company recorded a
pre-tax gain of $19,057,000 on the conversion of its investment in Sage
Enterprises during the fiscal quarter ended October 31, 1998. Such gain was
recorded net of the 20% interest attributable to CMG@Ventures II's profit
members.
Page 9
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Sale of CMG@Ventures Investments and Investment in Hollywood Entertainment
(Continued)
In October, 1998, CMG@Ventures II's holdings in Reel.com, Inc. (Reel.com) were
converted into 1,943,783 restricted common and 485,946 restricted, convertible
preferred shares of Hollywood Entertainment Corporation (Hollywood
Entertainment) as part of a merger wherein Hollywood Entertainment acquired
Reel.com. The preferred shares are convertible into common shares on a 1-for-1
basis, subject to approval by Hollywood Entertainment shareholders. CMG@Ventures
II invested $6.9 million in Reel.com beginning in July, 1997. The Company
recorded a pre-tax gain of $23,158,000 on the conversion of its investment in
Reel.com during the fiscal quarter ended October 31, 1998. The gain was reported
net of the 20% interest attributable to CMG@Ventures II's profit members.
Also in October, 1998, in a separate transaction, the Company purchased
1,524,644 restricted common and 803,290 restricted, convertible preferred shares
of Hollywood Entertainment for a total cash purchase price of $31.1 million. The
preferred shares are convertible into common shares on a 1-for-1 basis, subject
to approval by Hollywood Entertainment shareholders.
G. Gain on Stock Issuances by Lycos, Inc. and GeoCities
In August, 1998, the Company's affiliate, GeoCities, completed its initial
public offering of common stock, issuing approximately 5.5 million shares at a
price of $17.00 per share, which raised $84.5 million in net proceeds for
GeoCities. As a result of the initial public offering, the Company's ownership
interest in GeoCities was reduced from approximately 34% to approximately 28%.
The Company, through its subsidiaries, CMG@Ventures I, LLC (CMG@Ventures I) and
CMG@Ventures II, has invested a total of $5.9 million in GeoCities beginning in
January, 1996. The Company recorded a pre-tax gain of $24,132,000 on the
issuance of stock by GeoCities during the fiscal quarter ended October 31, 1998,
representing the increase in the book value of the Company's net equity in
GeoCities, primarily as a result of the initial public offering. The gain was
recorded net of the interests attributable to CMG@Ventures I's and II's profit
members.
The Company recorded a pre-tax gain of $20,374,000 in the first quarter of
fiscal 1999 resulting from the issuance of stock by Lycos. The gain for the
quarter was primarily related to the issuance of 4.1 million shares by Lycos
during August, 1998 in its acquisition of WhoWhere? Inc., net of the impact of
an in-process research and development charge recorded by Lycos related to the
acquisition. As a result of the issuance of stock by Lycos for the acquisition
of WhoWhere? Inc., the Company's ownership interest in Lycos was reduced from
approximately 24% to approximately 22%. The gain was recorded net of the
interest attributable to CMG@Ventures I's profit members.
H. Investments in Affiliates
During the first quarter of fiscal year 1999, the Company, through its limited
liability company subsidiary, CMG@Ventures III, LLC, invested a total of
$1,142,000 to acquire initial minority ownership interests in three Internet
companies, including Raging Bull, Asimba and Virtual Ink. Raging Bull is a
financial Web message board service that offers the ability to filter content
and tailor personally relevant financial information to meet users' needs.
Asimba is creating a content rich, personalized, online community for the
competitive and recreational sports market. Virtual Ink is a newly launched
company focused on the development of Digital Meeting Assistant TM (DMA)
technologies. All of the above investments are carried at cost in CMGI's
consolidated financial statements. See the Company's Report on Form 10-K/A for
the year ended July 31, 1998 for a description of the structure of CMG@Ventures
III, LLC and @Ventures III, L.P.
Also during the first fiscal quarter of 1999, the Company invested an additional
$2 million in Magnitude Network, LLC (Magnitude Network), increasing CMGI's
ownership percentage in Magnitude Network to 23% at October 31, 1998 from 5% at
July 31, 1998. Accordingly, beginning October 22, 1998, the Company began
accounting for its investment in Magnitude Network under the equity method of
accounting, rather than the cost method. The acquisition accounting and
valuation for the investment in Magnitude Network may result in a significant
portion of the investment being identified as in-process research and
development, in accordance with valuation methodologies provided by the
Securities and Exchange Commission, which will be charged to operating results
when the amount is determined.
Page 10
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Sales of Lycos stock
During the first quarter of fiscal year 1999, CMG@Ventures I distributed
3,585,207 of its shares of Lycos common stock to the Company, and 558,317 shares
to CMG@Ventures I's profit members. During the first quarter of fiscal 1999 the
Company sold 70,000 of its Lycos shares on the open market. As a result of the
sale, the Company received proceeds of $2,520,000, and recognized a pre-tax gain
of $1,879,000, reported net of the associated interest attributed to
CMG@Ventures I's profit members, reflected as "Gain on sale of Lycos, Inc.
common stock."
J. Segment Information
The Company's continuing operations are classified in two primary business
segments: (i) investment and development and (ii) fulfillment services. The
Company's lists and database services segment is reported as discontinued
operations (see Note C). Summarized financial information by business segment
for continuing operations is as follows:
<TABLE>
<CAPTION>
Three months ended October 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Net revenues:
Investment and development $ 4,912,000 $ 10,571,000
Fulfillment services 32,493,000 12,024,000
------------ ------------
$ 37,405,000 $ 22,595,000
============ ============
Operating income (loss):
Investment and development $(20,385,000) $(13,259,000)
Fulfillment services 257,000 1,061,000
------------ ------------
$(20,128,000) $(12,198,000)
============ ============
</TABLE>
Operating income in the fulfillment services segment was adjusted during the
fourth quarter of fiscal year 1998 to correct prior quarters' understatements of
cost of sales by SalesLink's subsidiary company, Pacific Link. The cost of sales
understatement was caused by estimates used in determining the material content
in cost of sales. As a result, previous quarterly results had understated cost
of sales and overstated inventory. Had such adjustments been recorded in the
period in which they occurred, quarterly fulfillment services segment operating
income (loss) would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended
October 31, January 31, April 30, July 31,
----------- ---------- -------- --------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
As Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
</TABLE>
Page 11
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
L. Borrowing Arrangements
The Company is obligated under a collateralized corporate borrowing facility in
the amount of $20 million. This borrowing is secured by 2,511,578 of the
Company's shares of Lycos common stock and is payable in full on January 20,
1999. Under this agreement, the Company could become subject to additional
collateral requirements under certain circumstances. The Company expects to seek
the renewal of this note. SalesLink had an outstanding line of credit balance of
$3.8 million as of October 31, 1998 and an additional $1.2 million reserved in
support of outstanding letters of credit for operating leases. SalesLink also
has a $15.5 million bank term note outstanding at October 31, 1998, which
provides for repayment in quarterly installments beginning January, 1999 through
November, 2002. As of July 31, 1998 and October 31, 1998, SalesLink did not
comply with certain covenants of their borrowing arrangements. SalesLink is
working with the bank to cure the non-compliance as of October 31, 1998, and
prospectively, through waivers or amendments to the covenant terms. SalesLink
has not yet received such waivers or amendments, nor is there any assurance that
such waivers or amendments will be obtained. Accordingly, all of SalesLink's
bank borrowings have been classified as current liabilities in the October 31,
1998 balance sheet.
M. 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. Since the Company reported a loss from continuing operations for the
three months ended October 31, 1997, weighted average common equivalent shares
have been excluded from the calculation of diluted earnings per share.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss), the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial for the three months ended October
31, 1998.
The following table sets forth the reconciliation of the numerators and
denominators for the earnings per share calculations per SFAS No. 128:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three months ended October 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic net income per share:
- --------------------------
Income (loss) from continuing operations $38,389 $(2,259)
Loss from discontinued operations of lists and
database services segment (131) (34)
Gain on sale of data warehouse product rights -- 4,978
------- -------
Net income $38,258 $ 2,685
======= =======
Weighted average shares outstanding 46,082 38,716
======= =======
</TABLE>
Page 12
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
M. Earnings Per Share (Continued)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Diluted net income per share:
- ----------------------------
Income (loss) from continuing operations $38,389 $(2,259)
Net effect of income attributable to dilutive
subsidiary stock equivalents -- (237)
------- -------
Income (loss) from continuing operations available
to common stockholders 38,389 (2,496)
Loss from discontinued operations of lists and
database services segment (131) (34)
Gain on sale of data warehouse product rights -- 4,978
------- -------
Net income available to common stockholders $38,258 $ 2,448
======= =======
Weighted average shares outstanding 46,082 38,716
Weighted average number of dilutive common
stock equivalents outstanding 3,850 --
------- -------
Shares used in computing diluted earnings per
share 49,932 38,716
======= =======
</TABLE>
N. Comprehensive Income
As of August 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, it has no impact on the Company's net income or
shareholders' equity. SFAS No. 130 requires all changes in equity from non-owner
sources to be included in the determination of comprehensive income.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended October 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $38,258 $2,685
Net unrealized holding loss arising during period (89) --
------- ------
Comprehensive income $38,169 $2,685
======= ======
</TABLE>
O. Consolidated Statements of Cash Flows Supplemental Information
<TABLE>
<CAPTION>
(in thousands) Three months ended October 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $ 868 $ 717
====== =====
Income taxes $ 8,567 $ 83
====== =====
</TABLE>
During the first quarter of fiscal year 1999, significant non-cash investing
activities included the sale of the Company's equity interest in Reel.com in
exchange for Hollywood Entertainment available-for-sale securities valued at
$32,801,000, as well as the sale of the Company's minority investment in Sage
Enterprises in exchange for Amazon.com available-for-sale securities valued at
$26,519,000 (See Note F).
Page 13
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
P. Available-for-Sale Securities
At October 31, 1998, available-for-sale securities consist of the following
securities held by CMGI directly: 238,160 shares of Red Brick Systems, Inc.
common stock; 386,473 shares of Open Market, Inc. common stock; and 1,524,644
common and 803,290 convertible preferred shares of Hollywood Entertainment
stock. Also at October 31, 1998, available-for-sale securities consist of the
following securities held by CMG@Ventures II: 192,094 shares of Amazon.com
common stock, as well as 1,943,783 common and 485,946 convertible preferred
shares of Hollywood Entertainment stock. Subject to the terms of CMG@Ventures
II's operating agreement, certain of the shares held by CMG@Ventures II may be
allocated to CMG@Ventures II's profit members in the future.
Available-for-sale securities are carried at fair value as of October 31, 1998,
based on quoted market prices, net of a market value discount to reflect the
remaining restrictions on transferability on certain of these securities. A net
unrealized holding loss of $525,000 has been reflected in the equity section of
the consolidated balance sheet based on the change in market value of the
available-for-sale securities from dates of acquisition to October 31, 1998.
CMG@Ventures II's shares of Amazon.com stock include 22,556 shares which are
being held in escrow by Amazon.com until August 27, 1999 as indemnification
related to Amazon.com's acquisition of Sage Enterprises. CMG@Ventures II also
holds 33,463 shares of Amazon.com stock at October 31, 1998 which were allocated
to its profit members in October, 1998 and, therefore, have not been classified
as available-for-sale securities in the accompanying consolidated balance sheet.
The Hollywood Entertainment common and convertible preferred shares held by CMGI
and CMG@Ventures II are subject to restrictions on transferability until
September 1, 1999.
Q. New Accounting Pronouncements
In March, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, issued SOP 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use," which
requires the capitalization of certain internal costs related to the
implementation of computer software obtained for internal use. The Company is
required to adopt this standard in the first quarter of fiscal year 2000. The
Company expects that the adoption of SOP 98-1 will not have a material impact on
the Company's financial position or its results of operations.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2000. The Company expects that the adoption of SFAS No.
133 will not have a material impact on the Company's financial position or its
results of operations.
R. Subsequent Events
In November, 1998, CMGI received a distribution of 169,538 shares of Amazon.com
stock from CMG@Ventures II. CMGI sold these shares for total proceeds of
$27,177,169 in November, 1998.
In October, 1998, Lycos announced it had entered into a definitive agreement to
acquire Wired Digital, Inc. in exchange for consideration including newly issued
Lycos stock. Upon completion of this transaction and issuance of additional
Lycos shares, the Company's ownership interest in Lycos will fall below 20% of
Lycos' outstanding shares. Accordingly, CMGI will begin accounting for its
investment in Lycos as available-for-sale securities, carried at fair value,
rather than under the equity method.
Page 14
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
R. Subsequent Events (Continued)
Beginning in November, 1998, CMGI's ownership interest in Vicinity was reduced
to below 50% as a result of employee stock option exercises. As such, beginning
in November, 1998, the Company will begin to account for its remaining
investment in Vicinity under the equity method of accounting, rather than the
consolidation method. Prior to these events, the operating results of Vicinity
were consolidated within the operating results of the Company's investment and
development segment, and the assets and liabilities of Vicinity were
consolidated with those of CMGI's other majority-owned subsidiaries in the
Company's consolidated balance sheets.
In December, 1998, CMG@Ventures III, LLC acquired a minority interest in
Ancestry.com, with a total committed investment of up to $2.9 million.
Ancestry.com features the Web's largest and fastest-growing collection of
searchable genealogy data.
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/A for
the year ended July 31, 1998.
Restatement Related to In-Process Research and Development Expense
The accompanying consolidated financial statements have been restated to
reflect the impact of adjustments made by Lycos, Inc. (Lycos) to its previously
reported in-process research and development charges associated with Lycos'
acquisitions of Tripod, Inc., WiseWire Corporation, GuestWorld, Inc. and
WhoWhere? Inc. during CMGI's third and fourth quarters of fiscal 1998 and first
quarter of fiscal 1999. The accompanying consolidated financial statements have
also been restated to reflect a change in the original accounting for the
purchase price allocation related to CMGI's acquisition of Accipiter, Inc.
(Accipiter) in the third fiscal quarter of 1998.
Lycos reduced the amount of its charges for in-process research and
development in connection with the above noted acquisitions and,
correspondingly, increased the amounts allocated to intangible assets by $89.4
million. During the periods effected, CMGI's ownership in Lycos ranged from
approximately 46% to approximately 22%, and CMGI accounted for its investment in
Lycos under the equity method of accounting, whereby CMGI's portion of the net
operating performance of Lycos was reflected in equity in losses of affiliates.
Additionally, during such periods CMGI recorded gains on sales of portions of
its Lycos stock holdings, and recorded gains on issuances of stock by Lycos. As
a result of the Lycos restatements, CMGI has accordingly restated previously
reported equity in losses of Lycos, gains on sales of Lycos stock and gains on
issuance of stock by Lycos for CMGI's fiscal quarters ended April 30, 1998, July
31, 1998 and October 31, 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 months ended October 31, 1998 and as of July
31, 1998 is as follows (in thousands, except per share amounts):
Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended
October 31, 1998
----------------
As Reported Restated
----------- --------
<S> <C> <C>
Cost of revenues $ 35,545 $ 35,625
General and administrative expenses 7,936 8,317
Operating loss (19,667) (20,128)
Gain on sale of Lycos, Inc. common stock 2,018 1,879
Gain on stock issuance by Lycos, Inc. 19,182 20,374
Equity in losses of affiliates (2,589) (3,359)
Income from continuing operations before income taxes 64,883 64,705
Income tax expense 26,199 26,316
Income from continuing operations 38,684 38,389
Net income 38,553 38,258
Basic income from continuing operations per share 0.84 0.83
Basic net income per share 0.84 0.83
Balance Sheets:
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998 July 31, 1998
---------------- -------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Investments in affiliates $ 115,057 $ 131,574 $ 66,187 $ 82,616
Cost in excess of net assets of subsidiaries acquired,
net of accumulated amortization 48,238 54,361 49,301 55,770
Other assets 6,367 7,978 2,238 3,964
Total assets 324,295 348,546 235,194 259,818
Non-current deferred income tax liabilities 23,187 28,312 10,528 15,536
Minority interest 33,402 37,472 11,045 15,310
Retained earnings 66,726 81,782 28,173 43,524
Total stockholders' equity 157,745 172,801 117,785 133,136
</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.
Deconsolidation of Lycos
During the first fiscal quarter ended October 31, 1997 the Company owned in
excess of 50% of Lycos and accounted for its investment under the consolidation
method. Through the subsequent sale and distribution of Lycos shares, the
Company's ownership percentage in Lycos was reduced to below 50% beginning in
November, 1997. As such, beginning in November, 1997, the Company began
accounting for its remaining investment in Lycos under the equity method of
accounting, rather than the consolidation method. Prior to these events, the
operating results of Lycos were consolidated within the operating results of the
Company's investment and development segment, and the assets and liabilities of
Lycos were consolidated with those of CMGI's other majority-owned subsidiaries
in the Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1997
included Lycos sales of $9,303,000 and operating losses of $433,000.
Page 17
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Fiscal 1998 Fulfillment Segment Results
Operating income in the fulfillment services segment was adjusted during
the fourth quarter of fiscal year 1998 to correct prior quarters'
understatements of cost of sales by SalesLink's subsidiary company, Pacific
Link. The cost of sales understatement was caused by estimates used in
determining the material content in cost of sales. As a result, previous
quarterly results had understated cost of sales and overstated inventory. Had
such adjustments been recorded in the period in which they occurred, quarterly
fulfillment services segment operating income (loss) would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended
October 31, January 31, April 30, July 31,
----------- ----------- --------- --------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
As Reported $ 1,061,000 $ 1,149,000 $ 1,547,000 $ (2,313,000) $ 1,444,000
============== ============ =========== ============= ===========
As Restated $ 279,000 $ 335,000 $ 656,000 $ 174,000 $ 1,444,000
============== ============ =========== ============= ===========
</TABLE>
Discontinued Operations
On March 11, 1999, the Company announced the signing of a binding agreement
to sell its wholly-owned subsidiary, CMG Direct to Marketing Services Group, Inc
(MSGI). At the time, CMG Direct comprised the Company's entire lists and
database services segment. As a result, the operations of the Company's lists
and database services segment have been reflected as income (loss) from
discontinued operations in the accompanying consolidated financial statements.
The gain on sale of certain data warehouse product rights by the Company's
subsidiary, Engage Technologies, Inc. (Engage) in the first quarter of fiscal
1998 has also been reflected as discontinued operations. These data warehouse
products were developed by Engage during fiscal 1996 and 1997, when Engage was
included in the Company's lists and database services segment. CMG Direct's net
assets, which included accounts receivable, prepaid expenses, net property and
equipment, net goodwill, other assets, accounts payable, accrued expenses and
other liabilities are reported as net current and non-current assets of
discontinued operations at October 31, 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 October 31, 1998 compared to three months ended October 31,
1997
Net revenues for the quarter ended October 31, 1998 increased $14,810,000,
or 66%, to $37,405,000 from $22,595,000 for the quarter ended October 31, 1997.
The increase was largely attributable to an increase of $20,469,000 in net
revenues for the Company's fulfillment services segment, reflecting the
acquisitions of On-Demand Solutions and InSolutions during the fourth quarter of
fiscal 1998. Additionally, net revenues in the Company's investment and
development segment decreased $5,659,000 primarily reflecting the impact of the
deconsolidation of Lycos. Lycos net revenues for the quarter ended October 31,
1997 were $9,303,000. Absent the impact of Lycos, net revenues in the investment
and development segment increased by $3,644,000 reflecting improved sales by
Engage, Navisite, Planet Direct, ADSmart and Vicinity. 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 during fiscal 1999.
Therefore, the Company expects to report future revenue growth.
Page 18
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Cost of revenues increased $21,950,000, or 161%, to $35,625,000 in the
first quarter of fiscal 1999 from $13,675,000 for the corresponding period in
fiscal 1998, primarily reflecting increases of $19,315,000 and $2,635,000 in the
fulfillment services and investment and development segments, respectively.
Adjusted for the $782,000 impact of prior year understatements, cost of sales
increased $18,533,000 in the fulfillment services segment resulting from higher
revenues, the acquisitions of On-Demand Solutions and InSolutions, and
incremental costs incurred in fiscal 1999 associated with relocating SalesLink's
Boston operations to a more efficient facility. Investment and development
segment cost of sales increases were primarily attributable to higher revenues
and the acceleration of operations in the segment, partially offset by
$1,878,000 lower cost of sales resulting from the deconsolidation of Lycos
beginning in the second quarter of fiscal 1998. The start-up of Internet
operations with minimal revenues during early stages, and the impact of
deconsolidating Lycos, are the primary reasons cost of revenues as a percentage
of revenues in the investment and development segment increased to 146% in the
first quarter of fiscal 1999 from 43% in the prior year. After adjusting for
prior year understatements, fulfillment services segment cost of revenues as a
percentage of net revenues increased to 88% in the first quarter of fiscal 1999
from 82% in the first quarter of fiscal 1998, reflecting operating
inefficiencies during a period of high volume growth and the impact of
facilities relocation costs incurred.
Research and development expenses decreased $694,000, or 11%, to $5,353,000
in the quarter ended October 31, 1998 from $6,047,000 in the prior year's first
quarter. In the investment and development segment, research and development
expenses decreased $694,000, primarily reflecting a $1,436,000 reduction due to
the deconsolidation of Lycos, offset by an increase in expenditures primarily
associated with the development of NaviNet's technology platform. Of the
Company's investments made during the first quarter of fiscal year 1999, the
acquisition accounting and valuation for the investment of $2.0 million in
Magnitude Network may result in a significant portion of the purchase price
being identified as in-process research and development, in accordance with
valuation methodologies provided by the Securities and Exchange Commission,
which will be charged to operating results when the amount is determined. The
Company anticipates it will continue to devote substantial resources to product
development and that these costs may substantially increase in future periods.
Selling expenses decreased $2,299,000 or 22% to $8,238,000 in the first
quarter ended October 31, 1998 from $10,537,000 for the corresponding period in
fiscal 1998, primarily reflecting a $2,556,000 decrease in the Company's
investment and development segment. Investment and development results include a
$5,479,000 decrease due to the deconsolidation of Lycos, offset by sales and
marketing efforts related to several product launches and continued growth of
sales and marketing infrastructures. Selling expenses in the fulfillment
services segment increased by $257,000 in comparison with last year's first
quarter due to the acquisitions of On-Demand Solutions and Insolutions. Selling
expenses decreased as a percentage of net revenues to 22% in the first quarter
of fiscal 1999 from 47% for the corresponding period in fiscal 1998, primarily
reflecting the impact of increased revenues. 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 these costs will substantially increase in future
periods.
General and administrative expenses increased $3,783,000, or 83%, to
$8,317,000 in the first quarter of fiscal 1999 from $4,534,000 for the
corresponding period in fiscal 1998. The investment and development segment
experienced an increase of $2,082,000, primarily due to the building of
management infrastructures in several of the Company's Internet investments.
Such increases were somewhat offset by reductions associated with the
deconsolidation of Lycos in the amount of $944,000. General and administrative
expenses in the fulfillment services segment increased by $1,701,000 in
comparison with last year's first quarter, largely due to the acquisitions of
On-Demand Solutions and InSolutions, including $381,000 higher goodwill charges,
and general and administrative expenses in the lists and database services
segment were essentially level. General and administrative expenses increased as
a percentage of net sales to 22% in the first quarter of fiscal 1999 from 20% in
the first quarter of fiscal 1998. 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 19
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Gain on stock issuance by Lycos, Inc. resulted primarily from the issuance
of stock by Lycos for the fiscal 1999 acquisition of WhoWhere? Gain on stock
issuance by GeoCities in fiscal 1999 arose as a result of the sale of stock by
GeoCities in an initial public offering in August, 1998. Gain on sale of
investment in Sage Enterprises, Inc. occurred during the first quarter of fiscal
year 1999 when CMG@Ventures II's holdings in Sage Enterprises were converted
into 225,558 shares of Amazon.com, Inc. common stock as part of a merger wherein
Amazon.com, Inc. acquired Sage Enterprises. Gain on sale of investment in
Reel.com, Inc. occurred in October, 1998, when CMG@Ventures II's holdings in
Reel.com were converted into 1,943,783 restricted common and 485,946 restricted,
convertible preferred shares of Hollywood Entertainment Corporation (Hollywood
Entertainment) as part of a merger wherein Hollywood Entertainment acquired
Reel.com. Gain on sale of Lycos, Inc. common stock reflects the Company's net
gain realized on the sale of 70,000 shares in the first quarter of fiscal 1999
and 219,900 shares in the first quarter of fiscal 1998. Gain on sale of
available-for-sale securities reflects the Company's net gain realized on the
sale of 224,795 shares of Premiere Technologies, Inc. stock during the first
quarter of fiscal year 1998.
Interest income decreased $284,000 to $559,000 in the first fiscal quarter
of 1999 from $843,000 in fiscal 1998, reflecting a $540,000 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 $298,000 compared with the first quarter of fiscal
1998, primarily due to higher corporate collateralized borrowings and borrowings
incurred in conjunction with the Company's acquisition of InSolutions.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method.
Under the equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates for the quarter ended
October 31, 1998 include the results from the Company's minority ownership in
Lycos, GeoCities, ThingWorld.com (formerly Parable), Silknet, Speech Machines,
Mother Nature and Magnitude Network. Equity in losses of affiliates for the
quarter ended October 31, 1997 included the results from the Company's minority
ownership in Ikonic Interactive, Inc., ThingWorld.com, Silknet, GeoCities,
Reel.com, and Speech Machines. 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.
Income tax expense in the first quarter of fiscal 1999 was $26,316,000.
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 quarter of fiscal
1999, Gains on stock issuances by Lycos and GeoCities, Gains on sales of
investments in Sage Enterprises, Inc. and Reel.com, Inc., and gain on sale of
Lycos, Inc. common stock were excluded.
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 Systems, Inc. (Red
Brick) for $9.5 million and 238,160 shares of Red Brick common stock.
Liquidity and Capital Resources
Working capital at October 31, 1998 increased to $36.3 million compared to
$12.8 million at July 31, 1998. The Company's principal uses of capital during
the first quarter of fiscal 1999 were $20.2 million for funding of operations,
primarily those of start-up activities in the Company's investment and
development segment, $31.1 million for the purchase of Hollywood Entertainment
stock, $4.8 million for investments in affiliates, $2.9 million for net
repayments of notes payable, and $2.2 million for purchases of property and
equipment. The Company's principal sources of capital during the first quarter
of fiscal 1999 were $2.5 million received from the sale of 70,000 shares of
Lycos stock and $1.9 million net proceeds from issuance of stock by
subsidiaries.
Page 20
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company is obligated under a collateralized corporate borrowing
facility in the amount of $20 million. This borrowing is secured by 2,511,578
of the Company's shares of Lycos common stock and is payable in full on January
20, 1999. The Company expects to seek the renewal of this note. SalesLink had
an outstanding line of credit balance of $3.8 million as of October 31, 1998 and
an additional $1.2 million reserved in support of outstanding letters of credit
for operating leases. SalesLink also has a $15.5 million bank term note
outstanding at October 31, 1998, which provides for repayment in quarterly
installments beginning January, 1999 through November, 2002. As of July 31,
1998 and October 31, 1998, SalesLink did not comply with certain covenants of
their borrowing arrangements. SalesLink is working with the bank to cure the
non-compliance as of October 31, 1998, and prospectively, through waivers or
amendments to the covenant terms. SalesLink has not yet received such waivers
or amendments, nor is there any assurance that such waivers or amendments will
be obtained. Accordingly, all of SalesLink's bank borrowings have been
classified as current liabilities in the October 31, 1998 balance sheet.
Subsequent to October 31, 1998, CMG@Ventures III, LLC acquired a minority
interest in Ancestry.com with a total committed investment of up to $2.9
million. Ancestry.com features the Web's largest and fastest-growing collection
of searchable genealogy data.
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, proceeds from sales of Amazon.com stock subsequent to quarter
end, and the availability of additional Lycos, GeoCities and Hollywood
Entertainment shares which could be sold or posted as additional collateral for
additional loans, will be sufficient to fund its operations, investments and
capital expenditures for the foreseeable future. Additionally, the Company is
currently seeking to raise additional capital through private placement. Should
additional capital be needed to fund future investment and acquisition activity,
the Company may seek to raise additional capital through public or private
offerings of the Company's or its subsidiaries' stock, or through debt
financings.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. CMGI is in the process of evaluating and correcting the Year 2000
compliance of its proprietary products and services and third party equipment
and software that it uses, as well as its non-information technology systems,
such as building security, voice mail and other systems. The Company's Year 2000
compliance efforts will consist of the following phases: (i) identification of
all software products, information technology systems and non-information
technology systems; (ii) assessment of repair or replacement requirements; (iii)
repair or replacement; (iv) testing; (v) implementation; and (vi) creation of
contingency plans in the event of Year 2000 failures. The Company has
substantially completed phases (i) and (ii) and is currently working on phase
(iii) of its Year 2000 efforts. The Company expects to complete its Year 2000
compliance efforts by the end of June, 1999.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues.
Preliminary estimates regarding expected costs to CMGI for evaluating and
correcting Year 2000 issues are in the range of $3 million to $5 million, but
there can be no assurance that the costs will not exceed such amounts. The
Company's expectations regarding Year 2000 remediation efforts will evolve as it
continues to analyze and correct its systems. The Company has not yet developed
a formal Year 2000-specific contingency plan. The Company expects that a formal
Year 2000 contingency plan will evolve as it completes its Year 2000 compliance
efforts. Failure by the Company to resolve Year 2000 issues with respect to its
proprietary products and services could have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
failure of third-party equipment or software to operate properly with regard to
the year 2000 and thereafter could require CMGI to incur significant
unanticipated expenses to remedy any problems.
Page 21
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to equity price risks on the marketable portion of
its equity securities. The Company's available-for-sale securities at October
31, 1998 includes investments in companies in the Internet industry sector,
including Amazon.com, Inc. and Open Market, Inc., many of which have experienced
significant historical volatility in their stock prices. The Company typically
does not attempt to reduce or eliminate its market exposure on these securities.
A 20% adverse change in equity prices, based on a sensitivity analysis of the
Company's available-for-sale securities portfolio as of October 31, 1998, would
result in an approximate $18.5 million decrease in the fair value of the
Company's available-for-sale securities.
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
carrying value of long-term debt approximates its fair value, as estimated by
using discounted future cash flows based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in interest rates on its borrowing
arrangements. The Company does not enter into derivative financial instruments
for trading purposes. As a matter of policy all derivative positions are used
to reduce risk by hedging underlying economic exposure. The derivatives the
Company uses are straightforward instruments with liquid markets. At October
31, 1998, the Company was primarily exposed to the London Interbank Offered Rate
(LIBOR) interest rate on the outstanding borrowings under its line of credit and
other bank borrowing arrangements.
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may
dramatically increase. Therefore, in the future, the Company may consider
utilizing derivative instruments to mitigate such risks.
Page 22
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are filed herewith or incorporated by
reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934:
<TABLE>
<CAPTION>
Exhibit No. Title Method of Filing
----------- ----- ----------------
<S> <C> <C>
3 (i) (1) Amendment to the Restated Certificate of Incorporated by reference to Exhibit 3
Incorporation (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
the common stock Registration Statement on Form S-1, as
amended, filed on November 10, 1993
(Registration No. 33-71518).
27.1 Restated Financial Data Schedule for the Filed herewith.
three months ended October 31, 1998.
(b) Reports on Form 8-K.
None.
</TABLE>
Page 23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
--------------------------
Date: May 26, 1999 Andrew J. Hajducky III, CPA
Chief Financial Officer and Treasurer
Principal)
Financial and Accounting Officer)
Page 24
<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 OCTOBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 6,639
<SECURITIES> 92,287
<RECEIVABLES> 26,302
<ALLOWANCES> 0
<INVENTORY> 9,547
<CURRENT-ASSETS> 140,773
<PP&E> 12,725
<DEPRECIATION> 0
<TOTAL-ASSETS> 348,546
<CURRENT-LIABILITIES> 104,478
<BONDS> 0
0
0
<COMMON> 462
<OTHER-SE> 172,339
<TOTAL-LIABILITY-AND-EQUITY> 348,546
<SALES> 37,405
<TOTAL-REVENUES> 37,405
<CGS> 35,625
<TOTAL-COSTS> 35,625
<OTHER-EXPENSES> 21,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,068
<INCOME-PRETAX> 64,705
<INCOME-TAX> 26,316
<INCOME-CONTINUING> 38,389
<DISCONTINUED> (131)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,258
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.77
</TABLE>
