<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended January 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-23262
CMGI, INC.
----------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Brickstone Square 01810
Andover, Massachusetts (Zip Code)
(Address of principal executive offices)
(978) 684-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __________
---------
Number of shares outstanding of the issuer's common stock, as of March 1, 2000
Common Stock, par value $.01 per share 279,844,110
-------------------------------------- -----------
Class Number of shares outstanding
<PAGE>
CMGI, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
January 31, 2000 and July 31, 1999 3
Consolidated Statements of Operations
Three and six months ended January 31, 2000 and 1999 4
Consolidated Statements of Cash Flows
Six months ended January 31, 2000 and 1999 5
Notes to Interim Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24-25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26-28
SIGNATURE 29
EXHIBIT INDEX 30
</TABLE>
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, 2000.
2
<PAGE>
CMGI, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share and per share amounts) January 31, July 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 880,695 $ 468,912
Available-for-sale securities 2,378,703 1,532,327
Accounts receivable, trade, less allowance for doubtful accounts 158,272 41,794
Inventories 19,802 8,367
Prepaid expenses and other current assets 50,341 5,934
---------- ----------
Total current assets 3,487,813 2,057,334
---------- ----------
Property and equipment, net 167,977 24,832
Investments in affiliates 409,230 44,623
Goodwill and other intangible assets, net of accumulated amortization 4,002,394 149,703
Deferred income taxes 17,318 --
Other assets 182,083 128,102
---------- ----------
$8,266,815 $2,404,594
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 20,000
Current installments of long-term debt 16,267 5,258
Accounts payable and accrued expenses 319,490 74,371
Accrued income taxes 39,974 11,777
Deferred income taxes 835,528 508,348
Deferred revenues 26,456 6,726
Other current liabilities 102,217 49,849
---------- ----------
Total current liabilities 1,339,932 676,329
---------- ----------
Long-term debt, less current installments 231,142 15,060
Long-term deferred revenues 1,518 1,509
Deferred income taxes -- 35,140
Other long-term liabilities 41,146 18,298
Minority interest 416,888 184,514
Commitments and contingencies
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; issued 35,000
shares Series B convertible, redeemable preferred stock at January 31, 2000,
conversion premium at 4% per annum and issued 375,000
Series C convertible, redeemable preferred stock at January 31, 2000,
dividend at 2% per annum; both carried at liquidation value 415,739 411,283
Stockholders' equity:
Common stock, $0.01 par value per share. Authorized 400,000,000 shares;
issued and outstanding 279,770,687 shares at January 31, 2000 and
191,168,280 shares at July 31, 1999 2,798 956
Additional paid-in capital 4,663,620 235,229
Deferred compensation (36,566) (180)
Retained earnings 207,952 518,102
---------- ----------
4,837,804 754,107
Accumulated other comprehensive income 982,646 308,354
---------- ----------
Total stockholders' equity 5,820,450 1,062,461
---------- ----------
$8,266,815 $2,404,594
========== ==========
</TABLE>
see accompanying notes to consolidated financial statements
3
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three months ended January 31, Six months ended January 31,
------------------------------ ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 153,469 $ 38,972 $ 277,200 $ 76,377
Operating expenses:
Cost of revenues 121,749 37,121 229,922 72,744
Research and development 31,424 5,194 51,612 10,502
In-process research and development 4,717 -- 4,717 --
Selling 112,737 6,918 185,238 15,142
General and administrative 40,868 9,310 68,225 16,049
Amortization of intangible assets and stock-based
compensation 253,831 1,498 423,870 3,137
--------- -------- --------- --------
Total operating expenses 565,326 60,041 963,584 117,574
--------- -------- --------- --------
Operating loss (411,857) (21,069) (686,384) (41,197)
--------- -------- --------- --------
Other income (deductions):
Interest income 10,649 748 16,520 1,307
Interest expense (7,830) (1,165) (13,530) (2,233)
Other gains, net 166,149 50,598 214,498 94,692
Gain on issuance of stock by subsidiaries and affiliates 5,571 4,261 51,939 48,767
Equity in losses of affiliates (3,633) (6,189) (5,429) (9,548)
Minority interest 31,576 103 54,864 204
--------- -------- --------- --------
202,482 48,356 318,862 133,189
--------- -------- --------- --------
Income (loss) from continuing operations before income taxes (209,375) 27,287 (367,522) 91,992
Income tax expense (benefit) (23,800) 14,138 (64,535) 40,454
--------- -------- --------- --------
Income (loss) from continuing operations (185,575) 13,149 (302,987) 51,538
Discontinued operations, net of income taxes:
Income (loss) from operations of lists and database
services segment -- (148) -- (279)
--------- -------- --------- --------
Net income (loss) (185,575) 13,001 (302,987) 51,259
Preferred stock accretion and amortization of discount (2,228) -- (7,163) --
--------- -------- --------- --------
Net income (loss) available to common stockholders $(187,803) $ 13,001 $(310,150) $ 51,259
========= ======== ========= ========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.74) $ 0.07 $ (1.31) $ 0.28
Income (loss) from discontinued operations of lists and
database services segment -- -- -- --
--------- -------- --------- --------
Net income (loss) $ (0.74) $ 0.07 $ (1.31) $ 0.28
========= ======== ========= ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ -- $ 0.06 $ -- $ 0.25
Income (loss) from discontinued operations of lists and
database services segment $ -- -- -- --
--------- -------- --------- --------
Net income (loss) $ (0.74) $ 0.06 $ (1.31) $ 0.25
========= ======== ========= ========
Shares used in computing earnings (loss) per share:
Basic 252,515 185,040 237,519 184,640
========= ======== ========= ========
Diluted 252,515 205,028 237,519 202,600
========= ======== ========= ========
</TABLE>
see accompanying notes to consolidated financial statements
4
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Six months ended January 31,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (302,987) $ 51,538
Adjustments to reconcile income (loss) from continuing operations to net cash
used for continuing operations:
Depreciation and amortization 447,205 5,820
Deferred income taxes (233,073) 20,261
Non-operating gains, net (266,437) (143,460)
Equity in losses of affiliates 5,429 9,548
Minority interest (54,864) (204)
In-process research and development 4,717 --
Changes in operating assets and liabilities, excluding effects from
acquisitions of subsidiaries:
Trade accounts receivable (48,241) (3,905)
Inventories (4,515) (2,074)
Prepaid expenses (27,771) (209)
Accounts payable and accrued expenses 24,351 7,473
Deferred revenues 9,270 5,956
Refundable and accrued income taxes, net 28,197 10,497
Tax benefit from exercise of stock options 132,639
Other assets and liabilities (6,276) (227)
---------- ----------
Net cash used for operating activities of continuing operations (292,356) (38,986)
Net cash used for operating activities of discontinued operations -- (673)
---------- ----------
Net cash used for operating activities (292,356) (39,659)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment - continuing operations (75,989) (3,689)
Additions to property and equipment - discontinued operations -- (29)
Purchase of available-for-sale securities (51,178) (31,123)
Proceeds from sale of stock investments 686,002 80,283
Investments in affiliates (60,587) (14,013)
Net cash acquired through acquisitions of subsidiaries 105,842 --
Other (56) 1,536
---------- ----------
Net cash provided by investing activities 604,034 32,965
---------- ----------
Cash flows from financing activities:
Net proceeds from (repayments of) notes payable (20,000) (3,956)
Repayments of long-term debt (3,373) (335)
Net proceeds from issuance of Series B convertible preferred stock -- 49,805
Net proceeds from issuance of common stock 22,020 3,500
Net proceeds from issuance of stock by subsidiaries 87,901 2,805
Other 13,557 (344)
---------- ----------
Net cash provided by financing activities 100,105 51,475
---------- ----------
Net increase in cash and cash equivalents 411,783 44,781
Cash and cash equivalents at beginning of period 468,912 61,537
---------- ----------
Cash and cash equivalents at end of period $ 880,695 $ 106,318
========== ==========
</TABLE>
see accompanying notes to consolidated financial statements
5
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Basis of Presentation
The accompanying consolidated financial statements have been prepared by CMGI,
Inc. ("CMGI" or "the Company") in accordance with generally accepted accounting
principles. In the opinion of management, the accompanying consolidated
financial statements contain all adjustments, consisting only of those of a
normal recurring nature, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows at the dates and for
the periods indicated. While the Company believes that the disclosures presented
are adequate to make the information not misleading, these consolidated
financial statements should be read in conjunction with the audited financial
statements and related notes for the year ended July 31, 1999 which are
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission ("the SEC") on October 29, 1999. The results for the
three- and six-month periods ended January 31, 2000 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. Two-For-One Common Stock Split
On January 11, 2000, 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.
C. Other Gains, Net
During the six months ended January 31, 2000, the Company sold 3,155,000 shares
of Yahoo! Inc. common stock and 260,000 shares of Open Market common stock for
proceeds totaling $684.2 million. The Company recorded pre-tax gains of $208
million and $5.8 million on the sales of the Yahoo! Inc. common stock and Open
Market common stock, respectively.
During the six months ended January 31, 1999, the Company recognized a pre-tax
gain of $94.7 million related to the sales of investments in Reel.com, Sage
Enterprises, Inc. and Amazon.com and sales of Lycos, Inc. (Lycos) common stock.
D. Gain on Issuance of Stock by Subsidiaries and Affiliates
In October 1999, the Company's subsidiary, NaviSite, commenced its initial
public offering of common stock, issuing approximately 5.5 million shares at a
price of $14 per share, raising $69.6 million in net proceeds for Navisite. As a
result of the initial public offering, the Company's ownership interest in
NaviSite was reduced from approximately 89.6% to approximately 71.8%. The
Company recorded a pre-tax gain of $46.4 million as a result of the initial
public offering.
In November 1999, the underwriters of NaviSite's initial public offering
exercised their over-allotment option in full to purchase an additional 825,000
shares of common stock at $14 per share. As a result, the Company's ownership
interest in NaviSite was further reduced from approximately 71.8% to
approximately 69.5%. The Company recorded a pre-tax gain of $5.5 million as a
result of the exercise of the over-allotment.
During the first six months of fiscal 1999, the Company recognized pre-tax gains
related to the stock issuances of affiliates Lycos and GeoCities of $20.3
million and $28.5 million, respectively.
The pre-tax gains represent the increase in the book value of the Company's net
equity in the subsidiary or affiliate as a result of the subsidiary or
affiliates' stock issuances.
6
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
E. Acquisitions and Investments
In August 1999, CMGI completed its acquisition of approximately 81.5% of
AltaVista Company (AltaVista), a Web portal that integrates proprietary Internet
technology and services to deliver relevant results for both individuals and
Web-based businesses, for 37,989,950 CMGI common shares valued at approximately
$1.8 billion, 18,090.45 shares of the Company's Series D preferred stock, which
were converted into approximately 3,618,090 million shares of CMGI common stock
in October 1999 valued at approximately $173 million, three-year notes totaling
$220 million and the exchange of CMGI and subsidiary stock options for AltaVista
stock options. The AltaVista acquisition included the assets and liabilities
constituting the AltaVista Internet search service and also included former
Compaq Computer Corporation (Compaq) subsidiaries Zip2 Corporation and
Shopping.com. The shares issued by the Company in connection with the AltaVista
acquisition are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for a period of one year from the date of
issuance. The total purchase price for AltaVista was valued at approximately
$2.4 billion, including costs of acquisition of $4 million. The value of the
Company's shares included in the purchase price was recorded net of a weighted
average 10% market value discount to reflect the restrictions on
transferability.
In January 2000, CMGI completed its acquisition of AdForce Inc. (AdForce), a
leading online provider of centralized, outsourced ad management and delivery
services. The total purchase price for AdForce was valued at approximately $545
million, consisting of 11,270,209 shares of CMGI common stock valued at
approximately $473 million, options and warrants to purchase CMGI common stock
valued at approximately $70.9 million, and direct acquisition costs of
approximately $1.1 million.
In January 2000, CMGI completed its acquisition of Flycast Communications
Corporation (Flycast), a leading provider of Web-based direct response
advertising solutions. The total purchase price for Flycast was valued at
approximately $904.4 million consisting of 14,594,916 shares of CMGI common
stock valued at approximately $715.7 million, options and warrants to purchase
CMGI common stock valued at approximately $168.2 million, and direct acquisition
costs of approximately $20.5 million.
On January 20, 2000, Engage Technologies, Inc. (Engage), a majority-owned
operating company of CMGI, announced a definitive agreement to acquire Flycast
and Adsmart from CMGI. Engage will acquire Flycast and Adsmart from CMGI through
the issuance of approximately 65 million shares of Engage common stock, (as
adjusted to reflect the Engage two-for-one stock split payable April 3, 2000.)
The transaction is expected to be completed in April/May 2000.
During the first quarter of fiscal year 2000, the Company also completed its
acquisitions of 1ClickCharge (formerly referred to as Cha! Technologies
Services, Inc), iAtlas, Inc. (iAtlas) and Signatures SNI, Inc. (Signatures
Network) for combined consideration of approximately $65 million in CMGI common
stock, convertible notes, cash and commitments to fund a total of approximately
$113 million in operating capital.
During the second quarter of fiscal year 2000, the Company also completed its
acquisitions of 1stUp.com (1stUp), Clara Vista, Activate.net Corporation
(Activate), AdKnowledge Inc. (Adknowledge), Tribal Voice, Equilibrium,
GreenWitch LLC (GreenWitch) and the remaining 33% minority interest in Netwright
not already owned by CMGI, for combined consideration of approximately $347
million in CMGI and subsidiary common stock, options and warrants to purchase
common stock of CMGI and subsidiaries and notes which are payable in CMGI common
stock. In the first step of the AdKnowledge transaction, CMGI acquired an 88%
equity stake in AdKnowledge. The second step of the AdKnowledge transaction, the
contribution of AdKnowledge shares held by AdKnowledge shareholders, including
CMGI, to Engage in exchange for approximately 10.3 million shares of Engage
common stock (as adjusted to reflect the Engage two-for-one stock split payable
April 3, 2000) closed on December 22, 1999. Upon completion of the transaction,
CMGI received approximately 9.8 million shares of Engage (as adjusted to reflect
the Engage two-for-one stock split payable April 3, 2000), and AdKnowledge
became a wholly-owned subsidiary of Engage.
7
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The acquisitions completed during the first six months of fiscal 2000 have been
accounted for using the purchase method and, accordingly, the purchase prices
have been allocated to the assets purchased and liabilities assumed based upon
their fair values at the date of acquisition. Goodwill and other intangibles,
totaling $4.1 billion, were recorded related to acquisitions, and are being
amortized on a straight-line basis over periods ranging from two to three years.
The acquired companies are included in the Company's consolidated financial
statements from the dates of acquisition.
The purchase price for each of the above acquisitions was allocated as follows:
<TABLE>
<CAPTION>
(in thousands) AltaVista AdForce Flycast Others Total
----------------- ---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Working capital, including cash
(cash overdraft) acquired $ (39,604) $ 33,808 $ 40,264 $ (2,939) $ 31,529
Property, plant and equipment 44,460 10,360 11,750 9,548 76,118
Other assets (liabilities), net 15,786 (5,078) (5,343) 15,892 21,257
Goodwill 2,199,426 505,910 857,783 372,993 3,936,112
Developed technology 128,128 -- -- 1,960 130,088
Other identifiable intangible assets 40,575 -- -- 10,000 50,575
In-process research and development -- -- -- 4,717 4,717
---------- -------- -------- -------- ----------
Purchase price $2,388,771 $545,000 $904,454 $412,171 $4,250,396
========== ======== ======== ======== ==========
</TABLE>
The above allocation of the AltaVista purchase price, represents the Company's
81.5% interest in the fair values of the acquired underlying assets and
liabilities of AltaVista. The purchase price allocations for each of the
acquisitions which were consummated during the first six months of fiscal year
2000 are preliminary and are subject to adjustment upon finalization of the
purchase accounting. The in-process research and development charge of $4.7
million recorded during the three months ended January 31, 2000 relates to the
acquisitions 1ClickCharge and AdKnowledge. The finalization of the purchase
accounting for AdForce, Equilibrium, Flycast, and GreenWitch, may result in a
significant portion of the aggregate purchase price of $1.5 billion being
identified as in-process research and development, which will be charged to
operating results in the third quarter of fiscal 2000 when the amounts are
determined.
Presented below is unaudited selected pro forma financial information for the
six-month periods ended January 31, 2000 and 1999 as if the acquisitions of
AltaVista, AdForce and Flycast had occurred at the beginning of each period. The
unaudited pro forma financial information excludes the impact of acquisitions
other than AltaVista, AdForce and Flycast, whose historical results are not
material to the pro forma financial information shown below. The unaudited pro
forma financial information is provided for informational purposes only and
should not be construed to be indicative of the Company's consolidated results
of operations had the acquisitions been consummated on the dates assumed and do
not project the Company's results of operations for any future period:
(in thousands ) Six months ended January 31, 2000 1999
- ------------------------------------------- ---- ----
Net revenues $ 327,937 $ 116,513
========= =========
Net loss $(575,601) $(469,654)
========= =========
Net loss per share (basic and diluted) $ (2.10) $ (2.13)
========= =========
During the first six months of fiscal year 2000, the Company, through its
limited liability company subsidiaries, CMG@Ventures III, LLC, CMGI@Ventures IV,
LLC, CMGI@Ventures B2B, LLC and CMGI@Ventures Technology Fund, LLC, acquired
initial or follow-on minority ownership interests in 28 Internet companies for
an aggregate total of approximately $58.8 million. These included investments in
FoodBuy.com, GX Media and Half.com which the Company accounts for using the
equity method. The finalization of the purchase accounting for the Company's
investments in FoodBuy.com, GX Media and Half.com may result in a significant
portion of the aggregate $28 million purchase price being identified as in-
process research and development, which will be charged to operating results in
the third quarter when the amount is determined.
8
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On October 29, 1999, the Company purchased 250,000 shares of Akamai Technologies
common stock at a cost of $26 per share. On November 29, 1999, the Company and
Pacific Century CyberWorks Limited (PCCW), a company listed on the Stock
Exchange of Hong Kong, completed their previously agreed to exchange of stock.
The Company received approximately 448.3 million shares of PCCW stock in
exchange for approximately 8.1 million shares of the Company's common stock. The
Akamai common stock acquired is accounted for as an available-for-sale security
and is carried at fair value based on quoted market prices. The PCCW stock
acquired is subject to a three year restriction on transferability and
accordingly is accounted for as a long-term asset at cost. The cost recorded for
the PCCW stock is $302 million, which represents the fair value of the CMGI
shares issued in the exchange as of the date the share exchange agreement was
executed, less a fair market value discount to reflect the restrictions on
transferability.
F. Segment Information
The Company's continuing operations have been classified in two primary business
segments, (i) Internet and (ii) fulfillment services. The Internet segment
focuses on strategic Internet opportunities afforded by the Internet and
interactive media markets. The fulfillment services segment provides product and
literature fulfillment and supply chain management, telemarketing, and
outsourced e-business program management services. During the three months and
six months ended January 31, 2000, one customer accounted for 28% and 26% of the
net revenues of the Internet segment, respectively. During the three months and
six months ended January 31, 2000, one customer accounted for 56% and 53% of the
net revenues of the fulfillment services segment, respectively. Summarized
financial information by business segment for continuing operations is as
follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended January 31, Six months ended January 31,
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Internet $ 115,267 $ 4,902 $ 200,369 $ 9,814
Fulfillment services 38,202 34,070 76,831 66,563
--------- -------- --------- --------
$ 153,469 $ 38,972 $ 277,200 $ 76,377
========= ======== ========= ========
Operating income (loss):
Internet $(414,304) $(21,974) $(691,671) $(42,359)
Fulfillment services 2,447 905 5,287 1,162
--------- -------- --------- --------
$(411,857) $(21,069) $(686,384) $(41,197)
========= ======== ========= ========
</TABLE>
All of the acquisitions during the first six months of fiscal year 2000 and the
increase in the value of the available-for-sale securities relate to the
Internet segment and are the primary reasons for the increase in the net assets
of the Company. Other gains, net, minority interest and equity in losses of
affiliates as reported in the Consolidated Statements of Operations for the six
months ended January 31, 2000 and 1999 relate to the Internet segment. All
intercompany transactions have been eliminated, and intersegment revenues are
not significant.
G. Borrowing Arrangements
In conjunction with its acquisition of AltaVista, the Company issued three year
notes totaling $220 million to Compaq and Digital Equipment Corporation
(Digital), a wholly-owned subsidiary of Compaq, due August 18, 2002. Interest on
each note, at a rate of 10.5% per annum, is due and payable semiannually on each
February 18 and August 18 until the note is paid in full. Principal and interest
payments due on the notes are payable, at the option of CMGI, in cash,
marketable securities (as defined in the note) or any combination thereof.
Upon its maturity in January 2000, the Company repaid the entire amount of its
previously outstanding $20 million collateralized corporate notes payable.
9
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents and convertible preferred stock is included in the calculation of
diluted earnings per share only when the effect of their inclusion would be
dilutive. The effect of convertible preferred stock using the "if-converted"
method and the dilutive effect of common stock equivalents were anti-dilutive
for the three and six months ended January 31, 2000 and, therefore, 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 income (loss) from
continuing operations the income attributable to the potential exercise of the
dilutive stock options or warrants of the subsidiary. The effect of income
attributable to dilutive subsidiary stock equivalents was immaterial for the
three and six months ended January 31, 2000 and 1999.
The reconciliation of the denominators of the basic and diluted earnings (loss)
per share computations is as follows:
<TABLE>
<CAPTION>
( in thousands) Three months ended January 31, Six months ended January 31,
--------------------------------- --------------------------------
2000 1999 2000 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common shares
Outstanding - basic 252,515 185,040 237,519 184,640
Weighted average number of dilutive common stock
equivalents -- 18,271 -- 17,100
Weighted average effect of assumed conversion of
convertible preferred stock -- 1,717 -- 860
------- ------- ------- -------
Shares used in computing diluted earnings (loss)
per share 252,515 205,028 237,519 202,600
======= ======= ======= =======
</TABLE>
I. Comprehensive Income
The components of comprehensive income, net of income taxes, are as follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended January 31, Six months ended January 31,
--------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(185,575) $ 13,001 $(302,987) $ 51,259
Net unrealized holding gain arising during period 518,157 483,619 800,470 483,530
Less: reclassification adjustment for gain
realized in net income (loss) (97,737) (4,119) (126,178) (4,119)
--------- -------- --------- --------
Comprehensive income $ 234,845 $492,501 $ 371,305 $530,670
========= ======== ========= ========
</TABLE>
10
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Consolidated Statements of Cash Flows Supplemental Information
(in thousands) Six months ended January 31,
----------------------------
2000 1999
---- ----
Cash paid during the period for:
Interest $2,664 $1,833
====== ======
Income taxes $7,667 $9,476
====== ======
Substantially all of the consideration for acquisitions of businesses by the
Company, or its subsidiaries, during the first six months of fiscal 2000
included the issuance of shares of the Company's or its subsidiaries' stock
and/or the issuance of seller's notes.
During the six months ended January 31, 2000, significant non-cash investing
activities included the exchange of 8.1 million shares of the Company's common
stock for approximately 448.3 million shares of PCCW stock. The PCCW shares
received were valued at $302 million, which represents the value of the CMGI
shares issued in the exchange on the date the agreement was executed, less a
market value discount to reflect the restrictions on transferability.
K. Available-for-Sale Securities
At January 31, 2000, available-for-sale securities primarily consist of common
stock investments. Available-for-sale investments are carried at fair value
based on quoted market prices, net of a market value discount to reflect any
remaining restrictions on transferability. Available-for-sale securities at
January 31, 2000 included approximately 1.5 million shares of Yahoo! Inc. valued
at $474 million, 12.9 million shares of Lycos Inc. valued at $947 million, 2.2
million shares of Silknet Software, Inc. (Silknet) valued at $328 million, 4.4
million shares of Hollywood Entertainment valued at $52 million, 2.7 million
shares of Ventro Corporation (formerly Chemdex Corporation) valued at $264
million, 1.3 million shares of Critical Path, Inc. (Critical Path) valued at $84
million and 250,000 shares of Akamai Technologies, Inc. (Akamai) valued at $62
million. Shares of publicly traded companies held by CMG@Ventures I and II which
have been allocated to CMG@Ventures I's and II's profit members have been
classified in other non-current assets in the accompanying Consolidated Balance
Sheet and valued at carrying value as of the date of allocation. Certain shares
included in available-for-sale securities at January 31, 2000 may be required to
be allocated to CMG@Ventures I's and II's profit members in the future. A net
unrealized holding gain of $982.6 million, net of deferred income taxes of
$719.3 million, has been reflected in the equity section of the consolidated
balance sheet based on the change in market value of the available-for-sale
securities from dates of acquisition to January 31, 2000.
L. New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position (SOP) 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 requires the capitalization of various
internal costs related to the implementation of computer software obtained for
internal use. The Company has adopted this standard in the first quarter of
fiscal year 2000. The adoption of SOP 98-1 did not have a material impact on its
financial position or its results of operations.
In April 1998, AcSEC issued SOP 98-5, "Reporting Costs of Start-Up Activities".
Under SOP 98-5, the cost of start-up activities should be expensed as incurred.
Start-up activities are broadly defined as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customer,
commencing some new operation or organizing a new entity. SOP 98-5 is effective
for the Company's fiscal 2000 financial statements. The adoption did not have a
material impact on its financial position or results of operations.
11
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 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 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 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. The Company expects that the adoption
of SFAS 133 will not have a material impact on its financial position or its
results of operations.
In November 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 100, "Restructuring and Impairment Charges." In
December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 100 expresses the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of impairment
charges. SAB No. 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. Although
the Company is still in the process of analyzing the impact of SAB No. 100 and
SAB No. 101, if any, the Company expects that there will be no material impact
on its financial position or its results of operations.
M. Subsequent Events
Subsequent to January 31, 2000, the Company sold 356,500 shares of its Yahoo!
common stock for proceeds of approximately $64.7 million.
On February 3, 2000, the Company's subsidiary, AltaVista Company completed its
previously announced acquisition of Raging Bull in a stock-for-stock exchange of
privately held shares of each company. (CMGI owned approximately 82% of
AltaVista and CMG@Ventures III LLC owned approximately 10% of Raging Bull's
outstanding shares on a fully diluted basis.)
On February 3, 2000, the Company and divine interVentures, Inc. (divine), a
Chicago-based Internet operating company focused on the business-to-business
marketplace, entered into an agreement whereby CMGI will acquire approximately
18.3 million shares of divine's series E convertible preferred stock for
approximately $18.3 million. In addition, divine agreed to sell to CMGI an
additional number of shares of its class A common stock such that, immediately
after a qualified initial public offering, CMGI will beneficially own 4.9% of
divine's class A common stock, in exchange for shares of CMGI common stock
having a market value equal to the shares of divine's class A common stock being
sold to CMGI, based upon the initial public offering price.
On February 9, 2000, the Company signed a definitive agreement to acquire
uBid.com, a leading business to consumer e-commerce auction site for
consideration preliminarily valued at $380 million, consisting of CMGI common
stock, options to purchase CMGI common stock and estimated additional
acquisition costs. Under the terms of the merger agreement, CMGI will issue
.2628 CMGI shares for every share of uBid.com held on the closing date of the
transaction. Closing of the transaction, expected in May 2000, is subject to
regulatory approvals and customary closing conditions, including formal approval
by uBid.com shareholders.
On February 10, 2000, CMG@Ventures III, LLC completed the sale of its interest
in Promedix.com, Inc. to Ventro Corporation (formerly Chemdex Corporation). In
exchange for CMG@Ventures III, LLC's approximate 7.4% interest in Promedix,
CMG@Ventures III, LLC received 1.0 million shares of Ventro Corporation. Under
the terms of the CMG@Ventures III LLC agreement, a portion of these shares may
be required to be allocated to CMG@Ventures III LLC's profit members in the
future.
12
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On February 14, 2000, the Company signed a definitive agreement to acquire an
approximate 94.1% equity stake in Tallan, Inc., (Tallan) a provider of Internet
and e-commerce professional services to Fortune 1000 and dot.com companies for
consideration preliminarily valued at approximately $920 million. Under the
terms of the agreement, the purchase price will consist of approximately $20
million in cash, approximately $300 million in notes payable maturing twenty
days from closing, approximately $395 million in notes payable bearing interest
at 6.5%, maturing six to nine months after closing and payable in cash or CMGI
stock at the option of CMGI, and options to purchase CMGI common stock valued at
approximately $200 million. Additionally, the Company currently estimates
additional acquisition costs of approximately $5 million. Closing of the
transaction is subject to regulatory approvals and customary closing conditions,
and is expected to be completed in May 2000.
On February 29, 2000, the Company announced an agreement with Cable & Wireless
plc to issue $500 million in shares of CMGI common stock in exchange for $500
million in shares of PCCW, which Cable & Wireless plc will receive upon the
completion of Cable & Wireless plc's sale of their Cable & Wireless HKT
subsidiary to PCCW.
On March 1, 2000, the Company along with Hicks, Muse, Tate, & Furst
Incorporated, ("HMTF"), and PCCW, announced the formation of a new venture
capital partnership, @Ventures Global Partners. Under the terms of the
partnership, the parties have each committed to invest up to $500 million, for a
total of up to $1.5 billion, to support the development of Internet companies
based in Asia, Europe, and the Americas. There can be no assurance that the
Company will be able to raise sufficient funds for the @Ventures Global Partners
arrangement or raise such funds on terms that are favorable to the Company.
On March 10, 2000, the Company completed the acquisition of yesmail.com, a
leading outsourcer of permission email marketing technologies and services for
consideration preliminarily valued at $671 million, consisting of CMGI common
stock, options to purchase CMGI common stock and estimated additional
acquisition costs. The Company issued .2504 shares of CMGI for every share of
yesmail.com outstanding on the closing date.
On March 16, 2000, a derivative action was filed in the Court of Chancery of the
State of Delaware against CMGI, Edward A. Bennett, Christopher A. Evans, Craig
D. Goldman, Andrew J. Hajducky III, Frederic D. Rosen, Paul L. Schaut, David S.
Wetherell and Engage Technologies Inc. The complaint alleges that, in connection
with the sale by CMGI of Flycast Communications Corporation and Adsmart
Corporation to Engage, CMGI and the individual defendants have violated their
fiduciary duties of loyalty and good faith. CMGI believes that the complaint is
without merit and intends to contest the claims vigorously.
13
<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 within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, that involve risks
and uncertainties. All statements other than statements of historical
information provided herein may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. Factors that could cause actual results to differ materially from
those reflected in the forward-looking statements include, but are not limited
to, those discussed in this section and elsewhere in this report, the risks
discussed in the "Factors That May Affect Future Results" section included in
the Company's Annual Report on Form 10K filed with the SEC on October 29, 1999,
and the risks discussed in the Company's other filings with the SEC. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis, judgment, belief or expectation only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
Basis of Presentation
Certain amounts for prior periods in the accompanying consolidated financial
statements, and in the discussion below have been reclassified to conform with
current period presentations.
Three months ended January 31, 2000 compared to three months ended January 31,
1999
Net revenues for the quarter ended January 31, 2000 increased $114,497,000,
or 294%, to $153,469,000 from $38,972,000 for the quarter ended January 31,
1999. The increase was largely attributable to an increase of $110,365,000 in
net revenues for the Company's Internet segment due to the acquisitions of
1stUp.com, Activate.net, AdForce, AdKnowledge and Flycast during the second
quarter of fiscal 2000, the acquisitions of AltaVista and Signatures Network
during the first quarter of fiscal 2000, the acquisitions of I/PRO and 2CAN
during the third quarter of fiscal 1999, and increased net revenues from
Adsmart, Engage, MyWay.com, NaviNet, and NaviSite. Additionally, net revenues in
the Company's fulfillment services segment increased $4,132,000 primarily
reflecting increased volume of turnkey business from Cisco and growth in
Internet - related fulfillment business. The Company believes that its
subsidiary companies will continue to develop and introduce their products
commercially, actively pursue increased revenues from new and existing
customers, and look to expand into new market opportunities. Additionally, on
March 10, 2000, the Company acquired yesmail.com. The Company has also signed
agreements to acquire several additional Internet companies, including Ubid.com
and Tallan. These acquisitions remain subject to customary closing conditions,
including regulatory approval and target company stockholder approval.
Therefore, as a result of both increased sales by existing companies, and
incremental revenues from new acquisitions, the Company expects to report future
revenue growth.
Cost of revenues increased $84,628,000, or 228%, to $121,749,000 in the
second quarter of fiscal 2000 from $37,121,000 for the corresponding period in
fiscal 1999, reflecting increases of $83,314,000 and $1,314,000 in the Internet
and fulfillment services segments, respectively. Internet segment cost of
revenues increases were primarily attributable to higher revenues as a result of
the acquisitions of 1stUp.com, Activate.net, AdForce, AdKnowledge, Flycast,
AltaVista, Signatures Network, I/PRO and 2CAN, and the acceleration of
operations for other subsidiaries within the segment. Cost of revenues increased
in the fulfillment services segment primarily as a result of higher revenues.
Cost of revenues as a percentage of revenues in the Internet segment decreased
to 79% in the second quarter of fiscal 2000 from 161% in the same period during
the prior year, primarily as a result of the acquisitions of AltaVista and
Signatures Network and improved margin percentages at NaviSite. Fulfillment
services segment cost of revenues as a percentage of net revenues decreased to
80% in the second quarter of fiscal 2000 from 86% in the second quarter of
fiscal 1999, primarily reflecting increased operating efficiencies related to
turnkey operations.
14
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Research and development expenses increased $26,230,000, or 505%, to
$31,424,000 in the quarter ended January 31, 2000 from $5,194,000 in the prior
year's second quarter. All research and development expenses in both periods
were incurred within the Company's Internet segment. The increase as compared to
the prior year was primarily due to the acquisition of AltaVista and the
increased development efforts at Engage, NaviSite, iCast, and MyWay.com. In-
process research and development expense was $4.7 million during the three
months ended January 31, 2000, resulting from the AdKnowledge and 1ClickCharge
acquisitions. All in-process research and development expenses were incurred
within the Company's Internet segment. Further, related to the Company's
acquisitions and investments made during the second quarter of fiscal year 2000,
the acquisition accounting and valuation for total investments of approximately
$1.5 billion related to AdForce, Equilibrium, Flycast, FoodBuy.com, Green Witch,
GXMedia and Half.com may result in a significant portion of the purchase price
being identified as in-process research and development, which will be charged
to operating results in the third quarter of fiscal 2000 when the amounts are
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 increased $105,819,000, or 1,530%, to $112,737,000 in the
second quarter ended January 31, 2000 from $6,918,000 for the corresponding
period in fiscal 1999, primarily reflecting a $106,034,000 increase in the
Company's Internet segment. The increased costs in the Internet segment are
primarily due to the acquisitions of 1stUp.com, Activate.net, AdForce,
AdKnowledge, Flycast, AltaVista, Signatures Network, 1ClickCharge, Activerse,
I/PRO and 2CAN, and the continued growth of sales and marketing efforts at
various other CMGI subsidiaries related to product launches and infrastructure.
Selling expenses in the fulfillment services segment decreased by $215,000 in
comparison with last year's second quarter due primarily to headcount
reductions. Selling expenses as a percentage of net revenues increased to 73% in
the second quarter of fiscal 2000 from 18% for the corresponding period in
fiscal 1999, primarily reflecting the impact of acquisitions, and the expansion
of sales and marketing efforts related to product launches and infrastructure
within the Company's Internet 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 these costs will substantially increase in future periods.
General and administrative expenses increased $31,558,000, or 339%, to
$40,868,000 in the second quarter of fiscal 2000 from $9,310,000 for the
corresponding period in fiscal 1999. The Internet segment experienced an
increase of $30,086,000, primarily due to the acquisitions of 1stUp.com,
Activate.net, AdKnowledge, Flycast, AltaVista, Signatures Network, 1ClickCharge,
Activerse, I/PRO and 2CAN, increased CMGI corporate expenses, and the building
of management infrastructures in several of the Company's Internet segment
subsidiaries. General and administrative expenses in the fulfillment services
segment increased by $1,472,000 in comparison with last year's second quarter,
largely due to the building of management infrastructure. General and
administrative expenses as a percentage of net revenues increased to 27% in the
second quarter of fiscal 2000 from 24% in the second quarter of fiscal 1999. The
Company anticipates that its general and administrative expenses will continue
to increase significantly as the Company adds newly acquired subsidiaries and as
existing subsidiaries continue to grow and expand their administrative staffs
and infrastructures.
Amortization of intangible assets and stock-based compensation increased
$252,333,000, or 16,845%, to $253,831,000 in the second quarter of fiscal 2000
from $1,498,000 for the corresponding period in fiscal 1999, reflecting a
$252,314,000 increase in the Internet segment, primarily due to the acquisitions
of 1stUp.com, Activate.net, AdForce, AdKnowledge, Flycast, AltaVista, Activerse,
I/PRO and 2CAN. Included in these amounts were $5,238,000 and $250,000 of
amortization of stock-based compensation for the three months ended January 31,
2000 and 1999, respectively. Substantially all of the amortization of stock-
based compensation relates to deferred compensation recorded as a result of the
application of purchase accounting to the Company's acquisitions. The Company
anticipates that its amortization of intangibles and stock-based compensation
expense will continue to increase significantly as the Company and its
subsidiaries continue to acquire new companies in the future.
15
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Gain on issuance of stock by subsidiaries and affiliates in the second
quarter of fiscal 2000 reflects the pre-tax gain of $5,474,000 on the issuance
of stock by NaviSite as a result of the exercise of the underwriters' over-
allotment option in its initial public offering. Gain on issuance of stock by
subsidiaries and affiliates for the second quarter of fiscal 1999 of $4,261,000
arose primarily as a result of the issuance of stock by GeoCities in its
acquisition of Starseed, Inc. (known as WebRing) in December 1998.
Other gains, net in the second quarter of fiscal 2000 primarily reflect a
pre-tax gain of $159,717,000 on the sale of 1,515,000 shares of Yahoo! common
stock and a pre-tax gain of $5,832,000 on the sale of 260,000 shares of Open
Market, Inc. common stock. Other gains, net recorded in the second quarter of
fiscal 1999 included a $43,596,000 gain on the sale of Lycos, Inc. common stock
and a $7,002,000 gain on the sale of Amazon.com, Inc. common stock.
Minority interest, net increased to $31,576,000 in the second quarter of
fiscal 2000 from $103,000 in the second quarter of fiscal 1999, primarily
reflecting minority interest in net losses of four subsidiaries during the
second quarter of fiscal 2000, including AltaVista, Blaxxun, Engage, and
NaviSite.
Interest income increased $9,901,000 to $10,649,000 in the second fiscal
quarter of 2000 from $748,000 in the second quarter of fiscal 1999, reflecting
increased income associated with higher average corporate cash equivalent
balances compared with the prior year and interest earned by Engage and NaviSite
on cash raised from their initial public offerings. Interest expense increased
$6,665,000 to $7,830,000 in the second fiscal quarter of 2000 from $1,165,000 in
the second quarter of fiscal 1999, primarily due to the notes issued as part of
the AltaVista acquisition in August 1999 and higher corporate collateralized
borrowings.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method
of accounting. Under the equity method of accounting, the Company's
proportionate share of each affiliate's operating losses and amortization of the
Company's net excess investment over its equity in each affiliate's net assets
is included in equity in losses of affiliates. Equity in losses of affiliates
for the quarter ended January 31, 2000 includes the results from the Company's
minority ownership in ThingWorld.com, WebCT, FoodBuy.com, Half.com, GX Media.com
and Engage Technologies Japan, Inc. Equity in losses of affiliates for the
quarter ended January 31, 1999 included the results from the Company's minority
ownership in Lycos, GeoCities, ThingWorld.com, Silknet, Speech Machines,
MotherNature.com, Magnitude Network and Engage Technologies Japan, Inc. 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 benefit in the second quarter of fiscal 2000 was $23,800,000.
Exclusive of taxes provided for significant, unusual or extraordinary items, the
Company provides for income taxes on a year to date basis at an effective rate
based upon its estimate of full year earnings.
16
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Six months ended January 31, 2000 compared to six months ended January 31, 1999
Net revenues for the six months ended January 31, 2000 increased
$200,823,000, or 263%, to $277,200,000 from $76,377,000 for the six months ended
January 31, 1999. The increase was largely attributable to an increase of
$190,555,000 in net revenues for the Company's Internet segment, reflecting the
acquisitions of 1stUp.com, Activate.net, AdForce, AdKnowledge and Flycast during
the second quarter of fiscal 2000, the acquisitions of AltaVista and Signatures
Network during the first quarter of fiscal 2000, the acquisitions of I/PRO and
2CAN during the third quarter of fiscal 1999, and increased net revenues from
Adsmart, Engage, MyWay.com, NaviNet, and NaviSite. Included in Internet segment
revenues in the first fiscal quarter was approximately $12 million recorded by
AltaVista's Shopping.com subsidiary related to the completion of a large order
for the sale of computer equipment purchased by Shopping.com from Compaq
Computer and sold to FreePC, an AltaVista investee. Additionally, net revenues
in the Company's fulfillment services segment increased $10,268,000 primarily
reflecting increased volume of turnkey business from Cisco and growth in
Internet - related fulfillment business, including the completion of an
approximate $4.3 million special project order from JuniorNet, a leading Web
destination for children, during the first quarter of fiscal 2000. The Company
believes that its subsidiary companies will continue to develop and introduce
their products commercially, actively pursue increased revenues from new and
existing customers, and look to expand into new market opportunities.
Additionally, on March 10, 2000, the Company acquired yesmail.com. The Company
has also signed agreements to acquire several additional Internet companies,
including Ubid.com and Tallan. These acquisitions remain subject to customary
closing conditions, including regulatory approval and target company stockholder
approval. Therefore, as a result of both increased sales by existing companies,
and incremental revenues from new acquisitions, the Company expects to report
future revenue growth.
Cost of revenues increased $157,178,000, or 216%, to $229,922,000 for the
six months ended January 31, 2000 from $72,744,000 for the corresponding period
in fiscal 1999, reflecting increases of $154,358,000 and $2,820,000 in the
Internet and fulfillment services segments, respectively. Internet segment cost
of revenues increases were primarily attributable to higher revenues as a result
of acquisitions and the acceleration of operations for other subsidiaries within
the segment. Cost of revenues increased in the fulfillment services segment
primarily as a result of higher revenues. Cost of revenues as a percentage of
revenues in the Internet segment decreased to 85% in the first six months of
fiscal 2000 from 153% in the same period during the prior year, primarily as a
result of the acquisitions of AltaVista and Signatures Network and improved
margin percentages at NaviSite. Fulfillment services segment cost of revenues as
a percentage of net revenues decreased to 79% in the first six months of fiscal
2000 from 87% in the first six months of fiscal 1999, primarily reflecting
increased operating efficiencies related to turnkey operations.
Research and development expenses increased $41,110,000, or 391%, to
$51,612,000 for the six months ended January 31, 2000 from $10,502,000 for the
corresponding period in fiscal 1999. All research and development expenses in
both periods were incurred within the Company's Internet segment. The increase
as compared to the prior year was primarily due to the acquisition of AltaVista
and the increased development efforts at Engage, NaviSite, iCast, and MyWay.com.
In-process research and development expense was $4.7 million during the six
months ended January 31, 2000, resulting from the AdKnowledge and 1ClickCharge
acquisitions. All in-process research and development expenses were incurred
within the Company's Internet segment. Further, related to the Company's
acquisitions and investments made during the second quarter of fiscal year 2000,
the acquisition accounting and valuation for total investments of approximately
$1.5 billion related to AdForce, Equilibrium, Flycast, FoodBuy.com, Green Witch,
GXMedia and Half.com may result in a significant portion of the purchase price
being identified as in-process research and development, which will be charged
to operating results in the third quarter of fiscal 2000 when the amounts are
determined. The Company anticipates it will continue to devote substantial
resources to product development and that these costs may substantially increase
in future periods.
17
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Selling expenses increased $170,096,000, or 1,123%, to $185,238,000 for the
six months ended January 31, 2000 from $15,142,000 for the corresponding period
in fiscal 1999, primarily reflecting a $170,693,000 increase in the Company's
Internet segment. The increased costs in the Internet segment are primarily due
to the acquisitions of 1stUp.com, Activate.net, AdForce, AdKnowledge, Flycast,
AltaVista, Signatures Network, 1ClickCharge, Activerse, I/PRO and 2CAN, and the
continued growth of sales and marketing efforts at various other CMGI
subsidiaries related to product launches and infrastructure. Selling expenses in
the fulfillment services segment decreased by $597,000 in comparison with last
year's first six months due primarily to headcount reductions. Selling expenses
as a percentage of net revenues increased to 67% for the six months ended
January 31, 2000 from 20% for the corresponding period in fiscal 1999, primarily
reflecting the impact of the acquisition of AltaVista, including the impact of
AltaVista advertising costs in support of the launch of its new media and
commerce network; the impact of the Company's other Internet acquisitions; and
the expansion of sales and marketing efforts related to product launches and
infrastructure. 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 $52,176,000, or 325%, to
$68,225,000 for the six months ended January 31, 2000 from $16,049,000 for the
corresponding period in fiscal 1999. The Internet segment experienced an
increase of $48,297,000, primarily due to the acquisitions of 1stUp.com,
Activate.net, AdKnowledge, Flycast, AltaVista, Signatures Network, 1ClickCharge,
Activerse, I/PRO and 2CAN, increased CMGI corporate expenses, and the building
of management infrastructures in several of the Company's other Internet segment
subsidiaries. General and administrative expenses in the fulfillment services
segment increased by $3,879,000 in comparison with last year's corresponding
period, largely due to the building of management infrastructure. General and
administrative expenses as a percentage of net revenues increased to 25% for the
six months ended January 31, 2000 from 21% for the corresponding period in
fiscal 1999. The Company anticipates that its general and administrative
expenses will continue to increase significantly as the Company adds newly
acquired subsidiaries and as existing subsidiaries continue to grow and expand
their administrative staffs and infrastructures.
Amortization of intangible assets and stock-based compensation increased
$420,733,000, or 13,412%, to $423,870,000 for the six months ended January 31,
2000 from $3,137,000 for the corresponding period in fiscal 1999, reflecting a
$420,693,000 increase in the Internet segment, primarily due to the acquisitions
of 1stUp.com, Activate.net, AdForce, AdKnowledge, Flycast, AltaVista, Signatures
Network, Activerse, I/PRO and 2CAN. Included in these amounts were $6,761,000
and $501,000 of amortization of stock-based compensation for the six months
ended January 31, 2000 and 1999, respectively. Substantially all of the
amortization of stock-based compensation relates to deferred compensation
recorded as a result of the application of purchase accounting to the Company's
acquisitions. The Company anticipates that its amortization of intangibles and
stock-based compensation expense will continue to increase significantly as the
Company and its subsidiaries continue to acquire new companies in the future.
Gain on issuance of stock by subsidiaries and affiliates for the six months
ended January 31, 2000 reflects the Company's first quarter pre-tax gain of
$46,432,000 on the issuances of stock by NaviSite in its initial public offering
and the second fiscal quarter pre-tax gain of $5,474,000 on the issuance of
stock by NaviSite as a result of the exercise of the underwriters' over-
allotment option in its initial public offering. Gain on issuance of stock by
subsidiaries and affiliates for the corresponding period ended January 31, 1999
included a $28,514,000 gain on stock issuances by GeoCities and a $20,253,000
gain on issuance of stock by Lycos. Gain on stock issuances by GeoCities in
fiscal 1999 arose primarily as a result of the sale of stock by GeoCities in its
initial public offering in August 1998 and the issuance of stock by GeoCities in
its acquisition of Starseed, Inc. (known as WebRing) in December 1998. The
fiscal 1999 gain on stock issuance by Lycos resulted primarily from the issuance
of stock by Lycos for its acquisition of WhoWhere?
18
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Other gains, net for the six months ended January 31, 2000 primarily
reflect a pre-tax gain of $208,066,000 on the sale of 3,155,000 shares of Yahoo!
common stock and a pre-tax gain of $5,832,000 on the sale of 260,000 shares of
Open Market, Inc. common stock. Other gains, net recorded in the six months
ended January 31, 1999 included a $45,475,000 gain on the sale of Lycos, Inc.
common stock, a $23,158,000 gain on the sale of investment in Reel.com, Inc., a
$19,057,000 gain on sale of investment in Sage Enterprises, Inc. and a
$7,002,000 gain on the sale of Amazon.com, Inc. common stock.
Minority interest, net increased to $54,864,000 for the six months ended
January 31, 2000 from $204,000 for the corresponding period in fiscal 1999,
primarily reflecting minority interest in net losses of four subsidiaries during
the first six months of fiscal 2000, including AltaVista, Blaxxun, Engage and
NaviSite.
Interest income increased $15,213,000 to $16,520,000 for the six months
ended January 31, 2000 from $1,307,000 for the comparable period in fiscal 1999,
reflecting increased income associated with higher average corporate cash
equivalent balances compared with the prior year and interest earned by Engage
and NaviSite on cash raised from their initial public offerings. Interest
expense increased $11,297,000 to $13,530,000 for the six months ended January
31, 2000 from $2,233,000 in corresponding period in fiscal 1999, primarily due
to the notes issued as part of the AltaVista acquisition and higher corporate
collateralized borrowings.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method
of accounting. Under the equity method of accounting, the Company's
proportionate share of each affiliate's operating losses and amortization of the
Company's net excess investment over its equity in each affiliate's net assets
is included in equity in losses of affiliates. Equity in losses of affiliates
for the six months ended January 31, 2000 includes the results from the
Company's minority ownership in ThingWorld.com, WebCT, FoodBuy.com, Half.com, GX
Media.com and Engage Technologies Japan, Inc. Equity in losses of affiliates for
the six months ended January 31, 1999 included the results from the Company's
minority ownership in Lycos, GeoCities, ThingWorld.com, Silknet, Speech
Machines, MotherNature.com, Magnitude Network and Engage Technologies Japan,
Inc. 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 benefit for the six months ended January 31, 2000 was
$64,535,000. Exclusive of taxes provided for significant, unusual or
extraordinary items, the Company provides for income taxes on a year to date
basis at an effective rate based upon its estimate of full year earnings.
Liquidity and Capital Resources
Working capital at January 31, 2000 increased to $2.1 billion compared to
$1.4 billion at July 31, 1999. Approximately $412 million of the net increase in
working capital is attributable to cash and cash equivalents. The Company's
principal sources of capital during the first six months of fiscal 2000 were
from the sales of Yahoo! Inc. common stock, net proceeds from the issuances of
common stock, primarily by NaviSite in its initial public offering and net cash
acquired through acquisitions of subsidiaries. The Company's principal uses of
capital during the first six months of fiscal 2000 were $292 million for funding
of operations, primarily those of start-up activities in the Company's Internet
segment and $76 million for purchases of property and equipment.
On October 22, 1999, NaviSite commenced its initial public offering at $14
per share, raising $69.6 million, net of issuance and other costs. In November
1999, NaviSite raised an additional $10.8 million pursuant to the exercise of
the underwriters' over-allotment option. CMGI currently owns approximately 19.6
million shares of NaviSite common stock. During the first six months of fiscal
year 2000 the Company sold 3,155,000 shares of Yahoo! common stock and received
total proceeds of approximately $675 million. Also during the first six months
of fiscal 2000 the Company sold 260,000 shares of Open Market, Inc. common stock
and received proceeds of $9.2 million. Subsequent to January 31, 2000, the
Company sold an additional 356,500 shares of its Yahoo! common stock for
proceeds of approximately $64.7 million.
19
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
In August 1999, CMGI completed its acquisition of 81.5% of AltaVista for
37,989,950 CMGI common shares valued at approximately $1.8 billion, 18,090.45
shares of the Company's Series D preferred stock, which were converted into
approximately 3,618,090 million shares of CMGI common stock in October 1999
valued at approximately $173 million, three-year notes totaling $220 million and
the exchange of CMGI and subsidiary stock options for AltaVista stock options.
The AltaVista acquisition included the assets and liabilities constituting the
AltaVista Internet search service and also included former Compaq subsidiaries
Zip2 Corporation and Shopping.com. The shares issued by the Company in
connection with the AltaVista acquisition are not registered under the
Securities Act of 1933 and are subject to restrictions on transferability for a
period of one year from the date of issuance. The total purchase price for
AltaVista was valued at approximately $2.4 billion, including costs of
acquisition of $4 million. The notes issued in conjunction with the acquisition
payable are due August 18, 2002. Interest on the notes, at a rate of 10.5% per
annum, is due and payable semiannually on each February 18 and August 18 until
the notes are paid in full. Principal and interest due on these notes are
payable, at the option of CMGI, in cash, marketable securities (as defined in
the notes) or any combination thereof.
In January 2000, CMGI completed its acquisition of AdForce, a leading
online provider of centralized, outsourced ad management and delivery services.
The total purchase price for AdForce was valued at approximately $545 million,
consisting of approximately 11,270,209 shares of CMGI common stock valued at
approximately $473 million, options and warrants to purchase CMGI common shares
valued at approximately $70.9 million, and direct acquisition costs of
approximately $1.1 million.
In January 2000, CMGI completed its acquisition of Flycast, a leading
provider of web-based direct response advertising solutions. The total purchase
price for Flycast was valued at approximately $904.4 million consisting of
approximately 14,594,916 shares of CMGI common stock valued at approximately
$715.7 million, options and warrants to purchase CMGI common stock valued at
approximately $168.2 million, and direct acquisition costs of approximately
$20.5 million.
On January 20, 2000, Engage, a majority-owned operating company of CMGI,
announced a definitive agreement to acquire Flycast and Adsmart from CMGI.
Engage will acquire Flycast and Adsmart from CMGI through the issuance of
approximately 65 million shares of Engage common stock, (as adjusted to reflect
the Engage two-for-one stock split payable April 3, 2000.) The Company expects
this transaction to be completed in late April or early May 2000.
During the first six months of fiscal year 2000, the Company also completed
its acquisitions of 1ClickCharge, iAtlas, Inc. Signatures SNI, Inc., 1stUp.com,
Clara Vista, Activate.net, AdKnowledge, Tribal Voice, Equilibrium, GreenWitch
and the remaining 33% minority interest in Netwright not already owned by CMGI,
for combined consideration of approximately $412 million and commitments to fund
a total of approximately $113 million in operating capital. Combined
consideration for these additional acquisitions included CMGI and subsidiaries
common stock, convertible notes, options and warrants to purchase common stock
of CMGI and subsidiaries, notes which are payable in CMGI common stock, and
cash. In the first step of the AdKnowledge transaction, CMGI acquired an 88%
equity stake in AdKnowledge. The second step of the AdKnowledge transaction, the
contribution of AdKnowledge shares held by AdKnowledge shareholders, including
CMGI, to Engage in exchange for approximately 10.3 million shares of Engage
common stock (as adjusted to reflect the Engage two-for-one stock split payable
April 3, 2000) closed on December 22, 1999. Upon completion of the transaction,
CMGI received approximately 9.8 million shares of Engage (as adjusted to reflect
the Engage two-for-one stock split payable April 3, 2000), and AdKnowledge
became a wholly-owned subsidiary of Engage.
During the first six months of fiscal year 2000, the Company, through its
limited liability company subsidiaries, CMG@Ventures III, LLC, CMGI@Ventures IV,
LLC, CMGI@Ventures B2B Fund, LLC and CMGI@Ventures Technology Fund, LLC,
acquired initial or follow-on minority ownership interests in 28 Internet
companies for an aggregate total of approximately $58.8 million. On October 29,
1999, the Company purchased 250,000 shares of Akamai Technologies common stock
at a cost of $26 per share. On November 29, 1999, the Company and Pacific
Century CyberWorks Limited ("PCCW"), a company listed on the Stock Exchange of
Hong Kong, completed their previously agreed to exchange of stock. The Company
received approximately 448.3 million shares of PCCW stock in exchange for
approximately 8.2 million shares of the Company's common stock.
20
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
During the Company's second fiscal quarter, CMGI announced the launch of
the CMGI @Ventures B2B Fund, a new venture fund to be focused exclusively on
business-to-business Internet venture capital investments. During the quarter,
CMGI also announced the launch of the CMGI @Ventures Technology Fund, which will
exclusively focus on investing in and supporting Internet enabling technologies
and infrastructure companies that are synergistic with the CMGI and CMGI
@Ventures network. Each fund is expected to reach up to $1 billion in capital
and will have CMGI as its sole limited investor. On March 1, 2000, the Company
along with Hicks, Muse, Tate, & Furst Incorporated, (HMTF), and PCCW,
announced the formation of another new venture capital partnership, @Ventures
Global Partners. Under the terms of the partnership, the parties have each
committed to invest up to $500 million, for a total of up to $1.5 billion, to
support the development of Internet companies based in Asia, Europe, and the
Americas. The Company expects to raise capital for the new funds through the
sale of marketable securities, the issuance and sale of Company securities,
borrowings or otherwise from outside sources, or a combination of the foregoing.
There can be no assurance that the Company will be able to raise sufficient
funds for the CMGI @Ventures B2B Fund, the CMGI @Ventures Technology Fund or the
@Ventures Global Partners fund, or that CMGI will be able to raise such funds on
terms that are favorable to the Company.
During the second quarter, on December 17, 1999, AltaVista filed with the
Securities and Exchange Commission a registration statement for the initial
public offering of shares of its common stock. MotherNature.com (Nasdaq: MTHR)
commenced its IPO on December 9, 1999. (CMG@Ventures II, LLC currently holds 1.2
million shares of MotherNature.com common stock.) Also in the quarter, Vicinity
Corporation (Nasdaq: VCNT) filed its initial registration statement for its
initial public offering with the Securities and Exchange Commission on November
3, 1999 and commenced its IPO on February 8, 2000. (CMG@Ventures I and II, LLC
collectively hold 5.8 million shares of Vicinity common stock.) On November 4,
1999, Tickets.com, Inc. (Nasdaq: TIXX) commenced its IPO. (CMG@Ventures II, LLC
currently holds approximately 800,000 shares of Tickets.com common stock.) Also
in the quarter, Furniture.com filed its initial registration statement for its
initial public offering with the Securities and Exchange Commission on January
27, 2000. (CMG @Ventures III, LLC holds approximately 3% of Furniture.com's
outstanding capital stock.) On March 8, 2000, NaviSite announced that its board
of directors has approved a follow-on offering of securities to raise
approximately $400 - $600 million, subject to market conditions.
On February 9, 2000, the Company signed a definitive agreement to acquire
uBid.com, a leading business to consumer e-commerce auction site for
consideration preliminarily valued at $380 million, consisting of CMGI common
stock, options to purchase CMGI common stock and estimated additional
acquisition costs. Under the terms of the merger agreement, CMGI will issue
.2628 CMGI shares for every share of uBid.com held on the closing date of the
transaction. Closing of the transaction, expected in May 2000, is subject to
regulatory approvals and customary closing conditions, including formal approval
by uBid.com shareholders.
On February 14, 2000, the Company signed a definitive agreement to acquire
an approximate 94.1% equity stake in Tallan, Inc., a provider of Internet and e-
commerce professional services to Fortune 1000 and dot.com companies for
consideration preliminarily valued at approximately $920 million. Under the
terms of the agreement, the purchase price will consist of approximately $20
million in cash, approximately $300 million in notes payable maturing twenty
days from closing, approximately $395 million in notes payable bearing interest
at 6.5%, maturing six to nine months after closing and payable in cash or CMGI
stock at the option of CMGI, and options to purchase CMGI common stock valued at
approximately $200 million. Additionally, the Company currently estimates
additional acquisition costs of approximately $5 million. Closing of the
transaction is subject to regulatory approvals and customary closing conditions,
and is expected to be completed in May 2000.
On February 29, 2000, the Company announced an agreement with Cable &
Wireless plc to issue $500 million in shares of CMGI stock in exchange for $500
million in shares of PCCW, which Cable & Wireless plc will receive upon the
completion of Cable &Wireless plc's sale of their Cable & Wireless HKT
subsidiary to PCCW.
21
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
On March 10, 2000, the Company completed the acquisition of yesmail.com, a
leading outsourcer of permission email marketing technologies and services for
consideration preliminarily valued at $671 million, consisting of CMGI common
stock, options to purchase CMGI common stock and estimated additional
acquisition costs. The Company issued .2504 shares of CMGI for every share of
yesmail.com outstanding on the closing date.
The Company intends to continue to fund existing and future Internet
efforts, acquire additional companies for cash, stock, or other consideration
and to actively seek new CMG@Ventures investment opportunities. Similar to
CMGI's current Internet subsidiaries, future Internet company acquisitions will
likely be in early stages of business development and therefore are expected to
require additional cash funding by the Company to fund their operations. The
Company believes that existing working capital and the availability of
available-for-sale securities which could be sold or posted as additional
collateral for additional loans, will be sufficient to fund its operations,
investments and capital expenditures for the foreseeable future. Additionally,
the Company may also choose to raise additional capital through private
placements. Should additional capital be needed to fund future investment and
acquisition activity, the Company may seek to raise additional capital through
public or private offerings of the Company's or its subsidiaries' stock, or
through debt financing. There can be no assurance, however, that the Company
will be able to raise additional capital on terms that are favorable to the
Company.
Year 2000 Compliance
--------------------
The Company and its subsidiaries have not experienced any material problems
with network infrastructure, software, hardware and computer systems relating to
the inability to recognize appropriate dates related to the year 2000. The
Company and its subsidiaries are also not aware of any material Year 2000
problems with customers, suppliers or vendors. Accordingly, the Company and its
subsidiaries do not anticipate incurring material expenses or experiencing any
material operational disruptions as a result of any Year 2000 issues.
22
<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 January
31, 2000 include strategic equity positions in the Internet industry sector,
including Lycos, Inc., Critical Path, Ventro, Amazon.com, Inc., Open Market,
Inc., Yahoo! Inc., Silknet Software, Inc., Hollywood Entertainment, and Akamai
Technologies, 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 equity component
of the Company's available-for-sale securities portfolio as of January 31, 2000,
would result in an approximate $459 million decrease in the fair value of the
Company's available-for-sale securities.
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
carrying value of long-term debt approximates its fair value, as estimated by
using discounted future cash flows based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in interest rates on its borrowing
arrangements. The Company does not enter into derivative financial instruments
for trading purposes. As a matter of policy all derivative positions are used to
reduce risk by hedging underlying economic exposure. The derivatives the Company
uses are straightforward instruments with liquid markets. At January 31, 2000,
the Company was primarily exposed to the London Interbank Offered Rate (LIBOR)
interest rate on its outstanding borrowing arrangements.
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. 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.
23
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On March 16, 2000, a derivative action was filed in the Court of Chancery
of the State of Delaware against CMGI, Edward A. Bennett, Christopher A. Evans,
Craig D. Goldman, Andrew J. Hajducky III, Frederic D. Rosen, Paul L. Schaut,
David S. Wetherell and Engage Technologies Inc. The complaint alleges that, in
connection with the sale by CMGI of Flycast Communications Corporation and
Adsmart Corporation to Engage, CMGI and the individual defendants have violated
their fiduciary duties of loyalty and good faith. CMGI believes that the
complaint is without merit and intends to contest the claims vigorously.
Item 2. Changes in Securities and Use of
--------------------------------
Proceeds
- --------
1stUp.com Corporation
On November 4, 1999, the Company acquired all of the outstanding stock of
1stUp.com Corporation, a Delaware corporation ("1stUp.com"). Pursuant to the
terms of the acquisition agreement, the Company, among other things, issued an
aggregate of 1,437,506 shares of Common Stock to stockholders of 1stUp.com in
exchange for such stock. The shares of Common Stock were issued and sold to the
stockholders of 1stUp.com in reliance on Section 4(2) of the Securities Act of
1933, as amended, as a sale by the Company not involving a public offering. No
underwriters were involved with the issuance and sale of the shares of Common
Stock.
Activate.Net Corporation
On November 16, 1999, the Company acquired all of the outstanding stock of
Activate.Net Corporation, a Washington corporation ("Activate"). Pursuant to the
terms of the acquisition agreement, the Company, among other things, issued an
aggregate of 1,042,108 shares of Common Stock to stockholders of Activate in
exchange for such stock. The shares of Common Stock were issued and sold to the
stockholders of Activate in reliance on Section 4(2) of the Securities Act of
1933, as amended, as a sale by the Company not involving a public offering. No
underwriters were involved with the issuance and sale of the shares of Common
Stock.
Clara Vista Corporation
On November 16, 1999, the Company acquired all of the outstanding stock of
Clara Vista Corporation, a Virginia corporation ("Clara Vista"). Pursuant to the
terms of the acquisition agreement, the Company, among other things, issued an
aggregate of 326,406 shares of Common Stock to stockholders of Clara Vista in
exchange for such stock. The shares of Common Stock were issued and sold to the
stockholders of Clara Vista in reliance on Section 4(2) of the Securities Act of
1933, as amended, as a sale by the Company not involving a public offering. No
underwriters were involved with the issuance and sale of the shares of Common
Stock.
Pacific Century CyberWorks Limited
On November 29, 1999, the Company and Pacific Century CyberWorks Limited, a
company listed on The Stock Exchange of Hong Kong ("PCCW"), completed their
previously agreed to exchange of stock. The Company received 448,347,107 shares
of PCCW stock in exchange for 8,115,942 shares of the Company's common stock.
The shares of Common Stock were issued and sold to PCCW in reliance on Section
4(2) of the Securities Act of 1933, as amended, as a sale by the Company not
involving a public offering. No underwriters were involved with the issuance and
sale of the shares of Common Stock.
AdKnowledge, Inc.
On November 30, 1999, the Company acquired approximately 88% of the
outstanding stock of AdKnowledge Inc., a California corporation ("AdKnowledge").
Pursuant to the terms of the acquisition agreement, the Company, among other
things, issued an aggregate of 3,607,720 shares of Common Stock to stockholders
of AdKnowledge in exchange for such stock. The shares of Common Stock were
issued to the stockholders of AdKnowledge in reliance on Section 3(a)(10) of the
Securities Act of 1933, as amended, as an issuance of securities where the terms
and conditions of such issuance are approved after a hearing upon the fairness
of such terms and conditions by a state governmental authority expressly
authorized by law to grant such approval. No underwriters were involved with the
issuance and sale of the shares of Common Stock.
24
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Tribal Voice, Inc.
On November 30, 1999, the Company acquired all of the outstanding stock of
Tribal Voice, Inc., a Delaware corporation ("Tribal Voice"). Pursuant to the
terms of the acquisition agreement, the Company, among other things, issued an
aggregate of 190,396 shares of Common Stock to stockholders of Tribal Voice in
exchange for such stock. The shares of Common Stock were issued and sold to the
stockholders of Tribal Voice in reliance on Section 4(2) of the Securities Act
of 1933, as amended, as a sale by the Company not involving a public offering.
No underwriters were involved with the issuance and sale of the shares of Common
Stock.
Green Witch, LLC
On January 18, 2000, the Company acquired all of the outstanding membership
interests of Green Witch, LLC, a California limited liability company ("Green
Witch"). Pursuant to the terms of the acquisition agreement, the Company, among
other things, agreed to issue up to an aggregate of 233,009 shares of Common
Stock to members of Green Witch in exchange for such membership interests. The
issuance of such shares of Common Stock is subject to the satisfaction of
certain terms and conditions contained in the acquisition agreement. The shares
of Common Stock are to be issued and sold to the members of Green Witch in
reliance on Section 4(2) of the Securities Act of 1933, as amended, as a sale by
the Company not involving a public offering. No underwriters were involved with
the issuance and sale of the shares of Common Stock.
Equilibrium
On January 18, 2000, the Company acquired all of the outstanding stock of
Equilibrium, a California corporation ("Equilibrium"). Pursuant to the terms of
the acquisition agreement, the Company, among other things, issued an aggregate
of 286,056 shares of Common Stock to stockholders of Equilibrium in exchange for
such stock. The shares of Common Stock were issued and sold to the stockholders
of Equilibrium in reliance on Section 4(2) of the Securities Act of 1933, as
amended, as a sale by the Company not involving a public offering. No
underwriters were involved with the issuance and sale of the shares of Common
Stock.
25
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1999 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
on December 17, 1999, the following matters were acted upon by the
stockholders of the Company:
1. The election of two Class III Directors for the ensuing three years;
2. The approval of the Company's 1999 Stock Option Plan for Non-Employee
Directors;
3. The approval of the amendments to the Company's 1995 Stock Option Plan
for Non-Employee Directors;
4. The approval of the amendments to the Company's 1995 Stock Option
Plan; and
5. Ratification of the appointment of KPMG LLP as independent auditors of
the Company for the current year.
The number of shares of Common Stock issued, outstanding and eligible to
vote as of the record date of November 5, 1999 was 237,214,550. The other
directors of the Company, whose terms of office as directors continued after the
Annual Meeting, are William H. Berkman, Craig D. Goldman, Avram Miller and
William D. Strecker. The results of the voting on each of the matters presented
to stockholders at the Annual Meeting are set forth below:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C>
1. Election of two Class III Directors:
David S. Wetherell 182,104,444 222,250 N.A. N.A. N.A.
Robert J. Ranalli 182,101,178 225,516 N.A. N.A. N.A.
2. Approval of the Company's 1999 Stock
Option Plan for Non-Employee Directors 165,909,936 N.A. 5,991,642 425,116 N.A.
3. Approval of the amendments to the
Company's 1995 Stock Option Plan for
Non-Employee Directors 173,770,160 N.A. 8,114,622 441,912 N.A.
4. Approval of the amendment to the
Company's 1986 Stock Option Plan 174,756,924 N.A. 7,090,962 478,808 N.A.
5. Ratification of Independent Auditors 181,789,056 N.A. 253,902 283,736 N.A.
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed as part of or are included in this Quarterly Report
on Form 10-Q.
26
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
(b) Reports on Form 8-K
On November 1, 1999, the Company filed Amendment No. 1 to Current Report
on Form 8-K/A to amend the Company's Current Report on Form 8-K dated August 18,
1999 to report under Item 7 (Financial Statements and Exhibits) certain
historical financial information of AltaVista Company, the AltaVista Business,
Zip2 Corporation and Shopping.com, and certain pro forma financial information
of the Company and the AltaVista Business. The following financial statements
were filed with, or incorporated by reference into, such report:
Audited financial statements of AltaVista as of and for the years ended
December 31, 1996, 1997 and 1998 and unaudited financial statements of the
AltaVista Business as of March 31, 1999 and for the three months ended March 31,
1999 and 1998.
Audited financial statements of Zip2 Corporation as of and for the years
ended December 31, 1996, 1997 and 1998 and unaudited financial statements of
Zip2 Corporation as of March 31, 1999 for the three months ended March 31, 1999
and 1998.
Audited financial statements of Shopping.com as of and for the years
ended January 31, 1999, 1998 and 1997.
Unaudited financial statements of the AltaVista Business as of June 30,
1999 and for the six months ended June 30, 1999 and 1998.
On November 17, 1999, the Company filed Amendment No. 2 to Current Report
on Form 8-K/A to further amend the Company's Current Report on Form 8-K dated
August 18, 1999 to report under Item 7 (Financial Statements and Exhibits)
certain historical financial information of AltaVista Company, the AltaVista
Business, Zip2 Corporation and Shopping.com, and certain pro forma financial
information of the Company and the AltaVista Business. The following financial
statements were filed with, or incorporated by reference into, such report:
Audited financial statements of AltaVista as of and for the years ended
December 31, 1996, 1997 and 1998 and unaudited financial statements of the
AltaVista Business as of March 31, 1999 and for the three months ended March 31,
1999 and 1998.
Audited financial statements of Zip2 Corporation as of and for the years
ended December 31, 1996, 1997 and 1998 and unaudited financial statements of
Zip2 Corporation as of March 31, 1999 for the three months ended March 31, 1999
and 1998.
Audited financial statements of Shopping.com as of and for the years
ended January 31, 1999, 1998 and 1997.
Unaudited financial statements of the AltaVista Business as of June 30,
1999 and for the six months ended June 30, 1999 and 1998.
On December 17, 1999, the Company filed a Current Report on Form 8-K to
report under Item 7 (Financial Statements and Exhibits) certain historical
financial information of Flycast Communications Corporation and certain pro
forma financial information of the Company and Flycast Communications
Corporation. The following financial statements were filed with such report:
27
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Audited financial statements of Flycast Communications Corporation and
subsidiary as of December 31, 1997 and 1998 and for the three years in the
period ended December 31, 1998.
Unaudited financial statements of Flycast Communications Corporation and
subsidiary as of September 30, 1999 and for the three and nine months ended
September 30, 1998 and 1999.
Unaudited pro forma condensed combined financial information of
Registrant as of and for the three months ended October 31, 1999 and for the
twelve months ended July 31, 1999.
On December 17, 1999, the Company filed a Current Report on Form 8-K
dated December 15, 1999 to report under Item 5 (Other Events) that the Company
had announced a two-for-one stock split. No financial statements were filed with
such report.
On January 24, 2000, the Company filed a Current Report on Form 8-K dated
January 12, 2000 to report under Item 5 (Other Events) the completion of the
acquisitions of AdForce, Inc. and Flycast Communications Corporation. No
financial statements were filed with such report.
28
<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: March 16, 2000 Andrew J. Hajducky III, CPA
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
29
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
EXHIBIT INDEX
Item Description
2.1 Amendment No. 1 to Amended and Restated Agreement and Plan of Merger,
dated as of January 10, 2000, by and among the Registrant, Artichoke
Corp. and AdForce, Inc.
2.2 Agreement and Plan of Merger and Reorganization, dated as of December
14, 1999, by and among the Registrant, Mars Acquisition, Inc. and
yesmail.com inc. is incorporated by reference to Annex A to the Proxy
Statement/Prospectus which is part of the Registrant's Registration
Statement on Form S-4 (File No. 333-95977).
2.3 Agreement and Plan of Merger and Contribution, dated as of January 19,
2000, by and among the Registrant, Engage Technologies, Inc., Adsmart
Corporation and Flycast Communications Corporation, is incorporated by
reference to Exhibit 2 to the Schedule 13D of the Registrant, dated
December 22, 1999 (File No. 005-58487).
2.4 Agreement and Plan of Merger and Reorganization, dated as of February
9, 2000, by and among the Registrant, Senlix Corporation and uBid,
Inc. is incorporated by reference to Annex A to the Proxy
Statement/Prospectus which is part of the Registrant's Registration
Statement on Form S-4 (File No. 333-32158).
27.1 Financial Data Schedule for the six months ended January 31, 2000.
30
<PAGE>
EXHIBIT 2.1
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 made this 10th day of January, 2000 (the "Amendment"),
by and among CMGI, Inc., a Delaware corporation (the "Buyer"), Artichoke Corp.,
a Delaware corporation and a wholly owned subsidiary of the Buyer (the
"Transitory Subsidiary") and AdForce, Inc., a Delaware corporation (the
"Company"), to the Amended and Restated Agreement and Plan of Merger, dated as
of September 20, 1999, by and among the Buyer, the Transitory Subsidiary and the
Company (the "Agreement"). Except as set forth below, the Agreement shall
remain in full force and effect. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to them in the Agreement.
WHEREAS, the Agreement currently provides that the Buyer, the Transitory
Subsidiary and the Company (collectively, the "Parties") (i) shall each use its
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368(a) of the Code and (ii) adopt the Agreement as a plan
of reorganization; and
WHEREAS, the Parties acting in accordance with Section 8.4 of the Agreement
desire to amend the Agreement to further provide that the Parties contemplate,
as part of such plan of reorganization, merging the Company after the Effective
Time into a limited liability company that is wholly owned by the Buyer;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. Section 6.8 of the Agreement shall be amended by adding the following
sentence after the first sentence of Section 6.8: "The parties hereto
contemplate that, as part of one overall plan, after the Effective Time, the
Company will merge with and into a limited liability company that is wholly
owned by the Buyer and is disregarded as an entity separate from the Buyer for
federal tax purposes pursuant to Treasury Regulation Section 301.7701-
3(b)(1)(ii)."
2. The Agreement, as supplemented and modified by this Amendment, together
with the other writings referred to in the Agreement or delivered pursuant
thereto which form a part thereof, contain the entire agreement among the
Parties with respect to the subject matter thereof and amend, restate and
supersede all prior and contemporaneous arrangements or understandings with
respect thereto.
3. Upon execution of this Amendment by the Parties, on and after the date
hereof, each reference in the Agreement to "this Agreement," "hereunder,"
"hereof,"
<PAGE>
"herein" or words of like import, and each reference in the other documents
entered into in connection with the Agreement, shall mean and be a reference to
the Agreement, as amended hereby. Except as specifically amended above, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
4. This Amendment shall be governed by and construed in accordance with
the internal laws of the State of Delaware without giving effect to any choice
or conflict of law provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the application of laws of any
jurisdictions other than those of the State of Delaware.
5. This Amendment may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
6. This Amendment shall be binding on all parties to the Agreement as and
when executed by the Buyer, the Transitory Subsidiary and the Company.
[Remainder of the page intentionally left blank]
2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CMGI, INC.
By: /s/ Andrew J. Hajducky III
-----------------------------------------
Title: Chief Financial Officer and Treasurer
ARTICHOKE CORP.
By: /s/ Andrew J. Hajducky III
-----------------------------------------
Title: Vice President and Treasurer
ADFORCE, INC.
By: /s/ Charles W. Berger
-----------------------------------------
Title: President and Chief Executive Officer
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CMGI, INC FOR THE QUARTER ENDED JANUARY 31,
2000 AS SET FORTH IN ITS FORM 10-Q FOR SUCH QUARTER AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 880,695
<SECURITIES> 2,378,703
<RECEIVABLES> 158,272
<ALLOWANCES> 0
<INVENTORY> 19,802
<CURRENT-ASSETS> 3,487,813
<PP&E> 167,977
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,266,815
<CURRENT-LIABILITIES> 1,339,932
<BONDS> 0
415,739
0
<COMMON> 2,798
<OTHER-SE> 5,817,652
<TOTAL-LIABILITY-AND-EQUITY> 8,266,815
<SALES> 277,200
<TOTAL-REVENUES> 277,200
<CGS> 229,922
<TOTAL-COSTS> 229,922
<OTHER-EXPENSES> 733,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,530
<INCOME-PRETAX> (367,522)
<INCOME-TAX> (64,535)
<INCOME-CONTINUING> (302,987)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (302,987)
<EPS-BASIC> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
