<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 October 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 December 11,
2000
Common Stock, par value $.01 per share 319,311,017
--------------------------------------- -----------
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
October 31, 2000 (unaudited) and July 31, 2000 3
Consolidated Statements of Operations
Three months ended October 31, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows
Three months ended October 31, 2000 and 1999 (unaudited) 5
Notes to Interim Unaudited Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 31-32
SIGNATURE 34
EXHIBIT INDEX 35
</TABLE>
2
<PAGE>
CMGI, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
October 31, July 31,
2000 2000
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,163,718 $ 639,666
Available-for-sale securities 513,396 1,595,011
Accounts receivable, trade, net of allowance for doubtful accounts 219,138 232,104
Prepaid expenses and other current assets 108,112 105,094
----------- -----------
Total current assets 2,004,364 2,571,875
----------- -----------
Property and equipment, net 283,767 259,270
Investments in affiliates 586,123 583,648
Goodwill and other intangible assets, net of accumulated amortization 4,790,166 4,955,076
Other assets 209,082 187,238
----------- -----------
$ 7,873,502 $ 8,557,107
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 136,004 $ 523,022
Current installments of long-term debt 6,218 6,649
Accounts payable 125,355 128,627
Accrued income taxes 115,318 36,318
Accrued expenses 231,566 246,289
Deferred income taxes 8,302 392,340
Deferred revenues 33,943 27,898
Other current liabilities 92,166 100,627
----------- -----------
Total current liabilities 748,872 1,461,770
----------- -----------
Long-term debt, less current installments 226,523 228,023
Deferred income taxes 312,732 61,365
Other long-term liabilities 47,767 50,945
Minority interest 650,057 586,062
Commitments and contingencies
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; issued 375,000
Series C convertible, redeemable preferred stock at October 31, 2000 and July
31, 2000, dividend at 2% per annum; carried at liquidation value 385,030 383,140
Stockholders' equity:
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; issued and
outstanding 318,875,119 shares at October 31, 2000 and 296,487,502 shares at July 31, 2000 3,189 2,965
Additional paid-in capital 6,990,741 6,190,182
Deferred compensation (30,122) (45,202)
Accumulated deficit (1,496,268) (857,814)
----------- -----------
5,464,351 5,290,131
Accumulated other comprehensive income (loss) 34,981 495,671
----------- -----------
Total stockholders' equity 5,502,521 5,785,802
----------- -----------
$ 7,873,502 $ 8,557,107
=========== ===========
</TABLE>
see accompanying notes to interim unaudited consolidated financial statements
3
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Net revenue $ 366,143 $ 129,118
Operating expenses:
Cost of revenue 329,878 113,560
Research and development 53,271 20,188
In-process research and development 1,462 --
Selling 141,066 72,501
General and administrative 85,047 30,053
Amortization of intangible assets and stock-based compensation 652,139 170,039
---------- ---------
Total operating expenses 1,262,863 406,341
---------- ---------
Operating loss (896,720) (277,223)
---------- ---------
Other income (expenses):
Interest income 12,119 5,871
Interest expense (22,588) (5,700)
Other gains, net 197,338 48,349
Gains on issuance of stock by subsidiaries and affiliates 126,589 46,368
Equity in losses of affiliates (15,872) (1,796)
Minority interest 88,852 23,288
---------- ---------
386,438 116,380
---------- ---------
Loss before income taxes (510,282) (160,843)
Income tax expense (benefit) 126,282 (43,431)
---------- ---------
Net loss (636,564) (117,412)
Preferred stock accretion and amortization of discount (1,890) (4,935)
---------- ---------
Net loss available to common stockholders $ (638,454) $(122,347)
========== =========
Basic and diluted loss per share $ (2.07) $ (0.54)
========== =========
Shares used in computing basic and diluted loss per share 307,873 226,372
========== =========
</TABLE>
see accompanying notes to interim unaudited consolidated financial statements
4
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended October 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (636,564) $ (117,412)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 680,893 175,430
Deferred income taxes 42,541 (118,918)
Non-operating gains, net (323,927) (94,717)
Equity in losses of affiliates 15,872 1,796
Minority interest (88,852) (23,288)
In-process research and development 1,462 --
Changes in operating assets and liabilities,
excluding effects from acquired companies:
Trade accounts receivable 19,548 (18,821)
Prepaid expenses and other current assets (3,549) (13,407)
Accounts payable and accrued expenses 543 16,254
Deferred revenues 1,428 7,316
Refundable and accrued income taxes, net 80,382 25,280
Tax benefit from exercise of stock options -- 48,802
Other assets and liabilities (640) (5,218)
---------- ----------
Net cash used for operating activities (210,863) (116,903)
Cash flows from investing activities:
Additions to property and equipment (42,202) (23,185)
Net proceeds from maturities of (purchases of)
available-for-sale securities 19,923 (6,500)
Proceeds from sale of stock investments 844,016 291,069
Investments in affiliates (46,173) (11,129)
Cash paid for acquisitions of subsidiaries, net
of cash acquired (12,460) 23,425
Other (8) --
---------- ----------
Net cash provided by investing activities 763,096 273,680
---------- ----------
Cash flows from financing activities:
Net repayments of notes payable (33,570) --
Net proceeds from issuance of common stock 6,795 5,569
Net proceeds from issuance of stock by subsidiaries 4,382 69,567
Other (5,788) 4,176
---------- ----------
Net cash provided by (used for) financing activities (28,181) 79,312
---------- ----------
Net increase in cash and cash equivalents 524,052 236,089
Cash and cash equivalents at beginning of period 639,666 468,912
---------- ----------
Cash and cash equivalents at end of period $1,163,718 $ 705,001
========== ==========
</TABLE>
see accompanying notes to interim unaudited consolidated financial statements
5
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, 2000 which
are contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission (SEC) on October 30, 2000 (as amended on
December 8, 2000). The results for the three-month period ended October 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. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting
for Derivative Instruments and Hedging Activities, which was later amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 and by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -an
Amendment of FASB Statement No. 133 (as amended, SFAS No. 133). SFAS No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. SFAS No. 133 requires that all derivatives be recognized
at fair value in the statement of financial position, and that the corresponding
gains or losses be reported either in the statements of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. If the derivative is determined to be a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through the statements of operations or recognized in other comprehensive income
until the hedged item is recognized in the statements of operations. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The Company currently holds derivative instruments and
engages in certain hedging activities, which have been accounted for as
described in Note L. The Company adopted SFAS No. 133 on August 1, 2000 and
recorded a transition gain, net of tax, of approximately $6.0 million during the
first quarter of fiscal year 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 expresses the views of
the SEC staff in applying generally accepted accounting principles to certain
revenue recognition issues. The Company adopted SAB 101 on August 1, 2000 and
had no material impact on its financial position or its results of operations.
C. Other Gains, Net
The following schedule reflects the components of "Other gains, net":
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
(in thousands)
Gain on sale of Lycos common stock $ 357,356 $ --
Gain on sale of Kana common stock 135,289 --
Gain on sale of Yahoo! common stock -- 48,349
Gain on forward contract on Yahoo! common stock 87,832 --
Gain on sale of Critical Path common stock 70,900 --
Gain on sale of investment in eGroups 8,114 --
Loss on sale of PCCW common stock (358,855) --
Loss on impairment of MSGI common stock (38,730) --
Loss on impairment of Hollywood Entertainment common stock (45,402) --
Other (19,166) --
--------- -------
$ 197,338 $48,349
========= =======
</TABLE>
6
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During the three months ended October 31, 2000, the Company sold marketable
securities for total proceeds of approximately $844.0 million and recorded a
net pre-tax gain of approximately $202.3 million on these sales. These sales
primarily consisted of approximately 8.4 million shares of Lycos, Inc. (Lycos)
common stock for proceeds of approximately $394.7 million, approximately 241.0
million shares of Pacific Century CyberWorks, Limited (PCCW) for proceeds of
approximately $190.2 million, approximately 3.7 million shares of Kana
Communications, Inc. (Kana) common stock for proceeds of approximately $137.6
million, approximately 1.3 million shares of Critical Path, Inc. (Critical Path)
common stock for proceeds of approximately $72.8 million.
In August 2000, Yahoo! acquired eGroups, Inc. (eGroups) and in connection
therein, the shares of eGroups held by the Company's subsidiary, CMG@Ventures
III, LLC (CMG@Ventures III) were converted into shares of Yahoo! common stock.
The Company recorded a pre-tax gain of $8.1 million on the conversion of its
investment in eGroups during the fiscal quarter ended October 31, 2000. Such
gain was recorded net of the 18% interest attributable to CMG@Ventures III's
outside profit members.
Also, included in "Other gains, net" were impairment charges of $4.5
million, $3.9 million and $1.5 million related to the Company's available-for-
sale securities holdings of Global Media, Virage and MotherNature.com,
respectively, under the provisions of Financial Accounting Standards Board
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
During the three months ended October 31, 1999, the Company sold
approximately 1.6 million shares of Yahoo! common stock for proceeds of $291.1
million.
D. Gains on Issuance of Stock by Subsidiaries and Affiliates
During the three months ended October 31, 2000, the Company recognized
gains on issuance of stock by subsidiaries and affiliates primarily related to
the issuance of approximately 14.9 million shares by Engage, Inc. (Engage), a
majority-owned subsidiary of the Company, valued at approximately $257.2 million
in its acquisitions of Space Media Holdings Limited (Space) and MediaBridge
Technologies, Inc. (MediaBridge). With these transactions, the Company's
ownership interest in Engage decreased from approximately 86% to approximately
78%. The Company provided for deferred income taxes resulting from the gain on
issuance of stock by Engage.
During the three months ended October 31, 1999, the Company recognized a
$46.4 million pre-tax gain on issuance of stock by a subsidiary related to
NaviSite's issuance of approximately 11.0 million shares of its common stock at
a price of $7 per share in connection with its initial public offering. The
Company's ownership interest in NaviSite decreased from approximately 90% to
approximately 69%. The Company provided for deferred income taxes resulting from
the gain on issuance of stock by NaviSite.
E. Business Combinations
On August 31, 2000, Engage completed its acquisition of Space, a leading
independent Internet marketing network in Asia. The total purchase price for
Space was valued at approximately $35.9 million consisting of approximately 3.2
million shares of Engage common stock valued at approximately $35.5 million, and
direct acquisition costs of approximately $425,000. Engage also recorded
approximately $18.9 million in deferred compensation related to approximately
1.5 million shares of Engage common stock issuable to certain employee
shareholders of Space contingent upon continued employment for a one year period
following the date of acquisition. Lastly, contingent consideration, comprised
of approximately 1.4 million shares of Engage common stock has been placed in
escrow to satisfy certain performance objectives by Space. The value of the
escrow shares will be recorded as additional purchase price at the then-fair
value upon the attainment of certain performance goals measured through December
31, 2000.
On September 11, 2000, Engage completed its acquisition of MediaBridge, a
leading provider of cross-media closed loop targeted marketing systems. The
total purchase price for MediaBridge was valued at approximately $221.7 million
consisting of approximately 11.7 million shares of Engage common stock valued at
approximately $190.2 million, options to
7
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
purchase Engage common stock valued at approximately $31.1 million, and direct
acquisition costs of approximately $482,000. Of the purchase price, $700,000 was
allocated to in-process research and development, which was charged to
operations during the first quarter of fiscal 2001. Engage also recorded
approximately $7.0 million in deferred compensation related to stock options
issued to certain MediaBridge employees. Approximately twelve percent of the
shares issued are subject to an escrow period of one year to secure certain
indemnification obligations of the former stockholders of MediaBridge.
The acquisitions completed during the first quarter of fiscal 2001 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 dates of acquisition. Goodwill and other
identifiable intangible assets totaling approximately $478.2 million were
recorded related to the acquisitions during the first quarter of fiscal 2001,
and are being amortized on a straight-line basis over three years. The acquired
companies are included in the Company's consolidated financial statements from
the dates of acquisition.
The purchase prices for these acquisitions were allocated as follows:
<TABLE>
<CAPTION>
(in thousands) Space MediaBridge Total
----- ----------- -----
<S> <C> <C> <C>
Working capital, including cash (cash
overdraft) acquired $ (972) $ (4,621) $ (5,593)
Property and equipment 434 2,034 2,468
Other assets (liabilities), net -- (404) (404)
Deferred tax liability -- (217,764) (217,764)
Goodwill 36,416 417,456 453,872
Developed technology -- 17,500 17,500
Other identifiable intangible assets -- 6,800 6,800
In-process research and development -- 700 700
------- --------- ---------
Purchase price $35,878 $ 221,701 $ 257,579
======= ========= =========
</TABLE>
Amortization of intangible assets and stock-based compensation consists of:
Three months ended
------------------
October 31,
-----------
(in thousands) 2000 1999
---- ----
Amortization of intangible assets $562,709 $168,497
Amortization of stock-based compensation 19,824 1,542
Impairment of intangible assets 69,606 --
-------- --------
Total $652,139 $170,039
======== ========
The amortization of stock-based compensation for the three months ended
October 31, 2000 and 1999 would have been primarily allocated to general and
administrative expense had the Company recorded the expense within the
functional department of the employee or director.
The Company has recorded impairment charges totaling approximately $69.6
million during the first quarter of fiscal 2001 as a result of management's
ongoing business review and impairment analysis performed under its existing
policy regarding impairment of long-lived assets. Subsequent to October 31,
2000, CMGI determined to exit the business conducted by its subsidiaries iCAST
Corporation (iCAST) and 1stUp.com Corporation (1stUp). In connection with this
decision, management determined that the carrying value of certain intangible
assets, principally goodwill, were permanently impaired, and recorded impairment
charges in the quarter ended October 31, 2000 of approximately $3.6 million and
$23.3 million related to iCAST and 1stUp, respectively. The Company will record
exit costs associated with the iCAST and 1stUp businesses in the second quarter
of fiscal 2001 (see Note M). The Company also recorded other impairment charges
during the quarter totaling approximately $42.7 million, consisting primarily of
$15.2 million related to intangible assets of Engage, Inc.'s subsidiary, Flycast
Communications Corporation, $8.9 million related to intangible assets of
MyWay.com Corporation, and $10.1 million related to intangible assets of CMGion,
Inc.'s subsidiary, Tribal Voice, Inc. It is reasonably possible that the
impairment factors evaluated by management will change in subsequent periods,
given that the Company operates in a volatile business environment. This could
result in material impairment charges in future periods.
8
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
F. Segment Information
Based on the information provided to the Company's chief operating decision
maker for purposes of making decisions about allocating resources and assessing
performance, the Company's operations have been classified in five operating
segments that are strategic business units offering distinctive products and
services that are marketed through different channels.
The five operating segments are: (i) Interactive Marketing, (ii) eBusiness
and Fulfillment, (iii) Search and Portals, (iv) Infrastructure and Enabling
Technologies and (v) Internet Professional Services. Management evaluates
segment performance based on segment operating income or loss excluding in-
process research and development expenses and amortization of intangible assets
and stock-based compensation.
On October 11, 2000 CMGion acquired AdForce from the Company. On November
13, 2000, the Company announced its decision to cease funding the operations of
iCAST in the second quarter of fiscal 2001, but to continue to operate
Signatures Network, a business previously included in the operations of iCAST,
as an independent CMGI majority-owned subsidiary. As a result of these
transactions, the results of AdForce, which were previously included in the
Interactive Marketing segment, are included in the Infrastructure and Enabling
Technologies segment and the results of Signatures Network, which were
previously included in the Search and Portals segment, are included in the
eBusiness and Fulfillment segment. For comparative purposes, all prior period
segment results and certain other amounts for prior periods have been
reclassified to reflect these transactions and conform to current period
presentation.
Summarized financial information of the Company's operations by business
segment is as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31,
-----------------------------
(in thousands) 2000 1999
---- ----
<S> <C> <C>
Net revenue:
Interactive Marketing $ 48,685 $ 18,628
eBusiness and Fulfillment 188,625 56,228
Search and Portals 60,439 49,431
Infrastructure and Enabling Technologies 35,053 4,617
Internet Professional Services 33,341 214
--------- ---------
$ 366,143 $ 129,118
========= =========
Operating loss:
Interactive Marketing $(240,919) $ (18,533)
eBusiness and Fulfillment (40,594) (1,505)
Search and Portals (353,656) (220,024)
Infrastructure and Enabling Technologies (193,725) (24,698)
Internet Professional Services (45,731) (4,738)
Other (22,095) (7,725)
--------- ---------
$(896,720) $(277,223)
========= =========
Operating income (loss), excluding in-process
research and development expenses and
amortization of intangible assets and stock-
based compensation:
Interactive Marketing $ (62,581) $ (14,411)
eBusiness and Fulfillment (3,539) 1,364
Search and Portals (64,980) (58,704)
Infrastructure and Enabling Technologies (92,294) (24,116)
Internet Professional Services 1,552 (3,648)
</TABLE>
9
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Other (21,277) (7,669)
--------- ---------
$(243,119) $(107,184)
========= =========
G. Borrowing Arrangements
As consideration for its acquisition of Tallan, the Company issued three
short-term promissory notes totaling approximately $376.9 million. Interest on
each note is payable at a rate of 6.5% per annum. Principal and interest
payments due on the notes are payable in September 2000 and December 2000, at
the option of CMGI, in cash, marketable securities or any combination thereof.
The value of the promissory notes included in the purchase price was recorded
net of a discount of $8.2 million to reflect the difference between the actual
interest rates of the promissory notes and the Company's current incremental
borrowing rates for similar types of borrowing transactions. On September 30,
2000, the Company issued approximately 7.3 million shares of its common stock as
payment of approximately $241.8 million in principal (see Note J). As a result
of this payment, the principal balance of the two remaining notes was
approximately $135.1 million on October 31, 2000.
In June 2000, NaviSite sold certain of its equipment and leasehold
improvements in its two new data centers in a sale-leaseback transaction to a
bank for approximately $30.0 million. NaviSite entered into a capital lease (the
"Capital Lease") upon the leaseback of those assets. The Capital Lease bears
interest at a nominal rate of 9.15% and an effective interest rate of 12.49%, is
payable in monthly installments ending June 2004 and contains certain financial
covenants as defined. As of October 31, 2000, NaviSite was not in compliance
with the market capitalization covenant. Effective December 11, 2000, NaviSite
obtained a waiver from the lessor for noncompliance with the market
capitalization covenant as of October 31, 2000. Additionally, in connection with
the waiver, NaviSite renegotiated the capital lease covenants to eliminate the
market capitalization requirement.
H. Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents and convertible preferred stock are included in the calculation of
diluted earnings per share only when the effect of their inclusion would be
dilutive. Approximately 10.3 million and 11.1 million weighted average common
stock equivalents and approximately 9.6 million and 9.4 million shares
representing the weighted average effect of assumed conversion of convertible
preferred stock were excluded from the denominator in the diluted loss per share
calculation for the three months ended October 31, 2000 and 1999, respectively.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss) the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial for the three months ended October
31, 2000 and 1999.
I. Comprehensive Income
The components of comprehensive income, net of income taxes, are as
follows:
(in thousands) Three months ended October 31,
-----------------------------
2000 1999
---- ----
Net loss $ (636,564) $(117,412)
Net unrealized holding gain (loss) arising during
period (453,118) 282,313
Less: reclassification adjustment for gain
realized in
10
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
net loss (7,572) (28,441)
----------- ---------
Comprehensive income (loss) $(1,097,254) $ 136,460
=========== =========
11
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
J. Consolidated Statements of Cash Flows Supplemental Information
(in thousands) Three months ended October 31,
------------------------------
2000 1999
---- ----
Cash paid during the period for:
Interest $1,942 $ 947
====== ======
Income taxes $4,738 $2,962
====== ======
During the three months ended October 31, 2000, significant non-cash
investing activities included the following transactions:
On August 1, 2000, the Company settled the first tranche of the forward
sale agreement (see Note L) that hedges a portion of the Company's investment in
common stock of Yahoo! through the delivery of 581,499 shares of Yahoo! common
stock to an investment bank.
On August 18, 2000, the Company issued approximately 313,000 shares of
its common stock to Compaq Computer Corporation as a semi-annual interest
payment valued at approximately $11.5 million related to notes payable issued in
the acquisition of AltaVista.
On August 25, 2000, the Company and Cable and Wireless plc, completed
their previously agreed to exchange of stock. CMGI received approximately 241.0
million shares of PCCW stock in exchange for approximately 13.4 million shares
of the Company's common stock. The PCCW stock received was valued at $546.6
million, which represents the value of the CMGI shares issued in the exchange on
the date the agreement was executed.
On August 31, 2000, Yahoo! acquired eGroups, a CMGI@Ventures investee
company. In connection with the merger, CMG@Ventures III, LLC received
approximately 91,000 shares of Yahoo! common stock.
On August 31, 2000 and September 12, 2000, respectively, Engage completed
the acquisitions of Space and MediaBridge in exchange for its own common stock
(see Note E).
On September 30, 2000, the Company issued approximately 7.3 million
shares of its common stock as payment of principal and interest totaling
approximately $249.8 million related to a note payable that had been issued in
the Company's acquisition of Tallan.
K. Available-for-Sale Securities
At October 31, 2000, available-for-sale securities primarily consist of
common stock investments. Available-for-sale securities 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
October 31, 2000 included approximately 9.4 million shares of Terra-Lycos Inc.
valued at approximately $226.4 million, approximately 8.0 million shares of
Primedia, Inc. valued at approximately $85.0 million, approximately 700,000
shares of Yahoo! Inc. valued at approximately $41.9 million, approximately 4.6
million shares of Vicinity Corporation valued at approximately $48.7 million and
approximately 3.2 million shares of Ventro Corporation (Ventro) valued at
approximately $15.4 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 Sheets and valued at carrying value as of the
date of allocation. Certain shares included in available-for-sale securities at
October 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 approximately
$35.0 million, net of deferred income taxes of approximately $58.4 million, has
been reflected in other comprehensive income in the equity section of the
consolidated balance sheets based on the change in market value of the
available-for-sale securities from dates of acquisition to October 31, 2000.
Also included in available-for-sale securities at October 31, 2000 were
approximately 2.6 million shares of Terra Lycos common stock which the Company
may be required to sell to Terra Lycos, at prices ranging from $.0012 to $1.12
per share, pursuant to employee stock option exercises.
L. Derivative Financial Instruments
12
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In April 2000, the Company entered into a forward sale agreement with
equity collars that hedges a portion of the Company's investment in common stock
of Yahoo! Inc. Under the terms of the contract, the Company agreed to deliver,
at its discretion, either cash or Yahoo! Inc. common stock in three separate
tranches, with maturity dates ranging from August 2000 to February 2001. The
Company executed the first tranche in April 2000 and received approximately
$106.4 million in cash. The Company subsequently settled this tranche through
the delivery of 581,499 shares of Yahoo! common stock in August 2000. In May
2000, the Company received approximately $68.5 million and $5.7 million upon the
execution of the second and third tranches, respectively. The Company
subsequently settled the second tranche for cash totaling approximately $33.6
million in October 2000. In November 2000, the Company entered into a new
forward sale agreement to hedge the Company's investment in 581,499 shares of
Yahoo! common stock. The Company received approximately $31.5 million of cash in
connection with this new agreement. Under the terms of the new contract, the
Company agreed to deliver, at its discretion, either cash or shares of Yahoo!
Inc. common stock on August 1, 2001.
The forward sale contracts include equity collars and are considered
derivative financial instruments that have been designated as fair value hedging
instruments under the guidance outlined in SFAS No. 133. The Company's objective
relative to the use of these hedging instruments is to limit the Company's
exposure to and benefits from price fluctuations in the underlying equity
securities, which are classified as available-for-sale securities in the
consolidated balance sheets. The Company accounts for the forward sale contracts
as hedges and has determined that the hedges are highly effective. Changes in
the value of the hedge are substantially offset by changes in the value of the
underlying investment securities. The hedging of the Yahoo! common stock is part
of the Company's overall risk management strategy, which includes the
preservation of cash and available-for-sale securities used to fund ongoing
operations and future investment opportunities. The Company does not hold or
issue any derivative financial instruments for trading purposes.
Including the effects of the transition accounting proscribed by SFAS No.
133 and settlement of the first and second tranches under the Yahoo! forward
sale agreement, the net gain recognized in the consolidated statement of
operations during the quarter ended October 31, 2000 was approximately $87.8
million. The net gain is included in "Other gains, net", in the consolidated
statements of operations.
M. Subsequent Events
On November 13, 2000, the Company announced its decision to cease funding
the operations of iCAST in the second quarter of fiscal 2001, but to continue to
operate Signatures Network, a business previously included in the operations of
iCAST, as an independent CMGI majority-owned subsidiary.
The Company also announced on November 13, 2000 that it will divest its ad-
supported Internet access business represented by 1stUp.com Corporation by the
end of the second fiscal quarter.
On December 12, 2000, the Company entered into a Note and Warrant Purchase
Agreement (the Agreement) with its subsidiary, NaviSite. The Agreement provides
for the sale of a subordinated, unsecured, convertible note in the principal
amount of $50.0 million (Initial Note), and a subordinated, unsecured,
convertible note in the principal amount of $30.0 million (Second Note). Also on
December 12, 2000, NaviSite issued the Initial Note to CMGI in the amount of
$50.0 million. The annual interest rate on the Initial Note is 7.5% payable
quarterly in, at NaviSite's discretion, either cash or NaviSite common stock.
The principal amount is due in full by December 12, 2003. The Agreement provides
that the use of proceeds from the Second Note are restricted to satisfying
certain of NaviSite's lease obligations.
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 under the heading "Factors That May Affect
Future Results" 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 10-K filed with the SEC on October 30, 2000 (as amended on
December 8, 2000), 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
The Company reports five operating segments: i) Interactive Marketing, ii)
eBusiness and Fulfillment, iii) Search and Portals, iv) Infrastructure and
Enabling Technologies, and v) Internet Professional Services. CMGI also invests
in companies involved in various aspects of the Internet through its affiliated
venture capital arm, CMGI@Ventures. In accordance with generally accepted
accounting principals, all significant intercompany transactions and balances
have been eliminated in consolidation. Accordingly, segment results reported by
CMGI exclude the effect of transactions between CMGI's subsidiaries.
On October 11, 2000 CMGion acquired AdForce. On November 13, 2000, the
Company announced its decision to cease funding the operations of its wholly-
owned subsidiary, iCAST, in the second quarter of fiscal 2001 and to continue to
operate Signatures Network, a business previously included in the operations of
iCAST, as an independent CMGI majority-owned subsidiary. As a result of these
transactions, the results of AdForce, which were previously included in the
Interactive Marketing segment, are included in the Infrastructure and Enabling
Technologies segment and the results of Signatures Network, which were
previously included in the Search and Portals segment, are included in the
eBusiness and Fulfillment segment. For comparative purposes, all prior period
segment results and certain other amounts for prior periods have been
reclassified to reflect these transactions and conform to current period
presentations.
Three months ended October 31, 2000 compared to three months ended October 31,
1999
NET REVENUE:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
October 31, As a % of Total October 31, As a % of Total
2000 Net Revenue 1999 Net Revenue $ Change % Change
---- ----------- ---- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interactive Marketing $ 48,685 13% $ 18,628 14% $ 30,057 161%
eBusiness and Fulfillment 188,625 52% 56,228 44% 132,397 236%
Search and Portals 60,439 16% 49,431 38% 11,008 22%
Infrastructure and Enabling Technologies 35,053 10% 4,617 4% 30,436 659%
Internet Professional Services 33,341 9% 214 - 33,127 15,480%
-------- -------- --------
Total $366,143 100% $129,118 100% $237,025 184%
======== === ======== === ======== ======
</TABLE>
Net revenue increased $237.0 million, or 184%, to $366.1 million for the
three months ended October 31, 2000 from $129.1 million for the same period
ended in fiscal year 2000. The increase was largely a result of the effects of
fiscal 2000 acquisitions and increased net revenue growth at existing companies
during the first quarter of fiscal year 2001. The fiscal year 2000 acquisitions
accounted for approximately 73% of the net revenue increase. The increase in
net revenue within the Interactive Marketing segment was primarily the result of
the effects of the fiscal year 2000 acquisitions of AdKnowledge,
14
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Inc., Flycast Communications Corporation (Flycast) and yesmail.com, inc. The
increase in net revenue within the eBusiness and Fulfillment segment was
primarily the result of the acquisition of uBid during fiscal year 2000, the
impact of a full quarter's net revenue from Signatures Network in fiscal 2001,
which was acquired on September 27, 1999, and increased volume of turn-key
business from Cisco Systems, Inc. (Cisco) at SalesLink. The increase in net
revenue within the Search and Portals segment was primarily the result of a full
quarter's net revenue from AltaVista, which was acquired on August 18, 1999, and
increased net revenue from MyWay.com. The increase in net revenue within the
Infrastructure and Enabling Technologies segment was primarily the result of
increased net revenue at NaviSite and NaviPath and the acquisitions of Activate,
AdForce and 1stUp during fiscal year 2000. The increase in net revenue for
NaviSite was primarily due to the growth in its customer base facilitated by the
build-out of its data center facilities. The increase in net revenue for
NaviPath primarily related to the growth in users due to the expansion of its
network coverage across North America. The increase in net revenue within the
Internet Professional Services segment was primarily the result of the
acquisition of Tallan during fiscal year 2000. The Company expects to report
future revenue growth as a result of increased net revenue from existing
companies.
COST OF REVENUE:
<TABLE>
<CAPTION>
Three Months Three Months
Ended As a % of Ended As a % of
October 31, Segment Net October 31, Segment
2000 Revenue 1999 Net Revenue $ Change % Change
---- ------- ---- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interactive Marketing $ 35,478 73% $ 14,747 79% $ 20,731 141%
eBusiness and Fulfillment 166,855 88% 45,597 81% 121,258 266%
Search and Portals 31,490 52% 35,709 72% (4,219) (12%)
Infrastructure and Enabling Technologies 73,498 210% 16,506 358% 56,992 345%
Internet Professional Services 22,557 68% 1,001 468% 21,556 2,153%
-------- -------- --------
Total $329,878 90% $113,560 88% $216,318 190%
======== === ======== === ======== =====
</TABLE>
Cost of revenue increased $216.3 million, or 190%, to $329.9 million for
the three months ended October 31, 2000 from $113.6 million for same period
ended in fiscal year 2000. Cost of revenue consisted primarily of expenses
related to the content, connectivity and production associated with delivering
the Company's products and services. The increase was largely attributable to
the increased net revenue due to fiscal year 2000 acquisitions and increased net
revenue growth at existing companies. The fiscal year 2000 acquisitions
accounted for approximately 73% of the increase in cost of revenue. Cost of
revenue as a percentage of net revenue increased for the first quarter of fiscal
2001 primarily due to the Company's acquisition of uBid at the end of the third
quarter of fiscal 2000.
RESEARCH AND DEVELOPMENT EXPENSES:
<TABLE>
<CAPTION>
Three Months Three Months
Ended As a % of Ended As a % of
October 31, Segment Net October 31, Segment
2000 Revenue 1999 Net Revenue $ Change % Change
---- ------- ---- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interactive Marketing $15,744 32% $ 3,293 18% $12,451 378%
eBusiness and Fulfillment 523 - 694 1% (171) (25%)
Search and Portals 24,929 41% 12,583 25% 12,346 98%
Infrastructure and Enabling Technologies 12,075 34% 2,722 59% 9,353 344%
Internet Professional Services - - 896 419% (896) (100%)
------- ------- -------
Total $53,271 15% $20,188 16% $33,083 164%
======= == ======= === ======= ====
</TABLE>
Research and development expenses increased $33.1 million, or 164%, to
$53.3 million for the three months ended October 31, 2000 from $20.2 million for
the same period in fiscal year 2000. Research and development expenses
consisted primarily of personnel and related costs to design, develop, enhance,
test and deploy the Company's product and service
15
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
efforts either prior to the development effort reaching technological
feasibility or once the product had reached the maintenance phase of its life
cycle. Research and development expenses as a percentage of net revenue
decreased primarily due to the impact of acquisitions and increased net revenues
at existing companies. The fiscal year 2000 acquisitions accounted for
approximately 46% of the increase in research and development expenses. The
increase within the Interactive Marketing segment was primarily the result of
the effects of the fiscal year 2000 acquisitions of AdKnowledge, Flycast and
yesmail.com and increased development efforts at Engage. The increase within the
Search and Portals segment was primarily the result of a full quarter's research
and development expenses from AltaVista. The increase in the Infrastructure and
Enabling Technologies segment was primarily the result of the acquisitions of
Activate, AdForce, Equilibrium, 1stUp and Tribal Voice during fiscal year 2000
and increased development efforts at NaviSite. The Company believes that
significant investments in research and development are required to remain
competitive. Consequently, the Company anticipates it will continue to devote
substantial resources to research and development efforts and that these costs
may substantially increase in absolute dollars in future periods.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES:
<TABLE>
<CAPTION>
Three Months Three Months
Ended As a % of Ended As a % of
October 31, Segment Net October 31, Segment Net
2000 Revenue 1999 Revenue $ Change % Change
---- ------- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interactive Marketing $ 700 1% - - $ 700 N/A
eBusiness and Fulfillment - - - - - N/A
Search and Portals - - - - - N/A
Infrastructure and Enabling Technologies - - - - - N/A
Internet Professional Services - - - - - N/A
Other 762 - - - 762 N/A
------ ------- ------
Total $1,462 - - - $1,462 N/A
====== ======= ======= ========= ======
</TABLE>
In-process research and development expenses increased to $1.5 million for
the three months ended October 31, 2000. There were no in-process research and
development expenses in the corresponding period of fiscal 2000. The increase
in the Interactive Marketing segment in-process research and development
expenses was primarily the result of the acquisitions of MediaBridge
Technologies, Inc. by Engage on September 11, 2000.
SELLING EXPENSES:
<TABLE>
<CAPTION>
Three Months Three Months
Ended As a % of Ended As a % of
October 31, Segment Net October 31, Segment Net
2000 Revenue 1999 Revenue $ Change % Change
---- ------- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interactive Marketing $ 40,173 83% $11,942 64% $28,231 236%
eBusiness and Fulfillment 14,660 8% 3,250 6% 11,410 351%
Search and Portals 57,294 95% 49,672 100% 7,622 15%
Infrastructure and Enabling Technologies 23,720 68% 6,120 133% 17,600 288%
Internet Professional Services 1,934 6% 1,015 474% 919 91%
Other 3,285 - 502 - 2,783 554%
-------- ------- -------
Total $141,066 39% $72,501 56% $68,565 95%
======== == ======= === ======= ===
</TABLE>
Selling expenses increased $68.6 million, or 95%, to $141.1 million for the
three months ended October 31, 2000 from $72.5 million for the same period in
fiscal year 2000. Selling expenses consisted primarily of advertising and other
general marketing related expenses, compensation and employee-related expenses,
sales commissions, facilities costs, trade show expenses and travel costs.
Selling expenses increased during the first three months of fiscal year 2001
primarily due to the effects of fiscal year 2000 acquisitions and the continued
growth of the sales and marketing efforts related to product launches and
infrastructure at existing companies. The fiscal year 2000 acquisitions
accounted for approximately 49% of the
16
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
increase in selling expenses. Selling expenses as a percentage of net revenue
decreased for the first quarter of fiscal 2001 primarily due to increased net
revenue. The increase within the Interactive Marketing segment was primarily the
result of the acquisitions of AdKnowledge, Flycast and yesmail.com during fiscal
year 2000 and increased sales and marketing efforts at Engage. Additionally,
during the first quarter of fiscal 2001, Engage recorded approximately $2.6
million of selling expenses for charges related to costs associated with exiting
certain leases and terminating personnel as part of the restructuring of its
business. The increase in the eBusiness and Fulfillment segment was primarily
the result of the acquisitions of uBid and Signatures Network during fiscal year
2000. The increase within the Search and Portals segment was primarily the
result of a full quarter's selling expenses from AltaVista, the impact of an
approximate $3.3 million charge recorded by AltaVista in fiscal 2001 related to
the termination of certain contracts and personnel in conjunction with a change
in its business focus and increased costs at iCAST.. The increase in the
Infrastructure and Enabling Technologies segment was primarily the result of the
acquisitions of Activate, AdForce, Equilibrium, ExchangePath, 1stUp and Tribal
Voice during fiscal year 2000 and increased sales and marketing efforts at
NaviSite. The increase within the Internet Professional Services segment was
primarily the result of the acquisition of Tallan during fiscal year 2000. The
Company anticipates that its selling and marketing expenses will increase in
future periods as the Company continues to create brand awareness for each of
the companies' products and services and as the Company continues to expand its
international operations.
GENERAL AND ADMINISTRATIVE EXPENSES:
<TABLE>
<CAPTION>
Three Months Three Months
Ended As a % of Ended As a % of
October 31, Segment Net October 31, Segment Net
2000 Revenue 1999 Revenue $ Change % Change
---- ------- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interactive Marketing $19,871 41% $ 3,057 16% $16,814 550%
eBusiness and Fulfillment 10,126 5% 5,323 9% 4,803 90%
Search and Portals 11,706 19% 10,171 21% 1,535 15%
Infrastructure and Enabling Technologies 18,054 52% 3,385 73% 14,669 433%
Internet Professional Services 7,298 22% 950 444% 6,348 668%
Other 17,992 - 7,167 - 10,825 151%
------- ------- -------
Total $85,047 23% $30,053 23% $54,994 183%
======= == ======= === ======= ===
</TABLE>
General and administrative expenses increased $55.0 million, or 183%, to
$85.1 million for the three months ended October 31, 2000 from $30.1 million for
the same period in fiscal year 2000. General and administrative expenses consist
primarily of compensation, facilities costs and fees for professional services.
General and administrative expenses increased during the first three months of
fiscal year 2001 primarily due to the effect of the fiscal year 2000
acquisitions and the building of management infrastructure at the corporate
level and at several of the Company's existing subsidiaries. The fiscal year
2000 acquisitions accounted for approximately 40% of the increase in general and
administrative expenses. General and administrative expenses as a percentage of
net revenue remained essentially equal for the first quarter of fiscal 2001 as
compared to the same period in the prior fiscal year due to the Company's
acquisition of Tallan which offset an increase in "Other" expenses. The
increase in the Interactive Marketing segment was primarily the result of
additional bad debt expense recorded by Engage and the acquisitions of
AdKnowledge, Flycast and yesmail.com during fiscal year 2000. The increase in
the eBusiness and Fulfillment segment was primarily the result of the
acquisitions of uBid and Signatures Network during fiscal year 2000. The
increase in the Search and Portals segment was primarily the result of a full
quarter's expenses from AltaVista. The increase in the Infrastructure and
Enabling Technologies segment was primarily due to the acquisitions of Activate,
AdForce, Equilibrium, ExchangePath, 1stUp and Tribal Voice during fiscal year
2000 and the building of management infrastructure at NaviSite and NaviPath.
The increase in the Internet Professional Services segment was primarily the
result of the acquisition of Tallan. The increase in the Other expenses, which
includes certain administrative functions such as legal, finance and business
development which are not fully allocated to CMGI's subsidiary companies, was
primarily the result of the growth of CMGI's corporate infrastructure including
higher personnel costs due to increased headcount, increased professional fees
and facilities costs. The Company anticipates that its general and
administrative expenses will increase in absolute dollars in future periods as
it continues to expand its international operations.
17
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
AMORTIZATION OF INTANGIBLE ASSETS AND STOCK-BASED COMPENSATION:
<TABLE>
<CAPTION>
Three Months Three Months
Ended As a % of Ended As a % of
October 31, Segment Net October 31, Segment Net
2000 Revenue 1999 Revenue $ Change % Change
---- ------- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interactive Marketing $177,638 365% $ 4,122 22% $173,516 4,210%
eBusiness and Fulfillment 37,055 20% 2,869 5% 34,186 1,192%
Search and Portals 288,676 478% 161,320 326% 127,356 79%
Infrastructure and Enabling Technologies 101,431 289% 582 13% 100,849 17,328%
Internet Professional Services 47,283 142% 1,090 509% 46,193 4,238%
Other 56 - 56 - - N/A
-------- -------- --------
Total $652,139 178% $170,039 132% $482,100 284%
======== === ======== === ======== ======
</TABLE>
Amortization of intangible assets and stock-based compensation increased
$482.1 million, or 284%, to $652.1 million for the three months ended October
31, 2000 from $170.0 million for same period in fiscal year 2000. Amortization
of intangible assets and stock-based compensation consisted primarily of
goodwill amortization expense related to acquisitions during fiscal year 2000.
The impact of acquisitions made during or after the first fiscal quarter of 2000
accounted for approximately 67% of the increase in amortization of intangible
assets and stock-based compensation. The intangible assets recorded as a result
of the fiscal 2000 acquisitions are being amortized over periods ranging from
two to five years. Included within amortization of intangible assets and stock-
based compensation expenses was approximately $13.2 million and $1.5 million of
stock-based compensation for the three months ended October 31, 2000 and 1999,
respectively. Also included within the amortization of intangible assets and
stock-based compensation during the first quarter of fiscal 2001 were impairment
charges totaling approximately $69.6 million as a result of management's ongoing
business review and impairment analysis performed under its existing policy
regarding impairment of long-lived assets. During the first quarter of fiscal
2001, CMGI announced its decision to exit the operations of iCAST and 1stUp. In
connection with this decision, management determined that the carrying value of
certain intangible assets, principally goodwill, was permanently impaired, and
recorded impairment charges of approximately $3.6 million and $23.3 million for
iCAST and 1stUp, respectively. The Company also recorded other impairment
charges during the quarter totaling approximately $42.7 million, consisting
primarily of $15.2 million related to intangible assets of Engage, Inc.'s
subsidiary, Flycast Communications Corporation, $8.9 million related to
intangible assets of MyWay.com Corporation, and $10.1 million related to
intangible assets of CMGion, Inc.'s subsidiary, Tribal Voice, Inc. It is
reasonably possible that the impairment factors evaluated by management will
change in subsequent periods, given that the Company operates in a volatile
business environment. This could result in material impairment charges in
future periods. The increase amortization in the Interactive Marketing segment
was primarily the result of the acquisitions of AdKnowledge, Flycast and
yesmail.com during fiscal year 2000. The increase in the eBusiness and
Fulfillment segment was primarily the result of the acquisitions of uBid and
Signatures Network during fiscal year 2000. The increase in the Search and
Portals segment amortization was primarily the result of a full quarter of
amortization on the acquisition of AltaVista. The increase in the
Infrastructure and Enabling Technologies segment was primarily the result of the
acquisitions of Activate, AdForce, Equilibrium, ExchangePath, 1stUp and Tribal
Voice during fiscal year 2000. The increase in the Internet Professional
Services segment was primarily the result of the acquisition of Tallan during
fiscal year 2000.
OTHER INCOME/EXPENSE:
Gains on issuance of stock by subsidiaries and affiliates increased $80.2
million, or 173%, to $126.6 million for the first three months of fiscal year
2001 from $46.4 million for the same period in fiscal year 2000. Gains on the
issuance of stock in the first quarter of fiscal year 2001 primarily related to
a pre-tax gain of approximately $125.9 million on the issuance of stock by
Engage in its acquisitions of MediaBridge Technologies and Space Media Holdings
Limited. Gains on issuance of stock in the first quarter of fiscal year 2000
reflects the pre-tax gain of $46.4 million on the issuance of common stock by
NaviSite in its initial public offering.
Other gains, net increased $149.0 million, or 308%, to $197.3 million for
the quarter ended October 31, 2000 from $48.3 million for the same period in
fiscal 2000. Other gains, net for the quarter ended October 31, 2000 primarily
consisted
18
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
of a pre-tax gain of approximately $357.4 million on the sale of Lycos, Inc.
(Lycos) common stock, a pre-tax gain of approximately $135.3 million on the sale
of Kana Communication Inc. (Kana) common stock, a pre-tax gain of approximately
$87.8 million on the forward sale agreement that hedges the Company's investment
in Yahoo!, Inc. (Yahoo!) common stock and a pre-tax gain of approximately $70.9
million on the sale of Critical Path, Inc. (Critical Path) common stock,
partially offset by a pre-tax loss of $358.9 million on the sale of Pacific
Century CyberWorks Limited (PCCW) common stock and write-downs of $45.4 million
and $38.7 million on the Company's Hollywood Entertainment, Inc. and Marketing
Services Group, Inc. common stock, respectively. Other gains, net for the
quarter ended October 31, 1999 consisted of pre-tax gains of approximately $48.3
million on the sale of Yahoo! common stock.
Interest income increased $6.2 million to $12.1 million for the three
months ended October 31, 2000 from $5.9 million for the same period in fiscal
2000, reflecting increased interest income associated with higher average
corporate cash and cash equivalent balances and due to increased interest income
earned by NaviSite as a result of their initial public offerings and by CMGion
as a result of a private placement of CMGion stock. Interest expense increased
$16.9 million to $22.6 million for the first quarter of fiscal 2001 from $5.7
million for the first quarter of fiscal 2000, primarily due to approximately
$596.9 million in notes issued as part of the AltaVista and Tallan acquisitions.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method.
Under the equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates increased $14.1 million
to $15.9 million for three months ended October 31, 2000, from $1.8 million for
the same period in fiscal 2000, primarily reflecting an increased number of
investments accounted for under the equity method compared to last year's first
fiscal quarter. Equity in losses of affiliates for the first quarter of fiscal
2001 included the results from the Company's minority ownership in AnswerLogic,
Inc., BizBuyer.com, Inc., CarParts.com, Inc., Corrigo, Inc., Domania.com, Inc.,
eCircles Corporation, Ensera, Inc., FindLaw, Inc., FoodBuy.com, Inc., GXMedia,
Inc., HotLinks Network, Inc., Idapta, Inc., Industria Solutions, Inc.
KnowledgeFirst, Inc., MyFamily.com, Inc., NameTree, Inc., NextMonet.com, Inc.,
NextOffice.com, Inc., OneCore Financial Network, Inc., Radiate, Inc., Undoo.com,
Virtual Ink Corporation, and WebCT, Inc. Equity in losses of affiliates for the
first quarter of fiscal 2000 include the results from the Company's minority
ownership in Engage Technologies Japan, Inc., ThingWorld.com LLC and WebCT, Inc.
The Company expects its affiliate companies to continue to invest in development
of their products and services, and to recognize operating losses, which will
result in future charges recorded by the Company to reflect its proportionate
share of such losses.
Minority interest increased to $88.9 million for the three months ended
October 31, 2000 from $23.3 million for the same period of fiscal 2000,
primarily reflecting minority interest in net losses of seven subsidiaries
during the first quarter of fiscal 2001, including AltaVista, Engage, MyWay.com,
NaviSite, CMGion, NaviPath and Tallan.
Income tax expense recorded in the first quarter of fiscal 2001 was
$126.3 million. Exclusive of taxes provided for significant, unusual or
extraordinary items that will be reported separately, the Company provides for
income taxes on a year to date basis at an effective rate based upon its
estimate of full year earnings. In determining the Company's effective rate for
the first quarter of fiscal 2001, gains on stock issuances by subsidiaries and
affiliates, other gains, net and impairment charges taken on intangible assets
were excluded. Income tax expense in the first quarter of fiscal 2001 differs
from the amount computed by applying the U.S. federal income tax rate of 35
percent to pre-tax loss primarily as a result of non-deductible goodwill and
impairment charges, valuation allowances recognized for operating losses of
certain majority-owned subsidiaries not included in the Company's consolidated
federal tax return group, and state income taxes.
19
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CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Liquidity and Capital Resources
Working capital at October 31, 2000 increased to $1.26 billion compared to
$1.11 billion at July 31, 2000. The net increase in working capital is primarily
attributable to a $524.1 million increase in cash and cash equivalents
approximately $387.0 million decrease in notes payable and a $384.0 million
decrease in current deferred tax liabilities, partially offset by a $1.08
billion decrease in available-for-sale securities. The Company's principal
sources of capital during the first three months of fiscal 2001 were from the
sales of approximately 8.4 million shares of Lycos common stock for proceeds of
$394.7 million, approximately 241.0 million shares of Pacific Century CyberWorks
Limited for proceeds of $190.2 million, approximately 3.7 million shares of Kana
common stock for proceeds of $137.6 million and approximately 1.3 million shares
of Critical Path common stock for proceeds of $72.8 million. The Company's
principal uses of capital during the first three months of fiscal 2001 were
$210.8 million for funding operations and $46.2 million for investments in
affiliates, primarily through the Company's CMGI@Ventures venture capital funds,
$42.2 million for purchases of property and equipment and $33.6 million for
repayment of short-term notes payable related to a forward sale agreement of the
Company's shares of Yahoo!, Inc. common stock.
Under the terms of a forward sale agreement entered into during fiscal
2000, the Company agreed to deliver, at its discretion, either cash or Yahoo!
Inc. common stock in three separate tranches, with maturity dates ranging from
August 2000 to February 2001. The Company executed the first tranche in April
2000 and received approximately $106.4 million. The Company subsequently settled
this tranche through the delivery of 581,499 shares of Yahoo! common stock in
August of 2000. In May 2000, the Company received approximately $68.5 million
and $5.7 million upon the execution of the second and third tranches,
respectively. The Company subsequently settled the second tranche for cash
totaling approximately $33.6 million in October of 2000. In November 2000, the
Company entered into a new forward sale agreement to hedge the Company's
investment in 581,499 shares of Yahoo! common stock. The Company received
approximately $31.5 million in connection with this agreement. Under the terms
of the new contract, the Company agreed to deliver, at its discretion, either
cash or shares of Yahoo! Inc. common stock on August 1, 2001.
During the first three months of fiscal year 2001, the Company, through its
limited liability company subsidiaries CMG@Ventures II, LLC, CMG@Ventures III,
LLC, CMGI@Ventures IV, LLC, CMGI@Ventures B2B, LLC, CMGI@Ventures Technology
Fund, LLC and CMG@Ventures Expansion, LLC acquired initial or follow-on minority
ownership interests in thirteen Internet and technology companies for an
aggregate total of approximately $42.2 million.
On August 18, 2000, the Company issued approximately 313,000 shares of its
common stock to Compaq Computer Corporation as a semi-annual interest payment of
approximately $11.5 million related to notes payable issued in the acquisition
of AltaVista. On September 30, 2000, the Company issued approximately 7.3
million shares of its common stock as payment of principal and interest totaling
approximately $249.8 million related to a note payable that had been issued in
the Company's acquisition of Tallan.
On August 23, 2000, the Company announced it has acquired the exclusive
naming and sponsorship rights to the New England Patriots' new stadium, to be
known as "CMGI Field," for a period of fifteen years. In return for the naming
and sponsorship rights, CMGI will pay $7.6 million per year for the first ten
years, with consumer price index adjustments for years eleven through fifteen.
CMGI will not make its first semi-annual payment under this agreement until
January 2002.
On August 25, 2000, the Company and Cable and Wireless plc, completed their
previously agreed to exchange of stock. CMGI received approximately 241.0
million shares of PCCW stock in exchange for approximately 13.4 million shares
of the Company's common stock. The PCCW stock received was valued at $546.6
million, which represents the value of the CMGI shares issued in the exchange on
the date the agreement was executed.
During the first three months of fiscal 2001, the Company's subsidiary,
Engage, completed two acquisitions for combined consideration of approximately
$257.6 million consisting of approximately 14.9 million shares of Engage common
stock valued at approximately $225.7 million, options to purchase Engage common
stock at approximately $31.1 million and direct acquisition costs of
approximately $907,000.
20
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
On December 12, 2000, the Company funded $50.0 million to its subsidiary,
NaviSite, under a note and warrant purchase agreement. The annual interest rate
on the Initial Note is 7.5% payable quarterly in, at NaviSite's discretion,
either cash or NaviSite common stock. The principal amount is due in full by
December 12, 2003. The Company has also committed to provide an additional $30.0
million which is restricted to satisfying certain of NaviSite's lease
obligations.
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 CMGI@Ventures investment opportunities. Similar to
CMGI's current 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. 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.
Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. Forward-
looking statements in this document and those made from time to time by the
Company through its senior management are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements concerning the expected future revenues or earnings or
concerning projected plans, performance, product development, product release or
product shipment, as well as other estimates related to future operations are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to, the
following:
CMGI may not have operating income or net income in the future.
During the fiscal year ended July 31, 2000 and for the three months ended
October 31, 2000, CMGI had operating losses of approximately $2.19 billion and
$896.7 million, respectively, and net losses of approximately $1.38 billion and
$636.6 million, respectively. CMGI anticipates continuing to incur significant
operating expenses in the future, including significant costs of revenue and
selling, general and administrative and amortization expenses. As a result, CMGI
expects to continue to incur operating losses and may not have enough money to
grow its business in the future. CMGI can give no assurance that it will achieve
profitability or be capable of sustaining profitable operations.
CMGI may have problems raising money it needs in the future.
In recent years, CMGI has financed its operating losses in part with
profits from selling some of the stock of companies in which CMGI had invested
through the @Ventures funds. This funding source may not be sufficient in the
future, and CMGI may need to obtain funding from outside sources. However, CMGI
may not be able to obtain funding from outside sources. In
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CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
addition, even if CMGI finds outside funding sources, CMGI may be required to
issue to such outside sources securities with greater rights than those
currently possessed by holders of CMGI's currently outstanding securities. CMGI
may also be required to take other actions, which may lessen the value of its
common stock, including borrowing money on terms that are not favorable to CMGI.
22
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
CMGI may incur significant costs to avoid investment company status and may
suffer adverse consequences if deemed to be an investment company.
CMGI may incur significant costs to avoid investment company status and may
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. Some of CMGI's equity investments in other
businesses and its venture subsidiaries may constitute investment securities
under the Investment Company Act. A company may be deemed to be an investment
company if it owns investment securities with a value exceeding 40% of its total
assets, subject to certain exclusions. Investment companies are subject to
registration under, and compliance with, the Investment Company Act unless a
particular exclusion or safe harbor provision applies. If CMGI were to be deemed
an investment company, CMGI would become subject to the requirements of the
Investment Company Act. As a consequence, CMGI would be prohibited from engaging
in business or issuing securities as it has in the past and might be subject to
civil and criminal penalties for noncompliance. In addition, certain of CMGI
contracts might be voidable, and a court-appointed receiver could take control
of CMGI and liquidate its business.
Although CMGI's investment securities currently comprise less than 40% of
its total assets, fluctuations in the value of these securities or of CMGI's
other assets may cause this limit to be exceeded. Unless an exclusion or safe
harbor was available to CMGI, CMGI would have to attempt to reduce its
investment securities as a percentage of its total assets. This reduction can be
attempted in a number of ways, including the disposition of investment
securities and the acquisition of non-investment security assets. If CMGI were
required to sell investment securities, CMGI may sell them sooner than it
otherwise would. These sales may be at depressed prices and CMGI may never
realize anticipated benefits from, or may incur losses on, these investments.
CMGI may be unable to sell some investments due to contractual or legal
restrictions or the inability to locate a suitable buyer. Moreover, CMGI may
incur tax liabilities when selling assets. CMGI may also be unable to purchase
additional investment securities that may be important to its operating
strategy. If CMGI decides to acquire non-investment security assets, CMGI may
not be able to identify and acquire suitable assets and businesses or the terms
on which CMGI is able to acquire such assets may be unfavorable.
If CMGI fails to successfully execute on its segmentation strategy, its revenue,
earnings prospects and business may be materially and adversely affected.
On September 7, 2000, CMGI announced that it had formally organized its
majority-owned operating companies and venture capital affiliates into six
segments. These six segments include five operational disciplines - Interactive
Marketing; eBusiness and Fulfillment; Search and Portals; Infrastructure and
Enabling Technologies; and Internet Professional Services - as well as CMGI's
affiliated venture capital arm, CMGI@Ventures. The segmentation strategy
includes a focus on:
. market segments in which CMGI can establish a leadership position;
. a planned reduction in the number of operating companies to an optimal
number of five to ten in total;
. improved future financial performance including continued revenue
growth; and
. a significant reduction in cash flow requirements through improved
operating efficiencies in acquisitions, consolidations and divestitures.
To successfully implement its segmentation strategy, CMGI must achieve each of
the following:
. overcome the difficulties of integrating its operating companies;
. decrease its cash burn rate;
. improve its cash position and revenue run rate; and
. increase its holdings of marketable securities.
23
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
If CMGI fails to address each of these factors, its business prospects for
achieving and sustaining profitability, and the market value of its securities
may be materially and adversely affected. Even if its implementation of this
segmentation strategy is successful, the revised structure and reporting
procedures of the new segmentation strategy may not lead to increased market
clarity or stockholder value. In addition, the execution of the segmentation
strategy, including planned reductions in the number of operating companies,
could result in restructuring charges being recorded by CMGI in future periods.
CMGI depends on certain important employees, and the loss of any of those
employees may harm CMGI's business.
CMGI's performance is substantially dependent on the performance of its
executive officers and other key employees, in particular, David S. Wetherell,
CMGI's chairman, president and chief executive officer, Andrew J. Hajducky III,
CMGI's executive vice president, chief financial officer and treasurer, and
David Andonian, CMGI's president, corporate development. The familiarity of
these individuals with the Internet industry makes them especially critical to
CMGI's success. In addition, CMGI's success is dependent on its ability to
attract, train, retain and motivate high quality personnel, especially for its
management team. The loss of the services of any of CMGI's executive officers or
key employees may harm its business. CMGI's success also depends on its
continuing ability to attract, train, retain and motivate other highly qualified
technical and managerial personnel. Competition for such personnel is intense.
There may be conflicts of interest among CMGI's network companies, CMGI's
officers, directors and stockholders and CMGI.
Some of CMGI's officers and directors also serve as officers or directors
of one or more of CMGI's network companies. As a result CMGI, CMGI's officers
and directors, and CMGI's network companies may face potential conflicts of
interest with each other and with its stockholders. Specifically, CMGI's
officers and directors may be presented with situations in their capacity as
officers or directors of one of CMGI's network companies that conflict with
their fiduciary obligations as officers or directors of CMGI's company or of
another network company.
In fiscal 2000 and the first three months of fiscal 2001, CMGI derived a
significant portion of its revenue from a small number of customers and the loss
of any of those customers could significantly damage CMGI's business.
During the fiscal year ended July 31, 2000, sales to Cisco accounted for
11% of CMGI's consolidated net revenue and 36% of CMGI's net revenue from its
eBusiness and Fulfillment segment. During the three months ended October 31,
2000, sales to Cisco accounted for 8% of CMGI's consolidated net revenue and 15%
of CMGI's net revenue from its eBusiness and Fulfillment segment. CMGI currently
does not have any agreements with Cisco which obligate this customer to buy a
minimum amount of products from CMGI or to designate CMGI as its sole supplier
of any particular products or services. During the fiscal year ended July 31,
2000, approximately 12% of CMGI's consolidated net revenue and 35% of net
revenue from CMGI's Search and Portals segment was derived from customer
advertising contracts serviced by DoubleClick, Inc. During the three months
ended October 31, 2000, approximately 4% of CMGI's consolidated net revenue and
27% of net revenue from CMGI's Search and Portals segment was derived from
customer advertising contracts serviced by DoubleClick, Inc. CMGI believes that
it will continue to derive a significant portion of its operating revenue from
sales to a small number of customers.
CMGI's strategy of selling assets of or investments in the companies that it has
acquired and developed presents risks.
One element of CMGI's business plan involves raising cash for working
capital for its business by selling, in public or private offerings, some of the
companies, or portions of the companies, that it has acquired and developed or
in which it has invested. Market and other conditions largely beyond CMGI's
control affect:
. its ability to engage in such sales;
24
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
. the timing of such sales; and
. the amount of proceeds from such sales.
As a result, CMGI may not be able to sell some of these assets. In
addition, even if CMGI is able to sell, CMGI may not be able to sell at
favorable prices. If CMGI is unable to sell these assets at favorable prices,
its business will be harmed.
CMGI's stock price may fluctuate because the value of some of its companies
fluctuates.
A portion of CMGI's assets include the equity securities of both publicly
traded and non-publicly traded companies. For example, as of December 8, 2000,
CMGI directly or through its @Ventures funds owned shares of common stock of
Akamai Technologies, Inc., Amazon.com, Inc., divine Interventures, inc., eBay,
Inc., Engage, Inc., Hollywood Entertainment, Inc., Kana Communications, Inc.,
marchFirst, Marketing Services Group, Inc., MotherNature.com, NaviSite, Inc.,
Netcentives, Inc., Pacific Century CyberWorks, Ltd., Primedia, Inc., Terra
Lycos, Inc, Tickets.com, Ventro Corporation, Vicinity Corporation and Yahoo!,
Inc., which are publicly traded companies. The market price and valuations of
the securities that CMGI holds in these and other companies may fluctuate due to
market conditions and other conditions over which CMGI has no control.
Fluctuations in the market price and valuations of the securities that CMGI
holds in other companies may result in fluctuations of the market price of
CMGI's common stock and may reduce the amount of working capital available to
CMGI.
CMGI's strategy of expanding its business through acquisitions of other
businesses and technologies presents special risks.
CMGI intends to continue to expand through the acquisition of businesses,
technologies, products and services from other businesses. Acquisitions involve
a number of special problems, including:
. difficulty integrating acquired technologies, operations, and personnel
with the existing businesses;
. diversion of management attention in connection with both negotiating
the acquisitions and integrating the assets;
. strain on managerial and operational resources as management tries to
oversee larger operations;
. exposure to unforeseen liabilities of acquired companies;
. potential issuance of securities in connection with an acquisition with
rights that are superior to the rights of holders of CMGI's currently
outstanding securities;
. the need to incur additional debt; and
. the requirement to record potentially significant additional future
operating costs for the amortization of goodwill and other intangible
assets.
CMGI may not be able to successfully address these problems. Moreover,
CMGI's future operating results will depend to a significant degree on its
ability to successfully manage growth and integrate acquisitions. In addition,
many of CMGI's investments are in early-stage companies with limited operating
histories and limited or no revenues. CMGI may not be able to successfully
develop these young companies.
CMGI faces competition from other acquirors of and investors in Internet-related
ventures which may prevent CMGI from realizing strategic opportunities.
25
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Although CMGI creates many of its network companies, it also acquires or
invests in existing companies that it believes are complementary to its network
and further its vision of the Internet. In pursuing these opportunities, CMGI
faces competition from other capital providers and operators of Internet-related
companies, including publicly-traded Internet companies, venture capital
companies and large corporations. Some of these competitors have greater
financial resources than CMGI does. This competition may limit CMGI's
opportunity to acquire interests in companies that could advance its vision of
the Internet and increase its value.
CMGI's growth places strain on its managerial, operational and financial
resources.
CMGI's rapid growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources.
Further, as the number of CMGI's users, advertisers and other business partners
grows, CMGI will be required to manage multiple relationships with various
customers, strategic partners and other third parties. CMGI's further growth or
an increase in the number of its strategic relationships will increase this
strain on its managerial, operational and financial resources, inhibiting its
ability to achieve the rapid execution necessary to successfully implement its
business plan.
CMGI must develop and maintain positive brand name awareness.
CMGI believes that establishing and maintaining its brand names is
essential to expanding its business and attracting new customers. CMGI also
believes that the importance of brand name recognition will increase in the
future because of the growing number of Internet companies that will need to
differentiate themselves. Promotion and enhancement of CMGI's brand names will
depend largely on its ability to provide consistently high-quality products and
services. If CMGI is unable to provide high-quality products and services, the
value of its brand names may suffer.
CMGI's quarterly results may fluctuate widely.
CMGI's operating results have fluctuated widely on a quarterly basis during
the last several years, and it expects to experience significant fluctuation in
future quarterly operating results. Many factors, some of which are beyond
CMGI's control, have contributed to these quarterly fluctuations in the past and
may continue to do so. Such factors include:
. demand for its products and services;
. payment of costs associated with its acquisitions, sales of assets and
investments;
. timing of sales of assets;
. market acceptance of new products and services;
. charges for impairment of long-lived assets in future periods;
. potential restructuring charges in connection with CMGI's segmentation
strategy;
. specific economic conditions in the industries in which CMGI competes;
and
. general economic conditions.
The emerging nature of the commercial uses of the Internet makes
predictions concerning CMGI's future revenues difficult. CMGI believes that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of its future
performance. It is also possible that in some fiscal quarters, CMGI's operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of CMGI's common stock may decline.
26
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
The price of CMGI's common stock has been volatile.
The market price of CMGI's common stock has been, and is likely to continue
to be, volatile, experiencing wide fluctuations. In recent years, the stock
market has experienced significant price and volume fluctuations, which have
particularly impacted the market prices of equity securities of many companies
providing Internet-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of such
companies. Future market movements may adversely affect the market price of
CMGI's common stock.
Ownership of CMGI is concentrated.
David S. Wetherell, CMGI's chairman, president and chief executive officer,
beneficially owned approximately 11.2% of CMGI's outstanding common stock as of
September 30, 2000. As a result, Mr. Wetherell possesses significant influence
over CMGI on matters, including the election of directors. Additionally, Compaq
owned approximately 13.2% of CMGI's outstanding common stock as of September 30,
2000. The concentration of CMGI's share ownership may:
. delay or prevent a change in its control;
. impede a merger, consolidation, takeover, or other transaction involving
CMGI; or
. discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of CMGI.
CMGI relies on NaviSite for Web site hosting.
CMGI and many of its operating companies rely on NaviSite for network
connectivity and hosting of servers. If NaviSite fails to perform such services,
CMGI's internal business operations may be interrupted, and the ability of
CMGI's operating companies to provide services to customers may also be
interrupted. Such interruptions may have an adverse impact on CMGI's business
and revenues and its operating companies.
The success of CMGI's network companies depends greatly on increased use of the
Internet by business and individuals.
The success of CMGI's network companies depends greatly on increased use of
the Internet for advertising, marketing, providing services and conducting
business. Commercial use of the Internet is currently at an early stage of
development and the future of the Internet is not clear. In addition, it is not
clear how effective advertising on the Internet is in generating business as
compared to more traditional types of advertising such as print, television and
radio. The businesses of CMGI's network companies will suffer if commercial use
of the Internet fails to grow in the future.
CMGI network companies are subject to intense competition.
The market for Internet products and services is highly competitive.
Moreover, the market for Internet products and services lacks significant
barriers to entry, enabling new businesses to enter this market relatively
easily. Competition in the market for Internet products and services may
intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with the products and services
of CMGI network companies. In addition, many of the current and potential
competitors of CMGI network companies have greater financial, technical,
operational and marketing resources than those of CMGI network companies. CMGI
network companies may not be able to compete successfully against these
competitors. Competitive pressures may also force prices for Internet goods and
services down and such price reductions may reduce the revenues of CMGI network
companies.
27
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CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Growing concerns about the use of "cookies" may limit Engage's ability to
develop user profiles.
Web sites typically place small files of information commonly known as
"cookies" on a user's hard drive, generally without the user's knowledge or
consent. Cookie information is passed to the Web site through the Internet
user's browser software. Engage's technology currently uses cookies to collect
information about an Internet user's movement through the Internet. Most of the
currently available Internet browsers allow users to modify their browser
settings to prevent cookies from being stored on their hard drive, and a small
minority of users currently choose to do so. Users can also delete cookies from
their hard drive at any time. Some Internet commentators and privacy advocates
have suggested limiting or eliminating the use of cookies, and recently, the
Federal Trade Commission initiated an informal inquiry into the data collection
practices of DoubleClick, Inc. The effectiveness of Engage's technology could be
limited by any reduction or limitation in the use of cookies. If the use or
effectiveness of cookies is limited, Engage would likely have to switch to other
technology that would allow it to gather demographic and behavioral information.
This could require significant reengineering time and resources, might not be
completed in time to avoid negative consequences to CMGI's business, financial
condition or results of operations, and might not be possible at all.
If the United States or other governments regulate the Internet more closely,
the businesses of CMGI network companies may be harmed.
Because of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
privacy, pricing, taxation and content. The enactment of any additional laws or
regulations may impede the growth of the Internet and the Internet-related
business of CMGI network companies and could place additional financial burdens
on their businesses.
To succeed, CMGI network companies must respond to the rapid changes in
technology and distribution channels related to the Internet.
The markets for the Internet products and services of our network companies
are characterized by:
. rapidly changing technology;
. evolving industry standards;
. frequent new product and service introductions;
. shifting distribution channels; and
. changing customer demands.
The success of CMGI network companies will depend on their ability to adapt
to this rapidly evolving marketplace. They may not be able to adequately adapt
their products and services or to acquire new products and services that can
compete successfully. In addition, CMGI network companies may not be able to
establish and maintain effective distribution channels.
CMGI network companies face security risks.
Consumer concerns about the security of transmissions of confidential
information over public telecommunications facilities is a significant barrier
to electronic commerce and communications on the Internet. Many factors may
cause compromises or breaches of the security systems CMGI network companies or
other Internet sites use to protect proprietary information, including advances
in computer and software functionality or new discoveries in the field of
cryptography. A compromise of security on the Internet would have a negative
effect on the use of the Internet for commerce and
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CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
communications and negatively impact CMGI network companies' businesses.
Security breaches of their activities or the activities of their customers and
sponsors involving the storage and transmission of proprietary information, such
as credit card numbers, may expose CMGI network companies to a risk of loss or
litigation and possible liability. CMGI cannot assure that the security measures
of CMGI network companies will prevent security breaches.
The success of the global operations of CMGI network companies is subject to
special risks and costs.
CMGI network companies have begun, and intend to continue, to expand their
operations outside of the United States. This international expansion will
require significant management attention and financial resources. The ability of
CMGI network companies to expand their offerings of CMGI's products and services
internationally will be limited by the general acceptance of the Internet and
intranets in other countries. In addition, CMGI and its network companies have
limited experience in such international activities. Accordingly, CMGI and its
network companies expect to commit substantial time and development resources to
customizing the products and services of its network companies for selected
international markets and to developing international sales and support
channels.
CMGI expects that the export sales of its network companies will be
denominated predominantly in United States dollars. As a result, an increase in
the value of the United States dollar relative to other currencies may make the
products and services of its network companies more expensive and, therefore,
potentially less competitive in international markets. As CMGI network companies
increase their international sales, their total revenues may also be affected to
a greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.
CMGI network companies could be subject to infringement claims.
From time to time, CMGI network companies have been, and expect to continue
to be, subject to third party claims in the ordinary course of business,
including claims of alleged infringement of intellectual property rights. Any
such claims may damage the businesses of CMGI network companies by:
. subjecting them to significant liability for damages;
. resulting in invalidation of their proprietary rights;
. being time-consuming and expensive to defend even if such claims are not
meritorious; and
. resulting in the diversion of management time and attention.
CMGI network companies may have liability for information retrieved from the
Internet.
Because materials may be downloaded from the Internet and subsequently
distributed to others, CMGI network companies may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature, content, publication and distribution of
such materials.
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CMGI, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to equity price risks on the marketable portion of
its equity securities. The Company's available-for-sale securities at October
31, 2000 include strategic equity positions in the Internet industry sector,
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, with the exception of the Yahoo! common stock as
discussed below.. 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 October 31, 2000, would result in an approximate $100.2 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
and during the third and fourth quarters of fiscal 2000 the Company entered into
a forward sale arrangement with respect to a portion of its Yahoo! Inc. common
stock - See note L to the Interim Unaudited Consolidated Financial Statements .
The Company does not enter into derivative financial instruments for trading
purposes. As a matter of policy all derivative positions are used to reduce
risk by hedging underlying economic exposure. The derivatives the Company uses
are straightforward instruments with liquid markets. At October 31, 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.
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CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
On August 2, 2000, the Company acquired additional ownership interests in
Freeup LLC ("Freeup"). Pursuant to the terms of the acquisition agreement, on
such date the Company, among other things, issued and sold 28,153 shares of its
Common Stock to Compaq Computer Corporation (Compaq), for an aggregate purchase
price of $2,000,000. The shares of Common Stock were issued and sold to Compaq
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.
On August 25, 2000, the Company and Cable and Wireless Far East Limited
("C&W") completed an exchange of stock. The Company received 241,013,597 shares
of Pacific Century Cyberworks Limited then held by C&W in exchange for
13,413,816 shares of the Company's Common Stock. The shares of Common Stock
were issued and sold to C&W 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.
On September 15, 2000, pursuant to the terms of convertible notes issued by
the Company on September 15, 1999 to certain of the former stockholders of cha!
Technologies Services, Inc. ("cha!") in connection with the Company's
acquisition of cha!, the Company issued an aggregate of 297,016 shares of Common
Stock to the noteholders upon conversion of such notes. The shares of Common
Stock were issued in reliance on Section 3(a)(9) of the Securities Act of 1933,
as amended, as a security exchanged by the issuer with its existing security
holders exclusively where no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange. No underwriters were
involved with the issuance and sale of the shares of Common Stock.
On September 30, 2000, pursuant to the terms of promissory notes issued by
the Company on March 31, 2000 to certain of the former stockholders of Tallan,
Inc. ("Tallan") in connection with the Company's acquisition of Tallan, the
Company issued an aggregate of 7,250,615 shares of Common Stock to the
noteholders upon conversion of such notes. The shares of Common Stock were
issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended,
as a security exchanged by the issuer with its existing security holders
exclusively where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange. No underwriters were involved with
the issuance and sale of the shares of Common Stock.
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.
(b) Reports on Form 8-K
On August 17, 2000, the Company filed a Current Report on Form 8-K
dated August 16, 2000 to file under Item 5 (Other Events) the
following financial statements:
Audited consolidated balance sheet of AdForce, Inc. as of
December 31, 1999, and the related consolidated statements of
operations, common stockholders' equity (deficit) and cash flows
for the year ended December 31, 1999.
Audited consolidated balance sheet of Flycast Communications
Corporation as of December 31, 1999, and the related consolidated
statements of operations, common stockholders' equity (deficit)
and cash flows for the year ended December 31, 1999.
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Unaudited Pro Forma condensed combined financial information of
Registrant for the nine months ended April 30, 2000 and the
twelve months ended July 31, 1999.
On August 18, 2000, the Company filed a Current Report on Form 8-K
dated August 18, 2000 to file under Item 5 (Other Events) the
following financial statements:
Unaudited financial statements of uBid, Inc. as of March 31, 2000
and for the three months ended March 31, 1999 and 2000.
32
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
--------------------------
Date: December 15, 2000 Andrew J. Hajducky III
Executive Vice President, Chief Financial Officer
and Treasurer (Principal Financial and Accounting
Officer)
34
<PAGE>
EXHIBIT INDEX
Item Description
10.1 Share Sale Agreement dated as of February 29, 2000 by and between the
Registrant and Cable & Wireless Far East Limited.
10.2 Registration Rights Agreement dated as of August 24, 2000 by and
between the Registrant and Cable & Wireless Far East Limited.
27.1 Financial Data Schedule for the three months ended October 31, 2000.
35
