<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 April 30, 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 June 9, 2000
Common Stock, par value $.01 per share 295,233,577
--------------------------------------- -----------
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
April 30, 2000 (unaudited) and July 31, 1999 3
Consolidated Statements of Operations
Three and nine months ended April 30, 2000 and 1999
(unaudited) 4
Consolidated Statements of Cash Flows
Nine months ended April 30, 2000 and 1999 (unaudited) 5
Notes to Interim Unaudited Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 34-35
SIGNATURE 36
EXHIBIT INDEX 37
</TABLE>
2
<PAGE>
CMGI, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
April 30, July 31,
1999 2000
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 674,288 $ 468,912
Available-for-sale securities 1,381,481 1,532,327
Accounts receivable, trade, less allowance for doubtful accounts 213,576 41,794
Inventories 40,209 8,367
Prepaid expenses and other current assets 55,323 5,934
---------- ----------
Total current assets 2,364,877 2,057,334
---------- ----------
Property and equipment, net 219,894 24,832
Investments in affiliates 587,019 44,623
Goodwill and other intangible assets, net of accumulated amortization 5,552,796 149,703
Deferred income taxes 17,167 --
Other assets 197,618 128,102
---------- ----------
$8,939,371 $2,404,594
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 436,901 $ 20,000
Current installments of long-term debt 16,265 5,258
Accounts payable and accrued expenses 408,429 74,371
Accrued income taxes 40,713 11,777
Deferred income taxes 476,755 508,348
Deferred revenues 29,597 6,726
Other current liabilities 51,978 49,849
---------- ----------
Total current liabilities 1,460,638 676,329
---------- ----------
Long-term debt, less current installments 229,952 15,060
Long-term deferred revenues 1,050 1,509
Deferred income taxes -- 35,140
Other long-term liabilities 52,454 18,298
Minority interest 573,141 184,514
Commitments and contingencies
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; issued 35,000
shares Series B convertible, redeemable preferred stock at July 31, 1999,
conversion premium at 4% per annum and issued 375,000 Series C convertible,
redeemable preferred stock at April 30, 2000 and July 31, 1999, dividend at 2%
per annum; both carried at liquidation value 381,250 411,283
Stockholders' equity:
Common stock, $0.01 par value per share. Authorized 400,000,000 shares; issued
and outstanding 293,303,274 shares at April 30, 2000 and 191,168,280 shares
at July 31, 1999 2,933 1,912
Additional paid-in capital 6,002,145 234,273
Deferred compensation (34,116) (180)
Retained earnings (deficit) (222,257) 518,102
---------- ----------
5,748,705 754,107
Accumulated other comprehensive income 492,181 308,354
---------- ----------
Total stockholders' equity 6,240,886 1,062,461
---------- ----------
$8,939,731 $2,404,594
========== ==========
</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 April 30, Nine months ended April 30,
------------------------------ -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 225,878 $ 43,655 $ 503,078 $120,032
Operating expense:
Cost of revenue 181,052 42,167 410,974 114,911
Research and development 49,671 5,008 101,283 15,510
In-process research and development 41,220 4,500 45,937 4,500
Selling 128,912 11,268 314,150 26,410
General and administrative 58,618 9,762 126,843 25,931
Amortization of intangible assets and stock-based
compensation 481,987 5,017 905,857 8,034
--------- -------- ----------- --------
Total operating expenses 941,460 77,722 1,905,044 195,296
--------- -------- ----------- --------
Operating loss (715,582) (34,067) (1,401,966) (75,264)
--------- -------- ----------- --------
Other income (deductions):
Interest income 14,430 852 30,950 2,159
Interest expense (12,987) (1,062) (26,517) (3,295)
Other gains, net 213,537 -- 428,035 94,692
Gain on issuance of stock by subsidiaries and affiliates 19,988 859 71,927 49,626
Equity in losses of affiliates (10,290) (3,553) (15,719) (13,101)
Minority interest, net 55,980 275 110,844 479
--------- -------- ----------- --------
280,658 (2,629) 599,520 130,560
--------- -------- ----------- --------
Income (loss) from continuing operations before income taxes (434,924) (36,696) (802,446) 55,296
Income tax expense (benefit) (6,885) (9,473) (71,420) 30,981
--------- -------- ----------- --------
Income (loss) from continuing operations (428,039) (27,223) (731,026) 24,315
Discontinued operations, net of income taxes:
Loss from operations of lists and database services
segment -- (527) -- (806)
--------- -------- ----------- --------
Net income (loss) (428,039) (27,750) (731,026) 23,509
Preferred stock accretion and amortization of discount (2,170) -- (9,333) --
--------- -------- ----------- --------
Net income (loss) available to common stockholders $(430,209) $(27,750) $ (740,359) $ 23,509
========= ======== =========== ========
Basic earnings (loss) per share: $(1.53) $(0.15) $(2.94) $0.13
========= ======== =========== ========
Diluted earnings (loss) per share: $(1.53) $(0.15) $(2.94) $0.12
========= ======== =========== ========
Shares used in computing earnings (loss) per share:
Basic 281,936 187,808 251,560 185,454
========= ======== =========== ========
Diluted 281,936 187,808 251,560 203,050
========= ======== =========== ========
</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>
Nine months
ended April 30,
---------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (731,026) $ 24,315
Adjustments to reconcile income (loss) from continuing
operations to net cash used for continuing operations:
Depreciation and amortization 944,253 12,047
Deferred income taxes (289,685) 18,810
Non-operating gains, net (499,962) (144,318)
Equity in losses of affiliates 15,719 13,101
Minority interest (110,844) (479)
In-process research and development 45,937 4,500
Changes in operating assets and liabilities,
excluding effects from acquisition and
deconsolidation of subsidiaries:
Trade accounts receivable (73,902) (6,016)
Inventories (8,245) (778)
Prepaid expenses (29,546) (2,470)
Accounts payable and accrued expenses 35,025 13,834
Deferred revenues 11,426 4,947
Refundable and accrued income taxes, net 29,858 (32,629)
Tax benefit from exercise of stock options 170,627 33,671
Other assets and liabilities (9,779) (704)
---------- ---------
Net cash used for operating activities of continuing
operations (500,144) (62,169)
Net cash used for operating activities of discontinued
operations -- (280)
---------- ---------
Net cash used for operating activities (500,144) (62,449)
---------- ---------
Cash flows from investing activities:
Additions to property and equipment - continuing
operations (130,176) (7,760)
Additions to property and equipment - discontinued
operations -- (63)
Purchase of available-for-sale securities, net of
maturities (31,632) (31,123)
Proceeds from sale of stock investments 1,007,883 80,283
Investments in affiliates (232,565) (22,865)
Cash paid for acquisitions of subsidiaries, net of
cash acquired (182,426) (26,518)
Other (4,597) 1,600
---------- ---------
Net cash provided by (used for) investing activities 426,487 (6,446)
---------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of) notes payable 86,444 (6,656)
Repayments of long-term debt (4,608) (4,904)
Net proceeds from issuance of Series B convertible
preferred stock -- 49,805
Net proceeds from issuance of common stock 29,591 5,655
Net proceeds from issuance of stock by subsidiaries 163,533 5,925
Other 4,073 (709)
---------- ---------
Net cash provided by financing activities 279,033 49,116
---------- ---------
Net increase (decrease) in cash and cash equivalents 205,376 (19,779)
Cash and cash equivalents at beginning of period 468,912 61,537
---------- ---------
Cash and cash equivalents at end of period $ 674,288 $ 41,758
========== =========
</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, 1999 which
are contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission ("the SEC") on October 29, 1999. The results
for the three- and nine-month periods ended April 30, 2000 are not necessarily
indicative of the results to be expected for the full fiscal year. Certain
prior year amounts in the consolidated financial statements have been
reclassified in accordance with generally accepted accounting principles to
conform with current year presentation.
B. TWO-FOR-ONE COMMON STOCK SPLIT
On January 11, 2000, the Company effected a two-for-one common stock split in
the form of a stock dividend. Accordingly, the consolidated financial
statements have been retroactively adjusted for all periods presented to reflect
this event.
C. OTHER GAINS, NET
During the nine months ended April 30, 2000, the Company sold 7,976,990 shares
of Yahoo! Inc. common stock, 260,000 shares of Open Market, Inc. common stock
and 87,698 shares of Amazon.com Inc. common stock for total proceeds of
approximately $1 billion. The Company recorded pre-tax gains of $417.4 million,
$5.8 million and $4.2 million on the sales of the Yahoo! Inc. common stock, Open
Market, Inc. common stock and Amazon.com Inc. common stock, respectively.
D. GAIN ON ISSUANCE OF STOCK BY SUBSIDIARIES AND AFFILIATES
In October 1999, the Company's subsidiary, NaviSite, Inc., commenced its initial
public offering of common stock, issuing approximately 11 million shares at a
price of $7 per share, (each as adjusted for the two for one stock split
effected during the third fiscal quarter) raising $69.6 million in net proceeds
for NaviSite, Inc. As a result of the initial public offering, the Company's
ownership interest in NaviSite Inc. was reduced from approximately 89.6% to
approximately 71.8%. The Company recorded a pre-tax gain of $46.4 million as a
result of the initial public offering.
In November 1999, the underwriters of NaviSite Inc.'s initial public offering
exercised their over-allotment option in full to purchase an additional 825,000
shares of common stock at $7 per share. As a result, the Company's ownership
interest in NaviSite Inc. was further reduced from approximately 71.8% to
approximately 69.5%. The Company recorded a pre-tax gain of $5.5 million as a
result of the exercise of the over-allotment.
In February 2000, the Company's affiliate, Vicinity Corp., completed its initial
public offering of common stock, issuing approximately 8 million shares at a
price of $17 per share, raising $126.1 million in net proceeds for Vicinity
Corp. As a result of the initial public offering, the Company's ownership
interest in Vicinity Corp. was reduced from approximately 29% to approximately
21%. The Company recorded a pre-tax gain of $20.9 million as a result of this
initial public offering.
The pre-tax gains represent the increase in the book value of the Company's net
equity in the subsidiary or affiliate as a result of the subsidiary or
affiliates' stock issuances.
6
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
E. ACQUISITIONS AND INVESTMENTS
In August 1999, CMGI completed its acquisition of approximately 81.5% of
AltaVista Company (AltaVista), a Web portal that integrates proprietary Internet
technology and services to deliver relevant results for both individuals and
Web-based businesses, for 37,989,950 CMGI common shares valued at approximately
$1.8 billion, 18,090.45 shares of the Company's Series D preferred stock, which
were converted into approximately 3,618,090 million shares of CMGI common stock
in October 1999 valued at approximately $173 million, three-year notes totaling
$220 million and the exchange of CMGI and subsidiary stock options for
AltaVista stock options. The AltaVista acquisition included the assets and
liabilities constituting the AltaVista Internet search service and also included
former Compaq Computer Corporation (Compaq) subsidiaries Zip2 Corporation and
Shopping.com. The shares issued by the Company in connection with the AltaVista
acquisition are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for a period of one year from the date of
issuance. The total purchase price for AltaVista was valued at approximately
$2.4 billion, including costs of acquisition of $4 million. The value of the
Company's shares included in the purchase price was recorded net of a weighted
average 10% market value discount to reflect the restrictions on
transferability.
In January 2000, CMGI completed its acquisition of AdForce, Inc. (AdForce), a
leading online provider of centralized, outsourced ad management and delivery
services. The total purchase price for AdForce was valued at approximately
$545 million, consisting of 11,270,209 shares of CMGI common stock valued at
approximately $473 million, options and warrants to purchase CMGI common stock
valued at approximately $70.9 million, and direct acquisition costs of
approximately $1.1 million. Of the purchase price, $9.3 million was allocated to
in-process research and development, which was charged to operations during the
third quarter of fiscal 2000.
In January 2000, CMGI completed its acquisition of Flycast Communications
Corporation (Flycast), a leading provider of Web-based direct response
advertising solutions. The total purchase price for Flycast was valued at
approximately $905.3 million consisting of 14,611,499 shares of CMGI common
stock valued at approximately $716.6 million, options and warrants to purchase
CMGI common stock valued at approximately $168.2 million, and direct acquisition
costs of approximately $20.5 million. Of the purchase price, $29.3 million was
allocated to in-process research and development, which was charged to
operations during the third quarter of fiscal 2000.
In March 2000, CMGI completed its acquisition of yesmail.com (yesmail), a
leading outsourcer of permission e-mail marketing technologies and services.
The total purchase price for yesmail was valued at approximately $597.2 million
consisting of 5,120,181 shares of CMGI common stock valued at approximately
$546.4 million, options to purchase CMGI common stock valued at approximately
$45.3 million, and direct acquisition costs of approximately $5.5 million. The
value of the Company's shares included in the purchase price was recorded net of
a weighted average 2% market value discount to reflect the restrictions on
transferability on certain shares.
In April 2000, CMGI completed its acquisition of approximately 94.2% of Tallan,
Inc. (Tallan), a leading provider of Internet and e-commerce services to Fortune
500, Global 2000 and dot.com companies. The total purchase price for Tallan was
valued at approximately $904.8 million consisting of cash totaling $342.3
million, options to purchase CMGI common stock valued at approximately $188.3
million, short-term promissory notes valued at approximately $368.7 million, and
direct acquisition costs of approximately $5.5 million.
In April 2000, CMGI completed its acquisition of uBid, Inc., (uBid) a leading
e-commerce auction site. The total purchase price for uBid was valued at
approximately $390.1 million consisting of 3,068,374 shares of CMGI common stock
valued at approximately $360.6 million, options to purchase CMGI common stock
valued at approximately $26.5 million, and direct acquisition costs of
approximately $3.0 million.
In April 2000, CMGI contributed Flycast and Adsmart Corporation (Adsmart) to
Engage, Inc. (Engage), a majority-owned subsidiary of CMGI. Upon completion of
the transaction, CMGI received approximately 64 million shares of Engage common
stock, and Flycast and Adsmart became wholly-owned subsidiaries of Engage. As a
result of the transaction, CMGI's ownership interest in Engage increased to
approximately 87% and CMGI recorded a decrease to its consolidated stockholders'
equity of $31.8 million, net of deferred income taxes, to reflect this
transaction.
During the first quarter of fiscal year 2000, the Company also completed its
acquisitions of ExchangePath (formerly iClickCharge), iAtlas, Inc. (iAtlas) and
Signatures SNI, Inc. (Signatures Network) for combined consideration of
approximately $65 million in CMGI common stock, convertible notes, cash and
commitments to fund a total of approximately $113 million in operating capital.
During the second quarter of fiscal year 2000, the Company also completed its
acquisitions of 1stUp.com (1stUp), Clara Vista, Activate.net Corporation
(Activate), AdKnowledge, Inc. (AdKnowledge), Tribal Voice, Equilibrium,
GreenWitch, LLC (GreenWitch) and the remaining 33% minority interest in
Netwright not already owned by CMGI, for combined consideration of approximately
$347 million in CMGI and subsidiary common stock, options and warrants to
purchase common stock of CMGI and subsidiaries and notes which are payable in
CMGI common stock. In the first step of the AdKnowledge transaction, CMGI
acquired an 88% equity stake in AdKnowledge. The second step of the AdKnowledge
transaction, the contribution of AdKnowledge shares held by AdKnowledge
shareholders, including CMGI, to Engage in exchange for approximately 10.3
million shares of Engage common stock closed in December 1999. Upon completion
of the transaction, CMGI received approximately 9.8 million shares of Engage,
and AdKnowledge became a wholly-owned subsidiary of Engage.
7
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During the third quarter of fiscal year 2000, the Company, or its subsidiaries,
completed the acquisitions of four other companies, including Raging Bull, Inc.
(Raging Bull), a CMGI affiliate, Transium Corporation (Transium), ClickHear,
Inc. (ClickHear) and AdTECH Advertising Service Providing GmbH (AdTECH) (in
which the Company acquired an 80.29% ownership interest) for combined
consideration of approximately $195.5 million in cash, CMGI and subsidiary
common stock and options.
The acquisitions completed during the first nine months of fiscal 2000 have been
accounted for using the purchase method and, accordingly, the purchase prices
have been allocated to the assets purchased and liabilities assumed based upon
their fair values at the date of acquisition. Goodwill and other intangibles,
totaling $6.1 billion, were recorded related to acquisitions, and are being
amortized on a straight-line basis over periods ranging from two to five 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) AltaVista AdForce Flycast yesmail
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Working capital, including cash (cash
overdraft) acquired $ (39,604) $ 33,808 $ 34,377 $ 15,378
Property and equipment 44,460 10,360 11,751 3,195
Other assets (liabilities), net 15,786 (5,078) (2,518) 2,044
Goodwill 2,199,426 438,350 738,537 576,623
Developed technology 128,128 29,440 35,000 --
Other identifiable intangible assets 40,575 28,820 58,820 --
In-process research and development -- 9,300 29,300 --
---------- -------- -------- ----------
Purchase price $2,388,771 $545,000 $905,267 $ 597,240
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Tallan uBid Others Total
------ ------- ------ -----
<S> <C> <C> <C> <C>
Working capital, including cash (cash
overdraft) acquired $ 13,793 $ 22,927 $ 17,701 $ 98,380
Property and equipment 3,062 5,423 10,828 89,079
Other assets (liabilities), net 341 -- 13,028 23,603
Goodwill 887,630 361,758 536,542 5,738,866
Developed technology -- -- 7,150 199,718
Other identifiable intangible assets -- -- 15,160 143,375
In-process research and development -- -- 7,337 45,937
---------- -------- -------- ----------
Purchase price $ 904,826 $390,108 $607,746 $6,338,958
========== ======== ======== ==========
</TABLE>
8
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The above allocation of the AltaVista purchase price represents the Company's
81.5% interest in the fair values of the acquired underlying assets and
liabilities of AltaVista. The purchase price allocations for each of the
acquisitions which were consummated during the first nine months of fiscal year
2000 are preliminary and are subject to adjustment upon finalization of the
purchase accounting. The in-process research and development charge of
$45.9 million recorded during the nine months ended April 30, 2000 relates to
the acquisitions of AdForce, Flycast, ExchangePath, AdKnowledge and Equilibrium.
The finalization of the valuations supporting purchase price allocations for
yesmail, Tallan, uBid and Raging Bull may result in a significant portion of the
aggregate purchase price of $2.1 billion being identified as in-process research
and development, which will be charged to operating results in the fourth
quarter of fiscal 2000 when the amounts are determined.
At April 30, 2000, amortization of intangible assets and stock-based
compensation consists of:
<TABLE>
<CAPTION>
(in thousands) Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Amortization of intangible assets $419,992 $4,697 $835,729 $7,215
Amortization of stock-based
compensation 45,295 320 53,428 819
Impairment of intangible asset 16,700 -- 16,700 --
-------- ------ -------- ------
Total $481,987 $5,017 $905,857 $8,034
======== ====== ======== ======
</TABLE>
Presented below is unaudited selected pro forma financial information for the
nine-month periods ended April 30, 2000 and 1999 as if the acquisitions of
AltaVista, AdForce, Flycast, yesmail, Tallan and uBid had occurred at the
beginning of each period. The unaudited pro forma financial information
excludes the impact of acquisitions other than AltaVista, AdForce, Flycast,
yesmail, Tallan and uBid, whose historical results are not material to the pro
forma financial information shown below. In-process research and development
charges totaling $38.6 million which were recorded during the nine months ended
April 30,2000 related to the acquisitions of AdForce and Flycast are excluded
from the pro forma results as they are not indicative of normal operating
results. The unaudited pro forma financial information is provided for
informational purposes only and should not be construed to be indicative of the
Company's consolidated results of operations had the acquisitions been
consummated on the dates assumed and do not project the Company's results of
operations for any future period:
<TABLE>
<CAPTION>
Nine months ended April 30, 2000 1999
--------------------------- ---- ----
(in thousands)
<S> <C> <C>
Net revenue $ 834,739 $ 291,730
=========== ===========
Net loss $(1,301,099) $(1,147,016)
=========== ===========
Net loss per share (basic and diluted) $ (4.70) $ (4.39)
=========== ===========
</TABLE>
During the first nine months of fiscal year 2000, the Company, through its
limited liability company subsidiaries, CMG@Ventures I, LLC, CMG@Ventures II,
LLC, CMG@Ventures III, LLC, CMG@Ventures Expansion, LLC, CMGI@Ventures IV, LLC,
CMGI@Ventures B2B, LLC and CMGI@Ventures Technology Fund, LLC, acquired initial
or follow-on minority ownership interests in 49 Internet companies for an
aggregate total of approximately $212 million. These included investments in
Answerlogic, Ironmax, FoodBuy.com, GX Media and Half.com which the Company
accounts for using the equity method. The finalization of the purchase
accounting for the Company's investments in Answerlogic and Ironmax may result
in a significant portion of the aggregate $15 million purchase price being
identified as in-process research and development, which will be charged to
operating results in the fourth quarter when the amounts are determined.
9
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On October 29, 1999, the Company purchased 250,000 shares of Akamai Technologies
(NASDAQ: AKAM) common stock at a cost of $26 per share. On November 29, 1999,
the Company and Pacific Century CyberWorks Limited (PCCW), a company listed on
the Stock Exchange of Hong Kong, completed their previously agreed to exchange
of stock. The Company received approximately 448.3 million shares of PCCW stock
in exchange for approximately 8.1 million shares of the Company's common stock.
On April 7, 2000, the Company and Netcentives (NASDAQ: NCNT) completed an
exchange of stock, whereby the Company received approximately 1.7 million shares
of Netcentives common stock in exchange for approximately 425,000 shares of the
Company's common stock. The Netcentives shares received were valued at $32
million, which represents the value of the CMGI shares issued in the exchange on
the date the agreement was executed, less a market value discount to reflect the
restrictions on transferability. The Akamai and Netcentives common stock
acquired is accounted for as an available-for-sale security and is carried at
fair value based on quoted market prices. The PCCW stock acquired is subject to
a three year restriction on transferability and accordingly is accounted for as
a long-term asset at cost. The cost recorded for the PCCW stock is $302
million, which represents the fair value of the CMGI shares issued in the
exchange as of the date the share exchange agreement was executed, less a fair
market value discount of 10% to reflect the restrictions on transferability.
F. SEGMENT INFORMATION
The Company's continuing operations have been classified in two primary business
segments, (i) Internet and (ii) fulfillment services. The Internet segment
focuses on strategic Internet opportunities afforded by the Internet and
interactive media markets. The fulfillment services segment provides product
and literature fulfillment and supply chain management, telemarketing, and
outsourced e-business program management services. During the three months and
nine months ended April 30, 2000, one customer accounted for 17% and 22% of the
net revenues of the Internet segment, respectively. During the three months
and nine months ended April 30, 2000, one customer accounted for 61% and 56% of
the net revenues of the fulfillment services segment, respectively. Summarized
financial information by business segment for continuing operations is as
follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
Internet $ 182,819 $ 10,610 $ 383,188 $ 20,424
Fulfillment services 43,059 33,045 119,890 99,608
--------- -------- ----------- --------
$ 225,878 $ 43,655 $ 503,078 $120,032
========= ======== =========== ========
Operating income (loss):
Internet $(718,255) $(35,632) $(1,409,926) $(77,991)
Fulfillment services 2,673 1,565 7,960 2,727
--------- -------- ----------- --------
$(715,582) $(34,067) $(1,401,966) $(75,264)
========= ======== =========== ========
</TABLE>
All of the acquisitions during the first nine months of the fiscal year relate
to the Internet segment and are the primary reasons for the increase in the net
assets of the Company. Other gains, net, minority interest and equity in losses
of affiliates as reported in the Consolidated Statements of Operations for the
nine months ended April 30, 2000 and 1999 relate to the Internet segment. All
significant intercompany transactions have been eliminated, and intersegment
revenues are not significant.
10
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
G. BORROWING ARRANGEMENTS
In conjunction with its acquisition of AltaVista, the Company issued three year
notes totaling $220 million to Compaq, a wholly-owned subsidiary of Compaq, due
August 18, 2002. Interest, payable at a rate of 10.5% per annum, is due and
payable semiannually on each February 18 and August 18 until the note is paid in
full. Principal and interest payments due on the notes are payable, at the
option of CMGI, in cash, marketable securities (as defined in the note) or any
combination thereof.
In conjunction with its acquisition of Tallan, the Company issued three short-
term promissory notes totaling approximately $368.7 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 on September 30, 2000 and December 31, 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
discounts 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. The discounts are being amortized over
the life of the notes, which mature between September 2000 and December 2000.
In April 2000, the Company entered into a forward sale agreement with an
investment bank. The transaction 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. Under the first tranche, which was executed in April 2000, the Company
agreed to deliver 581,499 shares of Yahoo! Inc. common stock or the cash
equivalent, to the investment bank in August 2000 and in exchange, received
$106.4 million, or 90.75% of the fair market value of the shares on the
execution date, in cash. Under the terms of the second and third tranches, both
executed in May 2000, the Company agreed to deliver an additional 581,499 shares
of Yahoo! Inc. common stock in November 2000 and 47,684 shares of Yahoo! common
stock in February 2001. See note M.
The amount payable at maturity will fluctuate according to pre-determined
formulas based on the fair market value of the Yahoo! Inc. common stock at the
respective settlement dates. At April 30, 2000, the Company has recorded a
short-term liability in notes payable of approximately $67 million, net of
appropriate discount to reflect the effective interest component of the
transaction. This liability, which will generally move in tandem with the
changes in the fair market value of the Yahoo! Inc. common stock, represents the
current fair value of the amount due at settlement under the first tranche of
the contract. The net unrealized gain on the contract at April 30, 2000 is
approximately $41.5 million, and is included in accumulated other comprehensive
income.
Upon its maturity in January 2000, the Company repaid the entire amount of its
previously outstanding $20 million collateralized corporate notes payable.
H. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents and convertible preferred stock is included in the calculation of
diluted earnings per share only when the effect of their inclusion would be
dilutive. The effect of convertible preferred stock using the "if-converted"
method and the dilutive effect of common stock equivalents were anti-dilutive
for the three and nine months ended April 30, 2000 and, therefore, have been
excluded from the calculation of diluted earnings per share.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from income (loss) from
continuing operations the income attributable to the potential exercise of the
dilutive stock options or warrants of the subsidiary. The effect of income
attributable to dilutive subsidiary stock equivalents was immaterial for the
three and nine months ended April 30, 2000 and 1999.
11
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The reconciliation of the denominators of the basic and diluted earnings (loss)
per share computations is as follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common shares
Outstanding - basic 281,936 187,808 251,560 185,454
Weighted average number of dilutive common stock
equivalents -- -- -- 17,596
------- ------- ------- -------
Shares used in computing diluted earnings (loss)
per share 281,936 187,808 251,560 203,050
======= ======= ======= =======
</TABLE>
I. COMPREHENSIVE INCOME
The components of comprehensive income, net of income taxes, are as follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(430,209) $(27,750) $ (740,359) $ 23,509
Net unrealized holding gain (loss) arising during
period (364,852) (60,543) 435,619 422,987
Less: reclassification adjustment for gain
realized in net income (loss) (125,613) -- (251,792) (4,119)
--------- -------- --------- --------
Comprehensive income (loss) $(920,674) $(88,293) $ (556,532) $442,377
========= ======== ========= ========
</TABLE>
J. CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
(in thousands) Nine months ended April 30,
---------------------------
<S> <C> <C>
2000 1999
---- ----
Cash paid during the period for:
Interest $12,663 $ 2,857
======= =======
Income taxes $13,835 $10,615
======= =======
</TABLE>
Substantially all of the consideration for acquisitions of businesses by the
Company, or its subsidiaries, during the first nine months of fiscal 2000
included the issuance of shares of the Company's or its subsidiaries' stock,
stock options and/or the issuance of seller's notes.
During the nine months ended April 30, 2000, significant non-cash investing
activities included the exchange of 8.1 million shares of the Company's common
stock for approximately 448.3 million shares of PCCW stock. The PCCW shares
received were valued at $302 million, which represents the value of the CMGI
shares issued in the exchange on the date the agreement was executed, less a
market value discount to reflect the restrictions on transferability. In
addition, the Company exchanged approximately 425,000 shares of the Company's
common stock for approximately 1.7 million shares of Netcentives common stock.
In April 2000, the remaining 35,000 shares of CMGI Series B convertible
preferred stock, with a face amount of $35 million and an accumulated conversion
premium of $2.0 million were converted into 2,834,520 shares of the Company's
common stock.
12
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
K. AVAILABLE-FOR-SALE SECURITIES
At April 30, 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
April 30, 2000 included approximately 12.9 million shares of Lycos Inc. valued
at $599 million, 2.3 million shares of Yahoo! Inc. valued at $303 million,
3.7 million shares of Kana Communications, Inc. valued at $157 million,
1.3 million shares of Critical Path, Inc. (Critical Path) valued at $76 million,
2.2 million shares of Ventro Corporation (formerly Chemdex Corporation) valued
at $60 million, 4.4 million shares of Hollywood Entertainment valued at
$31 million and 250,000 shares of Akamai Technologies, Inc. (Akamai) valued at
$25 million.
Shares of publicly traded companies held by CMG@Ventures I and II which have
been allocated to CMG@Ventures I's and II's profit members have been classified
in other non-current assets in the accompanying Consolidated Balance Sheet and
valued at carrying value as of the date of allocation. Certain shares included
in available-for-sale securities at April 30, 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 $492.2 million, net of deferred income taxes of
$423.8 million, has been reflected in the equity section of the consolidated
balance sheet based on the change in market value of the available-for-sale
securities from dates of acquisition to April 30, 2000.
L. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position (SOP) 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 requires the capitalization of various
internal costs related to the implementation of computer software obtained for
internal use. The Company has adopted this standard in the first quarter of
fiscal year 2000. The adoption of SOP 98-1 did not have a material impact on its
financial position or its results of operations.
In April 1998, AcSEC issued SOP 98-5, "Reporting Costs of Start-Up Activities".
Under SOP 98-5, the cost of start-up activities should be expensed as incurred.
Start-up activities are broadly defined as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customer,
commencing some new operation or organizing a new entity. SOP 98-5 is effective
for the Company's fiscal 2000 financial statements. The adoption did not have a
material impact on its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. The Company is required to adopt this standard in the first quarter
of fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. The Company expects that the adoption
of SFAS 133 will not have a material impact on its financial position or its
results of operations.
In November 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 100, "Restructuring and Impairment Charges."
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 100 expresses the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of impairment
charges. SAB No. 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. The
Company expects that adoption of SAB 100 and 101 will have no material impact on
its financial position or its results of operations.
13
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In January 2000, the Emerging Issues Task Force of the FASB issued Issue 99-17,
"Accounting for Advertising Barter Transactions" ("EITF 99-17"). EITF 99-17
established accounting and reporting standards for barter transactions that
involve nonmonetary exchanges of advertising and was adopted by the Company on
January 20, 2000. It requires that an entity recognize revenue and expenses from
advertising barter transactions at the fair value of the advertising surrendered
only when an entity has a historical practice of receiving cash for similar
transactions. The adoption of EITF 99-17 did not have a material impact on the
Company's results of operations and financial position for the three months
ended April 30, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" - an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
applies prospectively to new stock option awards, exchanges of awards in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after July 1, 2000. Although the Company is
still in process of analyzing the impact of FIN 44, if any, on its consolidated
statements and related disclosures, the Company expects that there will be no
material impact on its financial position or its results of operations.
M. SUBSEQUENT EVENTS
In May 2000, the Company executed the second and third tranches of a forward
sale agreement with an investment bank, hedging an additional 629,183 shares of
the Company's Yahoo! Inc. common stock and in exchange, received $74.2 million,
or 87.9% of the fair market value of the shares on the execution dates, in cash.
See Footnote G for further discussion of this transaction.
Also subsequent to April 30, 2000, the Company sold 1,115,314 shares of its
Yahoo! Inc. common stock for total proceeds of approximately $136 million.
On May 5, 2000, stockholders of CMGI approved an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of capital stock from 405,000,000 to 1,405,000,000 shares.
On May 19, 2000, the Company and Primedia, Inc. (NYSE: PRM), completed their
previously agreed-to exchange of stock. The Company received approximately 8.0
million shares of Primedia, Inc. stock in exchange for approximately 1.5 million
shares of CMGI common stock.
On June 13, 2000, CMGI purchased 980,873 additional shares of common stock of
its NaviSite subsidiary for $50 million.
On June 12, 2000, the Company's subsidiary, Engage announced a definitive
agreement to acquire MediaBridge Technologies, Inc., a leading provider of
cross-media closed loop targeted marketing systems. Under the terms of the
agreement, Engage will issue approximately 14.5 million shares of Engage common
stock to the shareholders of MediaBridge, subject to adjustment under certain
circumstances. The acquisition is subject to MediaBridge shareholder approval
and is expected to be completed by September 2000.
On June 13, 2000, eBay announced that it has agreed to acquire the Company's
affiliate, Half.com, in a stock-for-stock merger. The exact number of total
shares to be issued will be determined in accordance with an agreed upon formula
but is expected to be between 4.6 million and 5.5 million eBay shares. The
acquisition is subject to receipt of necessary approvals and is expected to be
completed during eBay's third quarter ending September 30, 1999. CMGI acquired
its 23% fully diluted ownership in Half.com for approximately $10 million in
January 2000 through its CMGI@Ventures IV, LLC subsidiary. In accordance with
the terms of an underlying operating agreement, 20% of gains realized by
CMGI@Ventures IV, LLC are attributable to outside profit members.
14
<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 29, 1999, and the risks
discussed in the Company's other filings with the SEC. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. The Company undertakes no obligation to publicly revise these forward-
looking statements to reflect events or circumstances that arise after the date
hereof.
BASIS OF PRESENTATION
Certain amounts for prior periods in the accompanying consolidated
financial statements, and in the discussion below, have been reclassified to
conform with current period presentations.
THREE MONTHS ENDED APRIL 30, 2000 COMPARED TO THREE MONTHS ENDED APRIL 30, 1999
Net revenue for the quarter ended April 30, 2000 increased $182,223,000, or
417%, to $225,878,000 from $43,655,000 for the quarter ended April 30, 1999. The
increase was largely attributable to an increase of $172,209,000 in net revenue
for the Company's Internet segment due to the acquisitions of yesmail.com and
Tallan Inc. (Tallan) during the third quarter of fiscal year 2000, the
acquisitions of 1stUp.com, Activate.net, AdForce, AdKnowledge and Flycast during
the second quarter of fiscal 2000, the acquisitions of AltaVista and Signatures
Network during the first quarter of fiscal 2000 and increased net revenue from
Adsmart, Engage, MyWay.com, NaviPath, and NaviSite. Additionally, net revenue in
the Company's fulfillment services segment increased $10,014,000 primarily
reflecting increased volume of turnkey business from Cisco and the impact of
orders processed through SalesLink's new Guadalajara, Mexico facility, which was
opened during the second quarter of fiscal 2000. The Company believes that its
subsidiary companies will continue to develop and introduce their products
commercially, actively pursue increased revenues from new and existing
customers, and look to expand into new market opportunities. Additionally, on
April 28, 2000 the Company acquired uBid.com. Based on the timing of the
acquisition of uBid.com Inc. (uBid), the Company did not record any income
statement related activity in its consolidated April 30, 2000 income statement.
In addition, on June 12, 2000, Engage entered into a definitive agreement to
acquire Media Bridge Technologies. As a result of both increased sales by
existing companies, and incremental revenues from new acquisitions, the Company
expects to report future revenue growth.
Cost of revenue increased $138,885,000, or 329%, to $181,052,000 in the
third quarter of fiscal 2000 from $42,167,000 for the corresponding period in
fiscal 1999, reflecting increases of $131,196,000 and $7,689,000 in the Internet
and fulfillment services segments, respectively. Internet segment cost of
revenue increases were primarily attributable to higher revenues as a result of
the acquisitions of yesmail.com, Tallan, 1stUp.com, Activate.net, AdForce,
AdKnowledge, Flycast, AltaVista and Signatures Network and the acceleration of
operations for other subsidiaries within the segment. Cost of revenue increased
in the fulfillment services segment primarily as a result of higher revenue.
Cost of revenue as a percentage of revenues in the Internet segment decreased to
80% in the third quarter of fiscal 2000 from 144% in the same period during the
prior year, primarily as a result of the acquisitions of AdForce, AltaVista,
Signatures Network and Tallan and improved margin percentages at NaviSite.
Fulfillment services segment cost of revenue as a percentage of net revenue
decreased to 80% in the third quarter of fiscal 2000 from 81% in the second
quarter of fiscal 1999, primarily reflecting increased operating efficiencies
related to turnkey operations.
Research and development expenses increased $44,663,000, or 892%, to
$49,671,000 in the quarter ended April 30, 2000 from $5,008,000 in the prior
year's third quarter. All research and development expenses in both periods were
incurred within the Company's Internet segment. The increase as compared to the
prior year was primarily due to the acquisitions of AltaVista and AdForce and
the increased development efforts at Engage, NaviSite, iCast, and MyWay.com.
In-process research and development expense increased $36,720,000 to $41,220,000
in the quarter ended April 30, 2000 from
15
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
$4,500,000 during the three months ended April 30, 1999. The increase in
the in-process research and development expense was due to in-process research
and development charges to operations during the third quarter of fiscal year
2000 as a result of the Flycast, AdForce and Equilibrium acquisitions.
All in-process research and development expenses were incurred within the
Company's Internet segment. Further, related to the Company's acquisitions and
investments made during the third quarter of fiscal year 2000, the acquisition
accounting and valuations supporting purchase price allocations for total
investments of approximately $2.1 billion related to yesmail.com, Tallan, uBid,
Raging Bull, Inc. (Raging Bull), AnswerLogic and IronMax may result in a
significant portion of the purchase price being identified as in-process
research and development, which will be charged to operating results in the
fourth quarter of fiscal 2000 when the amounts are determined. The Company
anticipates it will continue to devote substantial resources to product
development and acquisitions of companies developing technology and that these
costs may substantially increase in future periods.
Selling expenses increased $117,644,000, or 1,044%, to $128,912,000 in the
third quarter ended April 30, 2000 from $11,268,000 for the corresponding period
in fiscal 1999, primarily reflecting a $117,636,000 increase in the Company's
Internet segment. The increased costs in the Internet segment are primarily due
to the acquisitions of yesmail.com, 1stUp.com, Activate.net, AdForce,
AdKnowledge, Flycast, AltaVista, Signatures Network, ExchangePath, I/PRO and
2CAN, increased CMGI corporate expenses and the continued growth of sales and
marketing efforts at various other CMGI subsidiaries including iCast, NaviSite
and NaviPath related to product launches and infrastructure. Selling expenses in
the fulfillment services segment remained flat in comparison with last year's
third quarter. Selling expenses as a percentage of net revenues increased to 57%
in the third quarter of fiscal 2000 from 26% for the corresponding period in
fiscal 1999, primarily reflecting the impact of acquisitions, and the expansion
of sales and marketing efforts related to product launches and infrastructure
within the Company's Internet segment. As the Company's subsidiaries continue to
introduce new products and expand sales, the Company expects to incur
significant promotional expenses, as well as expenses related to the hiring of
additional sales and marketing personnel and increased advertising expenses, and
anticipates that these costs will substantially increase in future periods.
General and administrative expenses increased $48,856,000, or 500%, to
$58,618,000 in the third quarter of fiscal 2000 from $9,762,000 for the
corresponding period in fiscal 1999. The Internet segment experienced an
increase of $47,696,000, primarily due to the acquisitions of Tallan, AdForce,
1stUp.com, Activate.net, AdKnowledge, Flycast, AltaVista, Signatures Network,
ExhangePath, Activerse, I/PRO and 2CAN. Additionally, Internet segment general
and administrative expense increases reflected approximately $5 million in
acquisition costs incurred by Engage related to its acquisitions of Adsmart and
Flycast from CMGI, increased CMGI corporate expenses, and the building of
management infrastructures in several of the Company's Internet segment
subsidiaries including NaviSite, NaviPath and CMGI Solutions. General and
administrative expenses in the fulfillment services segment increased by
$1,160,000 in comparison with last year's third quarter, largely due to the
building of management infrastructure. General and administrative expenses as a
percentage of net revenues increased to 26% in the third quarter of fiscal 2000
from 22% in the third quarter of fiscal 1999. The Company anticipates that its
general and administrative expenses will continue to increase significantly as
the Company adds newly acquired subsidiaries and as existing subsidiaries
continue to grow and expand their administrative staffs and infrastructures.
Amortization of intangible assets and stock-based compensation increased
$476,970,000, or 9,507%, to $481,987,000 in the third quarter of fiscal 2000
from $5,017,000 for the corresponding period in fiscal 1999, reflecting a
$476,921,000 increase in the Internet segment, primarily due to the acquisitions
of yesmail.com, Tallan, 1stUp.com, Activate.net, AdForce, AdKnowledge, Flycast,
AltaVista, Activerse, Equilibrium, I/PRO and 2CAN and a $17 million impairment
charge associated with goodwill previously recorded by the Company's Magnitude
Network subsidiary. Additionally, included in the amortization of intangible
assets and stock-based compensation amounts were $45,295,000 and $320,000 of
amortization of stock-based compensation for the three months ended April 30,
2000 and 1999, respectively. Approximately $36.6 million of the $45.3 million
third quarter fiscal 2000 amortization of stock-based compensation expense was
related to the acceleration of the vesting of options to purchase approximately
323,000 shares of CMGI common stock options previously issued to four former
executives of Flycast under pre-existing severance agreements. The Company
anticipates that its amortization of intangibles and stock-based compensation
expense will continue to increase significantly as the result of the April 28,
2000 acquisition of uBid and as the Company and its subsidiaries continue to
acquire new companies in the future.
16
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Gain on the issuance of stock by subsidiaries and affiliates in the third
quarter ended April 30, 2000, primarily reflects completion of the initial
public offering of common stock by Vicinity Corp., an affiliate of the Company,
which resulted in a pre-tax gain of $20,915,000. This gain is offset by
$927,000 of pre-tax loss due to the issuance of stock by certain subsidiaries
and affiliates related to the exercise of stock options. Gain on issuance of
stock by subsidiaries and affiliates for the third quarter of fiscal 1999 of
$859,000 arose primarily as a result of the issuance of stock by GeoCities in
its acquisition of Futuretouch.
Other gains, net in the third quarter of fiscal 2000 primarily reflect a
pre-tax gain of $209,348,000 on the sale of 1,666,990 shares of Yahoo! Inc.
common stock and a pre-tax gain of $4,189,000 on the sale of 87,698 shares of
Amazon.com. common stock. There were no other gains, net in the third quarter of
fiscal 1999.
Minority interest, net increased to $55,980,000 in the third quarter of
fiscal 2000 from $275,000 in the third quarter of fiscal 1999, primarily
reflecting minority interest in the net losses of six subsidiaries during the
third quarter of fiscal 2000, including AltaVista, Engage, NaviSite, AdForce,
Signatures Network and MyWay.com.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method
of accounting. Under the equity method of accounting, the Company's
proportionate share of each affiliate's operating losses and amortization of the
Company's net excess investment over its equity in each affiliate's net assets
is included in equity in losses of affiliates. Equity in losses of affiliates
for the quarter ended April 30, 2000 includes the results from the Company's
minority ownership in Answerlogic, Engage Technologies Japan, Inc., FoodBuy.com,
GX Media.com, Half.com, Ironmax, ThingWorld.com, WebCT and Vicinity. Equity in
losses of affiliates for the quarter ended April 30, 1999 included the results
from the Company's minority ownership in Engage Technologies Japan, GeoCities,
Magnitude Network, Silknet and ThingWorld.com. The Company expects its
portfolio companies to continue to invest in development of their products and
services, and to recognize operating losses, which will result in future charges
recorded by the Company to reflect its proportionate share of such losses.
Interest income increased $13,578,000 to $14,430,000 in the third fiscal
quarter of 2000 from $852,000 in the third quarter of fiscal 1999, primarily
reflecting increased interest income associated with higher average corporate
cash equivalent balances compared with the prior year. Interest expense
increased $11,925,000 to $12,987,000 in the third fiscal quarter of 2000 from
$1,062,000 in the third quarter of fiscal 1999, primarily due to the notes
issued as part of the AltaVista and Tallan acquisitions.
Income tax benefit in the third quarter of fiscal 2000 was $6,885,000.
Exclusive of taxes provided for significant, unusual or extraordinary items, the
Company provides for income taxes on a year to date basis at an effective rate
based upon its estimate of full year earnings. Income tax benefit in the third
quarter of fiscal 1999 was $9,473,000. In determining the Company's effective
tax rate for the third quarter of fiscal 1999, one-time in-process research and
development expense and gain on stock issuance by GeoCities were excluded.
17
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
NINE MONTHS ENDED APRIL 30, 2000 COMPARED TO NINE MONTHS ENDED APRIL 30, 1999
Net revenue for the nine months ended April 30, 2000 increased
$383,046,000, or 319%, to $503,078,000 from $120,032,000 for the nine months
ended April 30, 1999. The increase was largely attributable to an increase of
$362,764,000 in net revenue for the Company's Internet segment, reflecting the
acquisitions of yesmail.com and Tallan during the third quarter of fiscal 2000,
the acquisitions of 1stUp.com, Activate.net, AdForce, AdKnowledge and Flycast
during the second quarter of fiscal 2000, the acquisitions of AltaVista and
Signatures Network during the first quarter of fiscal 2000 and increased net
revenue from Adsmart, Engage, MyWay.com, NaviPath, and NaviSite. Included in
Internet segment revenues in the first fiscal quarter was approximately
$12 million recorded by AltaVista's Shopping.com subsidiary related to the
completion of a large order for the sale of computer equipment purchased by
Shopping.com from Compaq and sold to FreePC, an AltaVista investee.
Additionally, net revenue in the Company's fulfillment services segment
increased $20,282,000, primarily reflecting increased volume of turnkey business
from Cisco and growth in Internet - related fulfillment business, including the
completion of an approximate $4.3 million special project order from JuniorNet,
a leading Web destination for children, during the first quarter of fiscal 2000.
The Company believes that its subsidiary companies will continue to develop and
introduce their products commercially, actively pursue increased revenue from
new and existing customers, and look to expand into new market opportunities.
Additionally, on April 28, 2000, the Company acquired uBid.com. Based on the
timing of the acquisition of uBid.com, the Company did not record any income
statement related activity in its consolidated April 30, 2000 statement of
operations. In addition, on June 12, 2000, Engage entered into a definitive
agreement to acquire Media Bridge Technologies. As a result of both increased
sales by existing companies, and incremental revenues from new acquisitions, the
Company expects to report future revenue growth.
Cost of revenue increased $296,063,000, or 258%, to $410,974,000 for the
nine months ended April 30, 2000 from $114,911,000 for the corresponding period
in fiscal 1999, reflecting increases of $285,554,000 and $10,509,000 in the
Internet and fulfillment services segments, respectively. Internet segment cost
of revenue increases were primarily attributable to higher revenues as a result
of acquisitions and the acceleration of operations for other subsidiaries within
the segment. Cost of revenue increased in the fulfillment services segment
primarily as a result of higher revenues. Cost of revenue as a percentage of
revenues in the Internet segment decreased to 82% in the first nine months of
fiscal 2000 from 148% in the same period during the prior year, primarily as a
result of the acquisitions of AdForce, AltaVista, Signatures Network and Tallan
and improved margin percentages at NaviSite. Fulfillment services segment cost
of revenue as a percentage of net revenue decreased to 79% in the first nine
months of fiscal 2000 from 85% in the first nine months of fiscal 1999,
primarily reflecting increased operating efficiencies related to turnkey
operations.
Research and development expenses increased $85,773,000, or 553%, to
$101,283,000 for the nine months ended April 30, 2000 from $15,510,000 for the
corresponding period in fiscal 1999. All research and development expenses in
both periods were incurred within the Company's Internet segment. The increase
as compared to the prior year was primarily due to the acquisitions of
AltaVista, AdForce and ExchangePath and the increased development efforts at
Engage, NaviSite, iCast, and MyWay.com. In-process research and development
expense was $45,937,000 during the nine months ended April 30, 2000, resulting
from the Flycast, AdForce, Equilibrium, AdKnowledge and ExchangePath
acquisitions. All in-process research and development expenses were incurred
within the Company's Internet segment. Further, related to the Company's
acquisitions and investments made during the third quarter of fiscal year 2000,
the acquisition accounting and valuations supporting purchase price allocations
for total investments of approximately $2.1 billion related to yesmail, Tallan,
uBid, Raging Bull, AnswerLogic and IronMax may result in a significant portion
of the purchase price being identified as in-process research and development,
which will be charged to operating results in the fourth quarter of fiscal 2000
when the amounts are determined. The Company anticipates it will continue to
devote substantial resources to product development and acquisitions of
companies developing technology and that these costs may substantially increase
in future periods.
18
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Selling expenses increased $287,740,000, or 1,090%, to $314,150,000 for the
nine months ended April 30, 2000 from $26,410,000 for the corresponding period
in fiscal 1999, primarily reflecting a $288,329,000 increase in the Company's
Internet segment. The increased costs in the Internet segment are primarily due
to the acquisitions of yesmail.com, 1stUp.com, Activate.net, AdForce,
AdKnowledge, Flycast, AltaVista, Signatures Network, ExchangePath and Activerse
and the continued growth of sales and marketing efforts at various other CMGI
subsidiaries related to product launches and infrastructure. Selling expenses in
the fulfillment services segment decreased by $589,000 in comparison with last
year's first nine months due primarily to headcount reductions. Selling expenses
as a percentage of net revenue increased to 62% for the nine months ended
April 30, 2000 from 22% for the corresponding period in fiscal 1999, primarily
reflecting the impact of the acquisition of AltaVista, including the impact of
AltaVista advertising costs in support of the launch of its new media and
commerce network, the impact of the Company's other Internet acquisitions and
the expansion of sales and marketing efforts related to product launches and
infrastructure. As the Company's subsidiaries continue to introduce new products
and expand sales, the Company expects to incur significant promotional expenses,
as well as expenses related to the hiring of additional sales and marketing
personnel and increased advertising expenses, and anticipates that these costs
will substantially increase in future periods.
General and administrative expenses increased $100,912,000, or 389%, to
$126,843,000 for the nine months ended April 30, 2000 from $25,931,000 for the
corresponding period in fiscal 1999. The Internet segment experienced an
increase of $95,873,000, primarily due to the acquisitions of Tallan, 1stUp.com,
Activate.net, AdKnowledge, Flycast, AltaVista, Signatures Network, ExchangePath
and Activerse. Additionally, Internet segment general and administrative expense
increases reflected approximately $5 million in acquisition costs incurred by
Engage related to its acquisition of Adsmart and Flycast from CMGI, increased
CMGI corporate expenses, and the building of management infrastructures in
several of the Company's other Internet segment subsidiaries. General and
administrative expenses in the fulfillment services segment increased by
$5,039,000 in comparison with last year's corresponding period, largely due to
the building of management infrastructure. General and administrative expenses
as a percentage of net revenues increased to 25% for the nine months ended
April 30, 2000 from 22% for the corresponding period in fiscal 1999. The Company
anticipates that its general and administrative expenses will continue to
increase significantly as the Company adds newly acquired subsidiaries and as
existing subsidiaries continue to grow and expand their administrative staffs
and infrastructures.
Amortization of intangible assets and stock-based compensation increased
$897,823,000, or 11,175%, to $905,857,000 for the nine months ended April 30,
2000 from $8,034,000 for the corresponding period in fiscal 1999, reflecting a
$897,734,000 increase in the Internet segment, primarily due to the acquisitions
of yesmail.com, Tallan, 1stUp.com, Activate.net, AdForce, AdKnowledge, Flycast,
AltaVista, Signatures Network, Activerse, 2CAN and a $17 million impairment
charge associated with goodwill previously recorded by the Company's Magnitude
Network subsidiary. Additionally, included in the amortization of intangible
assets and stock-based compensation amounts were $53,428,000 and $819,000 of
amortization of stock-based compensation for the nine months ended April 30,
2000 and 1999, respectively. Approximately $36.6 million of the $53.4 million
amortization of stock-based compensation expense recorded in the nine months
ended April 30, 2000 was related to the acceleration of the vesting of options
to purchase approximately 323,000 shares of CMGI common stock previously issued
to four former executives of Flycast under pre-existing severance agreements.
The Company anticipates that its amortization of intangibles and stock-based
compensation expense will continue to increase significantly as a result of the
April 28, 2000 acquisition of uBid and as the Company and its subsidiaries
continue to acquire new companies in the future.
Gain on issuance of stock by subsidiaries and affiliates for the nine
months ended April 30, 2000 primarily reflects the Company's first quarter pre-
tax gain of $46,432,000 on the issuances of stock by NaviSite in its initial
public offering, the second fiscal quarter pre-tax gain of $5,474,000 on the
issuance of stock by NaviSite as a result of the exercise of the underwriters'
over-allotment option in its initial public offering and the third quarter pre-
tax gain of $20,915,000 on the issuance of common stock by Vicinity Corp. in its
initial public offering . Gain on issuance of stock by subsidiaries and
affiliates for the corresponding period ended April 30, 1999 included a
$29,373,000 gain on stock issuances by GeoCities and a $20,253,000 gain on
issuance of stock by Lycos. Gain on stock issuances by GeoCities in fiscal 1999
arose primarily as a result of the sale of stock by GeoCities in its initial
public offering in August 1998 and the issuance of stock by GeoCities in its
acquisitions of Starseed, Inc. (known as WebRing) in December 1998 and
Futuretouch during the third fiscal quarter of 1999. The fiscal 1999 gain on
stock issuance by Lycos resulted primarily from the issuance of stock by Lycos
for its acquisition of WhoWhere?
19
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Other gains, net for the nine months ended April 30, 2000 primarily reflect
a pre-tax gain of $417,400,000 on the sale of 7,976,990 shares of Yahoo! Inc.
common stock, a pre-tax gain of $5,832,000 on the sale of 260,000 shares of Open
Market, Inc. common stock and a pre-tax gain of $4,200,000 on the sale of 87,698
shares of Amazon.com common stock. Other gains, net recorded in the nine months
ended April 30, 1999 included a $45,475,000 gain on the sale of Lycos, Inc.
common stock, a $23,158,000 gain on the sale of investment in Reel.com, Inc., a
$19,057,000 gain on sale of investment in Sage Enterprises, Inc. and a
$7,002,000 gain on the sale of Amazon.com, Inc. common stock.
Minority interest, net increased to $110,844,000 for the nine months ended
April 30, 2000 from $479,000 for the corresponding period in fiscal 1999,
primarily reflecting minority interest in net losses of seven subsidiaries
during the first nine months of fiscal 2000, including AdForce, AltaVista,
Blaxxun, Engage, Signatures Network, NaviSite and MyWay.com.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method
of accounting. Under the equity method of accounting, the Company's
proportionate share of each affiliate's operating losses and amortization of the
Company's net excess investment over its equity in each affiliate's net assets
is included in equity in losses of affiliates. Equity in losses of affiliates
for the nine months ended April 30, 2000 primarily includes the results from the
Company's minority ownership in Answerlogic, Engage Technologies Japan, Inc.,
FoodBuy.com, GX Media.com, Half.com, Ironmax, ThingWorld.com, Vicinity Corp. and
WebCT. Equity in losses of affiliates for the nine months ended April 30, 1999
included the results from the Company's minority ownership in Lycos, GeoCities,
ThingWorld.com, Silknet, Speech Machines, MotherNature.com, Magnitude Network
and Engage Technologies Japan, Inc. The Company expects its portfolio companies
to continue to invest in development of their products and services, and to
recognize operating losses, which will result in future charges recorded by the
Company to reflect its proportionate share of such losses.
Interest income increased $28,791,000 to $30,950,000 for the nine months
ended April 30, 2000 from $2,159,000 for the comparable period in fiscal 1999,
primarily reflecting increased income associated with higher average corporate
cash equivalent balances compared with the prior year and interest earned by
Engage and NaviSite on cash raised from their initial public offerings.
Interest expense increased $23,222,000 to $26,517,000 for the nine months ended
April 30, 2000 from $3,295,000 in the corresponding period in fiscal 1999,
primarily due to the notes issued as part of the AltaVista and Tallan
acquisitions and higher corporate collateralized borrowings through January
2000, at which time the company repaid its $20 million note payable to a bank.
Income tax benefit for the nine months ended April 30, 2000 was
$71,420,000. Exclusive of taxes provided for significant, unusual or
extraordinary items, the Company provides for income taxes on a year to date
basis at an effective rate based upon its estimate of full year earnings.
Interest tax expense from continuing operations for the nine months ended
April, 30, 1999 was $30,891,000. In determining the Company's effective tax rate
for fiscal 1999, one-time in-process research, gains on stock issuances by Lycos
and GeoCities, gains on sales of investments in Sage Enterprises, Inc. and
Reel.com, Inc. and gains on sales of Lycos, Inc. and Amazon. Com, Inc. common
stock were excluded.
In-Process Research and Development Expense
Flycast
In January 2000, CMGI completed its acquisition of Flycast, for total
purchase consideration of $905.3 million. Management is primarily responsible
for estimating the fair value of purchased in-process research and development.
The portion of the purchase price allocated to in-process research and
development (IPRD) was $29.3 million or approximately 3.2% of the total purchase
price. The value allocated to projects identified as IPRD has been charged to
operations during the third quarter of fiscal 2000.
20
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
At the acquisition date, Flycast was in the process of developing
technology, which would add functionality and features and developing a new
platform for its product. The IPRD had not yet reached technological
feasibility and had no alternative uses. The IPRD under development may not
achieve commercial viability. The technological feasibility of the in-process
product is established when the enterprise has completed all planning,
designing, coding, and testing activities that are necessary to establish that
the product can be produced to meet its design specifications including
functions, features, and technical performance requirements.
At acquisition date, management estimated that completion of the Flycast
IPRD would be accomplished in May 2000. The initial development effort had
commenced in late April through November 1999. At the valuation date, the new
technology had not reached a completed prototype stage, although some beta
testing on portions of the technology had begun. At the valuation date, the IPRD
was approximately 65% complete, based on costs incurred on the IPRD through the
acquisition date versus the total costs estimated to complete it. As of June
2000, the IPRD has been substantially completed.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including assembled workforce, working capital
and fixed assets. The cash flows are then discounted to present value at an
appropriate rate. Discount rates are determined by an analysis of the risks
associated with each of the identified intangible assets. The discount rate used
for in-process research and development was 30%, a premium over the estimated
weighted-average cost of capital of 24%. The resulting net cash flows to which
the discount rate was applied are based on Flycast management's estimates of
revenues, operating expenses and income taxes from such acquired in process
technology.
Other
During the first nine months of fiscal year 2000, CMGI acquired four other
companies for purchase prices valued at a combined total of $758.6 million,
including ExchangePath, AdKnowledge, AdForce and Equilibrium, for which a
portion of the purchase prices was allocated to IPRD. Management is primarily
responsible for estimating the fair value of purchased in-process research and
development. The portion of the purchase price allocated to IPRD for each of
these acquisitions were as follows: ExchangePath ($2.4 million, or approximately
19.3% of the total purchase price), AdKnowledge ($2.3 million, or approximately
1.4% of the total purchase price), AdForce ($9.3 million, or approximately 1.7%
of the total purchase price) and Equilibrium ($2.6 million, or approximately
6.5% of the total purchase price). The values allocated to the projects
identified as IPRD have been charged to operations during the nine months ended
April 30, 2000.
At the acquisition dates, the projects in development for ExchangePath,
AdKnowledge, AdForce and Equilibrium had not yet reached technological
feasibility and had no alternative uses. The IPRD under development may not
achieve commercial viability. The technological feasibility of the in-process
product is established when the enterprise has completed all planning,
designing, coding, and testing activities that are necessary to establish that
the product can be produced to meet its design specifications including
functions, features, and technical performance requirements.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including assembled workforce, working capital
and fixed assets. The cash flows are then discounted to present value at an
appropriate rate. The resulting net cash flows to which the discount rates were
applied were based on management's estimates of revenues, operating expenses and
income taxes from such acquired technology.
21
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 30, 2000 decreased to $904 million compared to
$1.4 billion at July 31, 1999. Approximately $151 million of the net decrease in
working capital is attributable to the decrease in available-for sale securities
and approximately $326 million is attributable to the increase in notes
payable, primarily related to the Tallan acquisition. The Company's principal
sources of capital during the first nine months of fiscal 2000 were from the
sales of Yahoo! Inc. common stock in the open market and the forward sale of
Yahoo! Inc. common stock, net proceeds from the issuances of common stock,
primarily by NaviSite in its initial public offering and net cash acquired
through acquisitions of subsidiaries. The Company's principal uses of capital
during the first nine months of fiscal 2000 were $500 million for funding of
operations, primarily those of start-up activities in the Company's Internet
segment and $130 million for purchases of property and equipment.
The first nine months of fiscal year 2000 the Company sold 7,976,990 shares
of Yahoo! Inc. common stock, 260,000 shares of Open Market, Inc. common stock
and 87,698 shares of Amazon.com, Inc. and received proceeds of approximately
$991.2 million, $9.2 million and $5.7 million, respectively. In April 2000, the
Company entered into a forward sale agreement with an investment bank. The
transaction 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. Under
the first tranche, which was executed in April 2000, the Company agreed to
deliver 581,499 shares of Yahoo! Inc. common stock or the cash equivalent, to
the investment bank in August 2000 and in exchange, received $106.4 million, or
90.75% of the fair market value of the shares on the execution date, in cash.
Under the terms of the second and third tranches, both executed in May 2000, the
Company agreed to deliver an additional 581,499 shares of Yahoo! Inc. common
stock in November 2000 and 47,684 shares of Yahoo! Inc. common stock in February
2001 and in exchange, received $74.2 million, or 87.9% of the fair market value
of the shares on the execution date, in cash. Subsequent to April 30, 2000, the
Company sold 1,115,314 shares of its Yahoo! Inc. common stock for total proceeds
of approximately $136 million.
On October 22, 1999, NaviSite commenced its initial public offering at $7
per share, raising $69.6 million, net of issuance and other costs. In November
1999, NaviSite raised an additional $10.8 million pursuant to the exercise of
the underwriters' over-allotment option. CMGI currently owns approximately 39.2
million shares of NaviSite common stock.
On June 13, 2000, CMGI purchased 980,873 additional shares of common stock
of its NaviSite subsidiary for $50 million.
In August 1999, CMGI completed its acquisition of 81.5% of AltaVista for
37,989,950 CMGI common shares valued at approximately $1.8 billion, 18,090.45
shares of the Company's Series D preferred stock, which were converted into
approximately 3,618,090 million shares of CMGI common stock in October 1999
valued at approximately $173 million, three-year notes totaling $220 million and
the exchange of CMGI and subsidiary stock options for AltaVista stock options.
The AltaVista acquisition included the assets and liabilities constituting the
AltaVista Internet search service and also included former Compaq subsidiaries
Zip2 Corporation and Shopping.com. The shares issued by the Company in
connection with the AltaVista acquisition are not registered under the
Securities Act of 1933 and are subject to restrictions on transferability for a
period of one year from the date of issuance. The total purchase price for
AltaVista was valued at approximately $2.4 billion, including costs of
acquisition of $4 million. The notes issued in conjunction with the acquisition
payable are due August 18, 2002. Interest on the notes, at a rate of 10.5% per
annum, is due and payable semiannually on each February 18 and August 18 until
the notes are paid in full. Principal and interest due on these notes are
payable, at the option of CMGI, in cash, marketable securities (as defined in
the notes) or any combination thereof.
In January 2000, CMGI completed its acquisition of AdForce, a leading
online provider of centralized, outsourced ad management and delivery services.
The total purchase price for AdForce was valued at approximately $545 million,
consisting of approximately 11,270,209 shares of CMGI common stock valued at
approximately $473 million, options and warrants to purchase CMGI common shares
valued at approximately $70.9 million, and direct acquisition costs of
approximately $1.1 million.
22
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
In January 2000, CMGI completed its acquisition of Flycast, a leading
provider of web-based direct response advertising solutions. The total purchase
price for Flycast was valued at approximately $905.3 million consisting of
approximately 14,611,499 shares of CMGI common stock valued at approximately
$716.6 million, options and warrants to purchase CMGI common stock valued at
approximately $168.2 million, and direct acquisition costs of approximately
$20.5 million. In April 2000, CMGI contributed Flycast and Adsmart to Engage, a
majority-owned subsidiary of CMGI. Upon completion of the transaction, CMGI
received approximately 64 million shares of Engage common stock, and Flycast and
Adsmart became wholly-owned subsidiaries of Engage. As a result of the
transaction, CMGI's ownership interest in Engage increased to approximately 87%.
In March 2000, CMGI completed its acquisition of yesmail, a leading
outsourcer of permission email marketing technologies and services. The total
purchase price for yesmail was valued at approximately $597.2 million consisting
of 5,120,181 shares of CMGI common stock valued at approximately $546.4 million,
options to purchase CMGI common stock valued at approximately $45.3 million, and
direct acquisition costs of approximately $5.5 million.
In April 2000, CMGI completed its acquisition of approximately 94.2%
of Tallan leading provider of Internet and e-commerce services to Fortune 500,
Global 2000 and dot.com companies. The total purchase price for Tallan was
valued at approximately $904.8 million consisting of cash totaling
$342.3 million, options to purchase CMGI common stock valued at approximately
$188.3 million, promissory notes valued at approximately $368.7 million, and
direct acquisition costs of approximately $5.5 million.
In April 2000, CMGI completed its acquisition of uBid a leading e-commerce
auction site. The total purchase price for uBid was valued at approximately
$390.1 million consisting of 3,068,374 shares of CMGI common stock valued at
approximately $360.6 million, options to purchase CMGI common stock valued at
approximately $26.5 million, and direct acquisition costs of approximately
$3.0 million.
During the first nine months of fiscal year 2000, the Company, or its
subsidiaries, also completed its acquisitions of ExchangePath, iAtlas, Inc.,
Signatures SNI, Inc., 1stUp.com, Clara Vista, Activate.net, AdKnowledge, Tribal
Voice, Equilibrium, GreenWitch, Raging Bull, Transium, ClickHear, and AdTECH (in
which the Company acquired an 80.29% ownership interest) and the remaining 33%
minority interest in Netwright not already owned by CMGI, for combined
consideration of approximately $607.5 million and commitments to fund a total of
approximately $113 million in operating capital. Combined consideration for
these additional acquisitions included CMGI and subsidiaries common stock,
convertible notes, options and warrants to purchase common stock of CMGI and
subsidiaries, notes which are payable in CMGI common stock, and cash. In the
first step of the AdKnowledge transaction, CMGI acquired an 88% equity stake in
AdKnowledge. The second step of the AdKnowledge transaction, the contribution of
AdKnowledge shares held by AdKnowledge shareholders, including CMGI, to Engage
in exchange for approximately 10.3 million shares of Engage common stock, closed
in December 1999. Upon completion of the transaction, CMGI received
approximately 9.8 million shares of Engage, and AdKnowledge became a wholly-
owned subsidiary of Engage.
During the first nine months of fiscal year 2000, the Company, through its
limited liability company subsidiaries, CMG@Ventures I, LLC, CMG@Ventures II,
LLC, CMG@Ventures III, LLC, CMGI@Ventures IV, LLC, CMGI@Ventures B2B Fund, LLC,
CMGI@Ventures Technology Fund, LLC and CMGI@Ventures Expansion Fund LLC acquired
initial or follow-on minority ownership interests in 49 Internet companies for
an aggregate total of approximately $212 million. On October 29, 1999, the
Company purchased 250,000 shares of Akamai Technologies common stock at a cost
of $26 per share. On November 29, 1999, the Company and PCCW, completed their
previously agreed to exchange of stock. The Company received approximately
448.3 million shares of PCCW stock in exchange for approximately 8.2 million
shares of the Company's common stock. On April 7, 2000, the Company and
Netcentives, completed their previously agreed to exchange of stock. The
Company received approximately 1.7 million shares of Netcentives common stock in
exchange for approximately 425,000 shares of the Company's common stock. On May
19, 2000, the Company and Primedia Inc., completed their previously agreed to
exchange of stock. The Company received approximately 8.0 million shares of
Primedia, Inc. common stock in exchange for approximately 1.5 million shares
of CMGI common stock.
23
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
During the Company's second fiscal quarter, CMGI announced the launch of
the CMGI @Ventures B2B Fund, a new venture fund to be focused exclusively on
business-to-business Internet venture capital investments. During the second
fiscal quarter, CMGI also announced the launch of the CMGI @Ventures Technology
Fund, which will exclusively focus on investing in and supporting Internet
enabling technologies and infrastructure companies that are synergistic with
CMGI and the CMGI @Ventures network. Each fund is expected to reach up to
$1 billion in capital and will have CMGI as its sole limited investor. On
March 1, 2000, the Company along with Hicks, Muse, Tate, & Frusta Incorporated,
(HMTF), and PCCW, announced the formation of another new venture capital
partnership, @Ventures Global Partners. Under the terms of the partnership, the
parties have each committed to invest up to $500 million, for a total of up to
$1.5 billion, to support the development of Internet companies based in Asia,
Europe, and the Americas. The Company expects to raise capital for the new funds
through the sale of marketable securities, the issuance and sale of Company
securities, borrowings or otherwise from outside sources, or a combination of
the foregoing. There can be no assurance that the Company will be able to raise
sufficient funds for the CMGI @Ventures B2B Fund, the CMGI @Ventures Technology
Fund or the @Ventures Global Partners fund, or that CMGI will be able to raise
such funds on terms that are favorable to the Company.
On June 12, 2000, the Company's subsidiary, Engage announced a definitive
agreement to acquire MediaBridge Technologies, Inc., a leading provider of
cross-media closed loop targeted marketing systems. Under the terms of the
agreement, Engage will issue approximately 14.5 million shares of Engage common
stock to the shareholders of MediaBridge, subject to adjustment under certain
circumstances. The acquisition is subject to MediaBridge shareholder approval
and is expected to be completed by September 2000.
On December 17, 1999, AltaVista filed with the Securities and Exchange
Commission a registration statement for the initial public offering of shares
of its common stock. MotherNature.com (Nasdaq: MTHR) commenced its IPO on
December 9, 1999. (CMG@Ventures II, LLC currently holds 1.2 million shares of
MotherNature.com common stock.) On November 4, 1999, Tickets.com, Inc. (Nasdaq:
TIXX) commenced its IPO. (CMG@Ventures II, LLC currently holds approximately
800,000 shares of Tickets.com common stock.) During the third quarter, on
February 8, 2000. Vicinity Corp. (Nasdaq: VCNT) commenced its IPO. (CMG@Ventures
I and II, LLC collectively hold 5.8 million shares of Vicinity common stock.)
On February 29, 2000, the Company announced an agreement with Cable &
Wireless place to issue $500 million in shares of CMGI stock in exchange for
$500 million in shares of PCCW, which Cable & Wireless place will receive upon
the completion of Cable & Wireless place's sale of their Cable & Wireless HKT
subsidiary to PCCW.
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 Internet subsidiaries, future Internet company acquisitions will
likely be in early stages of business development and therefore are expected to
require additional cash funding by the Company to fund their operations. The
Company believes that existing working capital and the availability of
available-for-sale securities which could be sold or posted as additional
collateral for additional loans, will be sufficient to fund its operations,
investments and capital expenditures for the foreseeable future. Additionally,
the Company may also choose to raise additional capital through private
placements. Should additional capital be needed to fund future investment and
acquisition activity, the Company may seek to raise additional capital through
public or private offerings of the Company's or its subsidiaries' stock, or
through debt financing. There can be no assurance, however, that the Company
will be able to raise additional capital on terms that are favorable to the
Company.
YEAR 2000 COMPLIANCE
--------------------
The Company and its subsidiaries have not experienced any material problems
with network infrastructure, software, hardware and computer systems relating to
the inability to recognize appropriate dates related to the year 2000. The
Company and its subsidiaries are also not aware of any material Year 2000
problems with customers, suppliers or vendors. Accordingly, the Company and its
subsidiaries do not anticipate incurring material expenses or experiencing any
material operational disruptions as a result of any Year 2000 issues.
24
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
FUTURE RESULTS OF CERTAIN SUBSIDIARIES
The following forward-looking statements regarding the expected future
results of certain subsidiaries of the Company were presented by management of
the Company at a recent investor conference, each as updated as of the date
hereof. When referring to current or expected profitability of its
subsidiaries, the Company's remarks addressed profitability on a basis of
earnings before interest, taxes, depreciation and amortization, or "EBITDA"
basis. "EBITDA" should not be considered by investors as an alternative to net
income or income from operations. When referring to annualized revenues of its
subsidiaries, the Company's remarks are based on revenues during the Company's
third fiscal quarter for each respective subsidiary. Those updated statements
are as follows:
CMGI Solutions, on a pro forma basis giving effect to the expected
contribution of Tallan, was profitable for the month of May 2000. Its
annualized revenues are currently $100 million. It is also expected that Clara
Vista, wholly-owned CMGI subsidiary will be contributed to CMGI Solutions. On a
pro forma basis giving effect to the expected contribution of both Tallan and
Clara Vista, CMGI Solutions is expected to reach its first month of
profitability by fiscal year end.
AltaVista is expected to reach its first month of profitability by the end
of the second quarter of fiscal 2001. Its annualized revenues are currently
$230 million.
uBid is expected to reach its first month of profitability by the end of
the first quarter of fiscal 2002. Its annualized revenues are currently $380
million.
Engage is expected to reach its first month of profitability by the end of
the second quarter of fiscal 2002. Its annualized revenues are currently in
excess of $230 million.
Readers are cautioned not to place undue reliance on these statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date of this filing and which are preliminary and inherently speculative.
The Company undertakes no obligation to update these forward-looking statements.
This section contains forward-looking statements, which address the
expected growth, revenues and profitability of certain subsidiaries of the
Company. The important factors and uncertainties set forth below in "Factors
That May Affect Future Results," among others, could cause actual results to
differ materially from those described in these forward-looking statements. For
a detailed discussion of other cautionary statements relating to Engage, please
refer to Engage's filings with the Securities and Exchange Commission, including
Engage's Annual Report on Form 10-K for the most recently ended fiscal year. For
a detailed discussion of other cautionary statements relating to AltaVista,
please refer to AltaVista's filings with the Securities and Exchange Commission,
including AltaVista's Registration Statement on Form S-1 (File No. 333-93013).
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:
25
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
We may not have operating income or net income in the future.
During the fiscal year ended July 31, 1999 and for the nine months ended
April 30, 2000, we had an operating loss of approximately $127 million and
$1.4 billion, respectively. We anticipate continuing to incur significant
operating expenses in the future including significant cost of revenues,
selling, general and administrative and amortization expenses. As a result, we
expect to continue to incur operating losses and may not have enough money to
grow our business in the future.
We may have problems raising money we need in the future.
In recent years, we have financed our operating losses in part with profits
from selling some of the stock of companies in which we had invested. This
funding source may not be sufficient in the future, and we may need to obtain
funding from outside sources. However, we may not be able to obtain funding from
outside sources. In addition, even if we find outside funding sources, we may be
required to issue to such outside sources securities with greater rights than
those currently possessed by holders of shares of our common stock. We may also
be required to take other actions, which may lessen the value of our common
stock, including borrowing money on terms that are not favorable to us.
Our success depends greatly on increased use of the Internet by business and
individuals.
Our success 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. Because a
significant portion of our business depends on our Internet operating company
subsidiaries, our business will suffer if commercial use of the Internet fails
to grow in the future.
We may incur significant costs to avoid investment company status and may suffer
adverse consequences if deemed to be an investment company.
We 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 our equity investments in other
businesses and our venture subsidiaries may constitute investment securities
under the 1940 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 1940 Act unless a particular exclusion or
Commission safe harbor applies. If we were to be deemed an investment company,
we would become subject to the requirements of the 1940 Act. As a consequence,
we would be prohibited from engaging in business or issuing our securities as we
have in the past and might be subject to civil and criminal penalties for
noncompliance. In addition, certain of our contracts might be voidable, and a
court-appointed receiver could take control of us and liquidate our business.
Although our investment securities currently comprise less than 40% of our
total assets, fluctuations in the value of these securities or of our other
assets may cause this limit to be exceeded. Unless an exclusion or safe harbor
was available to us, we would have to attempt to reduce our investment
securities as a percentage of our 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 we were required to sell
investment securities, we may sell them sooner than we otherwise would. These
sales may be at depressed prices and we may never realize anticipated benefits
from, or may incur losses on, these investments. Some investments may not be
sold due to contractual or legal restrictions or the inability to locate a
suitable buyer. Moreover, we may incur tax liabilities when we sell assets.
We may also be unable to purchase additional investment securities that may be
important to our operating strategy. If we decide to acquire non-investment
security assets, we may not be able to identify and acquire suitable assets and
businesses.
26
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
We depend on certain important employees, and the loss of any of those employees
may harm our business.
Our performance is substantially dependent on the performance of our
executive officers and other key employees, in particular, David S. Wetherell,
our chairman, president, and chief executive officer, Andrew J. Hajducky III,
our executive vice president, chief financial officer and treasurer, and David
Andonian, our president, corporate development. The familiarity of these
individuals with the Internet industry makes them especially critical to our
success. In addition, our success is dependent on our ability to attract, train,
retain and motivate high quality personnel, especially for our management team.
The loss of the services of any of our executive officers or key employees may
harm our business. Our success also depends on our continuing ability to
attract, train, retain, and motivate other highly qualified technical and
managerial personnel. Competition for such personnel is intense.
In fiscal 1999 and the first nine months of fiscal 2000, we derived a
significant portion of our revenues from a small number of customers and loss of
any of those customers could significantly damage our business.
During the fiscal year ended July 31, 1999, sales to Cisco Systems, Inc.
accounted for 36% of our total revenues and 47% of our revenues from our
fulfillment services segment. During the nine months ended April 30, 2000, sales
to Cisco accounted for 13.4 % of our total revenues and 56.4% of our revenues
from our fulfillment services segment. We currently do not have any agreements
with Cisco which obligate this customer to buy a minimum amount of products from
us or to designate us as its sole supplier of any particular products or
services. During the nine months ended April 30, 2000, sales to DoubleClick,
Inc. accounted for 16.5% of our total revenues and 21.6% of our revenues from
our Internet segment. We believe that we will continue to derive a significant
portion of our operating revenue from sales to a small number of customers.
Our strategy of expanding our business through acquisitions of other businesses
and technologies presents special risks.
We intend 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 business;
. 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 the acquisition which
securities lessen the rights of holders of our currently outstanding
securities;
. the need to incur additional debt; and
. the requirement to record additional future operating costs for the
amortization of goodwill and other intangible assets, which amounts could
be significant.
We may not be able to successfully address these problems. Moreover, our
future operating results will depend to a significant degree on our ability to
successfully manage growth and integrate acquisitions. In addition, many of our
investments are in early-stage companies with limited operating histories and
limited or no revenues. We may not be able to successfully develop these young
companies.
27
<PAGE>
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 our 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. Our 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 FTC
initiated an informal inquiry into the data collection practices of DoubleClick,
Inc. The effectiveness of our technology could be limited by any reduction or
limitation in the use of cookies. If the use or effectiveness of cookies is
limited, we would likely have to switch to other technology that allows us 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 our 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,
our business 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 our Internet-related
business and could place additional financial burdens on our business.
To succeed, we must respond to the rapid changes in technology and distribution
channels related to the Internet.
The markets for our Internet products and services are characterized by:
. rapidly changing technology;
. evolving industry standards;
. frequent new product and service introductions;
. shifting distribution channels; and
. changing customer demands.
Our success will depend on our ability to adapt to this rapidly evolving
marketplace. We may not be able to adequately adapt our products and services
or to acquire new products and services that can compete successfully. In
addition, we may not be able to establish and maintain effective distribution
channels.
We 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 our products and
services. In addition, many of our current and potential competitors have
greater financial, technical, operational and marketing resources. We may not
be able to compete successfully against these competitors in selling our goods
and services. Competitive pressures may also force prices for Internet goods
and services down and such price reductions may reduce our revenues.
28
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Our strategy of selling assets of or investments in the companies that we have
acquired and developed presents risks.
One element of our business plan involves raising cash for working capital
for our Internet business by selling, in public or private offerings, some of
the companies, or portions of the companies, that we have acquired and
developed. Market and other conditions largely beyond our control affect:
. our ability to engage in such sales;
. the timing of such sales; and
. the amount of proceeds from such sales.
As a result, we may not be able to sell some of these assets. In addition,
even if we are able to sell, we may not be able to sell at favorable prices.
If we are unable to sell these assets at favorable prices, our business will be
harmed.
The value of our business may fluctuate because the value of some of our assets
fluctuates.
A portion of our assets include the equity securities of both publicly
traded and non-publicly traded companies. In particular, we own a significant
number of shares of common stock of Lycos, Inc., Hollywood Entertainment
Corporation, Kana Communications, Inc., Yahoo!, Marketing Services Group, Inc.,
Ventro Corporation, Netcentives, Critical Path, Inc., MotherNature.com, Inc.,
Pacific Century CyberWorks Limited, and Vicinity Corp., which are publicly
traded companies. The market price and valuations of the securities that we hold
in these and other companies may fluctuate due to market conditions and other
conditions over which we have no control. Fluctuations in the market price and
valuations of the securities that we hold in other companies may result in
fluctuations of the market price of our common stock and may reduce the amount
of working capital available to us.
Our growth places strains on our managerial, operational and financial
resources.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources.
Further, as the number of our users, advertisers and other business partners
grows, we will be required to manage multiple relationships with various
customers, strategic partners and other third parties. Our further growth or an
increase in the number of our strategic relationships will increase this strain
on our managerial, operational and financial resources, inhibiting our ability
to achieve the rapid execution necessary to successfully implement our business
plan. In addition, our future success will also depend on our ability to expand
our sales and marketing organization and our support organization commensurate
with the growth of our business and the Internet.
We must develop and maintain positive brand name awareness.
We believe that establishing and maintaining our brand names is essential
to expanding our Internet business and attracting new customers. We also
believe 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 our brand names will
depend largely on our ability to provide consistently high-quality products and
services. If we are unable to provide high-quality products and services, the
value of our brand name may suffer.
29
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Our quarterly results may fluctuate widely.
Our operating results have fluctuated widely on a quarterly basis during
the last several years, and we expect to experience significant fluctuation in
future quarterly operating results. Many factors, some of which are beyond our
control, have contributed to these quarterly fluctuations in the past and may
continue to do so. Such factors include:
. demand for our products and services;
. payment of costs associated with our acquisitions, sales of assets and
investments;
. timing of sales of assets;
. market acceptance of new products and services;
. specific economic conditions in the Internet and direct marketing
industries; and
. general economic conditions.
The emerging nature of the commercial uses of the Internet makes
predictions concerning our future revenues difficult. We believe that period-
to-period comparisons of our results of operations will not necessarily be
meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of our common stock may decline.
The price of our common stock has been volatile.
The market price of our 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 our
common stock.
We face security risks.
The secure transmission 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 we use or other Internet sites 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 communications and negatively impact our business. Security
breaches of our activities, our customers and sponsors involving the storage and
transmission of proprietary information, such as credit card numbers, may expose
us to a risk of loss or litigation and possible liability. We cannot assure that
our security measures will prevent security breaches.
Ownership of CMGI is concentrated.
David S. Wetherell, our chairman, president, and chief executive officer,
beneficially owned approximately 12.6% of our outstanding common stock as of
March 1, 2000. As a result, Mr. Wetherell possesses significant influence over
CMGI on matters, including the election of directors. Additionally, Compaq
Computer Corporation owned approximately 15% of our outstanding common stock as
of March 1, 2000. The concentration of our share ownership may:
. delay or prevent a change in our 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.
30
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
We rely on NaviSite for network connectivity.
We and many of our majority owned subsidiaries rely on NaviSite for network
connectivity and hosting of servers. If NaviSite fails to perform such services,
our internal business operations may be interrupted, and the ability of our
majority owned subsidiaries to provide services to customers may also be
interrupted. Such interruptions may have an adverse impact on our business and
revenues and our majority owned subsidiaries.
The success of our global operations is subject to special risks and costs.
We have begun, and intend to continue, to expand our operations outside of
the United States. This international expansion will require significant
management attention and financial resources. Our ability to expand offerings
of our products and services internationally will be limited by the general
acceptance of the Internet and intranets in other countries. In addition, we
have limited experience in such international activities. Accordingly, we
expect to commit substantial time and development resources to customizing our
products and services for selected international markets and to developing
international sales and support channels.
We expect that our export sales 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 our products and services more
expensive and, therefore, potentially less competitive in international markets.
As we increase our international sales, our 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.
We could be subject to infringement claims.
From time to time, we have been, and expect to continue to be, subject to
third party claims in the ordinary course of business, including claims of our
alleged infringement of intellectual property rights. Any such claims may
damage our business by:
. subjecting us to significant liability for damages;
. resulting in invalidation of our 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.
We may have liability for information retrieved from the Internet.
Because materials may be downloaded from the Internet and subsequently
distributed to others, we 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.
31
<PAGE>
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 April 30,
2000 include strategic equity positions in the Internet industry sector,
including Lycos, Inc., Critical Path, Ventro, Amazon.com, Inc., Open Market,
Inc., Yahoo! Inc., Kana Communications, Hollywood Entertainment, and Akamai
Technologies, Inc. many of which have experienced significant historical
volatility in their stock prices. The Company typically does not attempt to
reduce or eliminate its market exposure on these securities. A 20% adverse
change in equity prices, based on a sensitivity analysis of the equity component
of the Company's available-for-sale securities portfolio as of April 30, 2000,
would result in an approximate $261 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 G 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 April 30, 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.
32
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 16, 2000, a derivative action was filed in the Court of Chancery
of the State of Delaware against the Company, Edward A. Bennett, Christopher A.
Evans, Craig D. Goldman, Andrew J. Hajducky III, Frederic D. Rosen, Paul L.
Schaut, David S. Wetherell and Engage, Inc. The complaint alleges that, in
connection with the sale by the Company of Flycast Communications Corporation
and Adsmart Corporation to Engage, the Company and the individual defendants
have violated their fiduciary duties of loyalty and good faith. The Company
believes that the complaint is without merit and intends to contest the claims
vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Charter Amendment
-----------------
On May 5, 2000, the Company filed a Certificate of Amendment of Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware increasing the number of authorized shares of capital stock from
405,000,000 to 1,405,000,000 shares.
ClickHear, Inc.
---------------
On February 16, 2000, the Company acquired 100% of the outstanding stock of
ClickHear, Inc., a Nevada corporation ("ClickHear"). Pursuant to the terms of
the acquisition agreement, the Company, among other things, issued an aggregate
of 41,968 shares of Common Stock to stockholders of ClickHear in exchange for
such stock. The shares of Common Stock were issued and sold to the stockholders
of ClickHear 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.
AdTECH
------
On March 22, 2000, the Company acquired approximately 80% of the
outstanding stock of AdTECH Advertising Service Providing GmbH, a German
corporation ("AdTECH"). Pursuant to the terms of the acquisition agreement, the
Company, among other things, issued an aggregate of 88,418 shares of Common
Stock to stockholders of AdTECH in exchange for such stock. The shares of Common
Stock were issued and sold to the stockholders of AdTECH in reliance on
Regulation S as a sale by the Company that occurred outside the United States
and/or 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.
Tallan, Inc.
------------
On March 31, 2000, the Company acquired approximately 94.2% of the
outstanding capital stock of Tallan, Inc., a Delaware corporation ("Tallan").
Pursuant to the terms of the acquisition agreement, the Company, among other
things, issued three convertible notes in the aggregate principal amount of
$376,896,528 to certain stockholders of Tallan in exchange for shares of such
stock. The principal and interest on such notes is convertible, at the Company's
option, into shares of Common Stock. The notes were issued and sold to the
stockholders of Tallan in reliance on Regulation D and/or 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
notes.
Netcentives Inc.
---------------
On April 7, 2000, the Company and Netcentives Inc. ("Netcentives"),
completed an exchange of stock. The Company received 1,694,492 shares of
Netcentives common stock in exchange for 425,317 shares of the Company's common
stock. The shares of Common Stock were issued and sold to Netcentives 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.
33
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
(CONTINUED)
Conversion of Series B Preferred Stock
--------------------------------------
On April 17, 2000, the Company issued 2,834,520 shares of its Common Stock
upon the conversion of 35,000 shares of its Series B Convertible Preferred
Stock. 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 of the shares of
Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Special Meeting of Stockholders of the Company (the "Special Meeting") on
May 5, 2000, the following matter was acted upon by the stockholders of the
Company:
The approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of capital stock
from 405,000,000 to 1,405,000,000 shares.
The number of shares of Common Stock issued, outstanding and eligible to
vote as of the record date of March 16, 2000 was 280,444,939. The results of
the voting on the matter presented to stockholders at the Special Meeting are
set forth below:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C>
Approval of the amendment
to the Company's Restated
Certificate of Incorporation 177,191,403 N.A. 10,352,375 282,589 4,680
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding
such Exhibits are filed as part of or are included in this Quarterly
Report on Form 10-Q.
(b) Reports on Form 8-K
On February 22, 2000, the Company filed a Current Report on
Form 8-K dated February 9, 2000 to report under Item 5 (Other Events)
the execution of the agreement to acquire uBid, Inc. No financial
statements were filed with such report.
On March 3, 2000, the Company filed a Current Report on Form 8-K
to report dated February 14, 2000 to report under Item 5 (Other Events)
the execution of the agreement to acquire Tallan, Inc. No financial
statements were filed with such report
On March 9, 2000, the Company filed a Current Report on Form 8-K
dated March 9, 2000 to report under Item 5 (Other Events) that
AltaVista Company, a majority-owned operating company of CMGI, Inc.,
filed its Amendment No. 2 to Registration Statement on Form S-1 with
the Securities and Exchange Commission on March 9, 2000. No financial
statements were filed with such report.
On March 10, 2000, the Company filed a Current Report on Form 8-K
dated March 9, 2000 to report under Item 5 (Other Events) the execution
of the agreement to acquire yesmail.com. inc. and the execution of the
agreement to acquire Tallan, Inc. The following financial statements
were filed with such report:
34
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
(CONTINUED)
Audited consolidated balance sheets of yesmail.com, inc. as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, common stockholders' equity (deficit) and cash flows for
each of the years in the period ended December 31, 1999.
Audited balance sheets of Tallan, Inc. as of December 31, 1998 and
1999, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1999.
.
35
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
--------------------------
Date: June 14, 2000 Andrew J. Hajducky III
Executive Vice President, Chief Financial Officer
and Treasurer (Principal Financial and Accounting
Officer)
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item Description
---- -----------
<C> <S>
3.1 Amendment of Restated Certificate of Incorporation, dated May 5, 2000.
10.1 Amended and Restated 1999 Stock Option Plan for Non-Employee Directors.
10.2 Lease Agreement by and between TST 555/575 Market, L.L.C. as landlord
and Engage, Inc. as tenant, dated December 22, 1999 is incorporated
herein by reference to Exhibit 10.2 to Engage, Inc.'s Quarterly Report
on Form 10-Q for the fiscal quarter ended January 31, 2000 (File No.
000-26671).
27.1 Financial Data Schedule for the nine months ended April 30, 2000.
</TABLE>
