Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended January 31, 2003
|_| 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
incorporation or organization) Identification No.)
100 Brickstone Square
Andover, Massachusetts 01810
(Address of principal executive offices) (Zip Code)
(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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares outstanding of the issuer's common stock, as of March 13, 2003:
Common Stock, par value $.01 per share 393,471,707
Class Number of shares outstanding
================================================================================
================================================================================
CMGI, INC.
FORM 10-Q
INDEX
Page
Number
------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets--January 31, 2003
and July 31, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations--Three
and six months ended January 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows--Six months
ended January 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 6. Exhibits and Reports on Form 8-K 48
SIGNATURE 49
CERTIFICATIONS 50
EXHIBIT INDEX 52
================================================================================
2
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, July 31,
2003 2002
---------------- ----------------
(in thousands, except share
and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 174,712 $ 215,078
Available-for-sale securities 1,845 10,327
Trading security -- 94,271
Accounts receivable, trade, net of allowance for doubtful
accounts 60,173 38,221
Inventories 35,560 32,177
Prepaid expenses and other current assets 24,181 19,416
Current assets of discontinued operations 59,196 132,609
Deferred loss on disposal of subsidiary -- 31,869
---------------- ----------------
Total current assets 355,667 573,968
---------------- ----------------
Property and equipment, net 26,241 30,432
Investments in affiliates 32,507 57,770
Goodwill 22,123 24,341
Non-current assets of discontinued operations 16,042 189,449
Other assets 2,408 29,943
---------------- ----------------
$ 454,988 $ 905,903
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 94,271
Current installments of long-term debt 1,397 1,316
Accounts payable 40,774 24,065
Accrued restructuring 12,679 23,783
Accrued income taxes 94,813 93,515
Accrued expenses 44,016 33,482
Other current liabilities 4,413 5,440
Current liabilities of discontinued operations 53,048 94,217
---------------- ----------------
Total current liabilities 251,140 370,089
---------------- ----------------
Long-term debt, less current installments 7,643 7,884
Other long-term liabilities 14,974 14,181
Non-current liabilities of discontinued operations 1,744 61,272
Minority interest 38,319 35,847
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share. Authorized
5,000,000 shares; zero issued or outstanding as of
January 31, 2003 and July 31, 2002 -- --
Common stock, $0.01 par value per share. Authorized
1,405,000,000 shares; issued and outstanding
393,390,023 shares at January 31, 2003 and
392,679,011 shares at July 31, 2002 3,934 3,926
Additional paid-in capital 7,294,033 7,292,377
Accumulated deficit (7,157,302) (6,880,452)
---------------- ----------------
Accumulated other comprehensive income 503 779
---------------- ----------------
Total stockholders' equity 141,168 416,630
---------------- ----------------
$ 454,988 $ 905,903
================ ================
See accompanying notes to interim unaudited condensed consolidated
financial statements
3
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- --------------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(in thousands, except per share amounts)
Net revenue $ 119,774 $ 43,744 $ 232,996 $ 88,521
Operating expenses:
Cost of revenue 110,549 36,121 214,912 84,810
Research and development 1,445 2,449 3,499 5,711
Selling 2,860 2,993 6,058 7,524
General and administrative 13,273 15,924 35,631 37,292
Amortization of intangible assets and stock-based compensation 54 1,751 109 3,501
Impairment of long-lived assets 24 2,328 24 2,328
Restructuring 9,095 (361) 9,405 (9,224)
--------- -------- --------- ---------
Total operating expenses 137,300 61,205 269,638 131,942
--------- -------- --------- ---------
Operating loss (17,526) (17,461) (36,642) (43,421)
--------- -------- --------- ---------
Other income (expense):
Interest income 845 2,699 2,083 8,722
Interest (expense) recovery, net (25,725) 13,474 1,162 7,127
Other gains (losses), net 23,468 (17,886) (31,394) (25,746)
Equity in losses of affiliates, net (373) (1,144) (888) (13,393)
Minority interest 327 21 (1,980) (47)
--------- -------- --------- ---------
(1,458) (2,836) (31,017) (23,337)
Loss from continuing operations before income taxes and
extraordinary item (18,984) (20,297) (67,659) (66,758)
Income tax expense (benefit) 738 (1,794) 1,594 10,785
--------- -------- --------- ---------
Loss from continuing operations before extraordinary item (19,722) (18,503) (69,253) (77,543)
Discontinued operations, net of income taxes:
Loss from discontinued operations (163,544) (97,575) (207,597) (263,339)
Extraordinary gain on retirement of debt, net of income taxes -- 131,281 -- 131,281
--------- -------- --------- ---------
Net income (loss) (183,266) 15,203 (276,850) (209,601)
Preferred stock accretion -- (411) -- (2,301)
Gain on repurchase of Series C Convertible Preferred Stock -- 63,505 -- 63,505
--------- -------- --------- ---------
Net income (loss) available to common stockholders $(183,266) $ 78,297 $(276,850) $(148,397)
========= ======== ========= =========
Basic and diluted income (loss) per share available to common
stockholders:
Income (loss) from continuing operations before extraordinary
item $ (0.05) $ 0.12 $ (0.18) $ (0.04)
Loss from discontinued operations $ (0.42) $ (0.25) $ (0.53) $ (0.72)
Extraordinary gain on retirement of debt, net of income taxes $ -- $ 0.33 $ -- $ 0.36
--------- -------- --------- ---------
Net income (loss) available to common stockholders $ (0.47) $ 0.20 $ (0.71) $ (0.40)
========= ======== ========= =========
Shares used in computing basic income (loss) per share 393,064 383,845 392,873 367,560
--------- -------- --------- ---------
Shares used in computing diluted income (loss) per share 393,064 388,641 392,873 367,560
--------- -------- --------- ---------
See accompanying notes to interim unaudited condensed consolidated
financial statements
4
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
January 31,
----------------------------
2003 2002
------------ ------------
(in thousands)
Cash flows from operating activities of continuing operations:
Net loss $(276,850) $(209,601)
Loss from discontinued operations (207,597) (263,339)
--------- ---------
Income (loss) from continuing operations (69,253) 53,738
Adjustments to reconcile net loss to cash used for continuing operations:
Depreciation, amortization and impairment charges 6,220 14,880
Deferred income taxes - 12,380
Realization of cumulative translation adjustment 5,026 -
Non-operating losses, net 23,933 (126,052)
Equity in losses of affiliates 888 13,393
Minority interest (1,980) (47)
Changes in operating assets and liabilities, excluding effects from acquired and
divested subsidiaries:
Trade accounts receivable (22,292) 8,806
Prepaid expenses and other current assets 242 636
Inventories (3,453) 3,325
Accounts payable, accrued restructuring and expenses 19,500 (32)
Deferred revenues 462 (2,378)
Refundable and accrued income taxes, net 1,298 13,852
Other assets and liabilities 11,019 (9,818)
--------- ---------
Net cash used for operating activities of continuing operations (28,390) (17,317)
--------- ---------
Cash flows from investing activities of continuing operations:
Additions to property and equipment (6,046) (6,050)
Net proceeds from maturities of (purchases of) available-for-sale securities, net - 21,367
Proceeds from liquidation of stock investments 15,377 19,446
Cash impact of acquisitions and divestitures of subsidiaries, net (583) (1,539)
Net investments in affiliates 10,200 (4,077)
Other, net - 3,384
--------- ---------
Net cash provided by investing activities of continuing operations 18,948 32,531
--------- ---------
Cash flows from financing activities of continuing operations:
Net repayments of notes payable - (75,000)
Net repayments of long-term debt (160) (1,780)
Payment for retirement of Series C Convertible Preferred Stock - (100,301)
Net proceeds from issuance of common stock 324 793
--------- ---------
Net cash provided by (used for) financing activities of continuing operations 164 (176,288)
--------- ---------
Net cash used for discontinued operations (31,088) (136,851)
Net decrease in cash and cash equivalents (40,366) (297,925)
Cash and cash equivalents at beginning of period 215,078 619,590
--------- ---------
Cash and cash equivalents at end of period $ 174,712 $ 321,665
========= =========
See accompanying notes to interim unaudited condensed consolidated
financial statements
5
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by CMGI, Inc. (together with its consolidated subsidiaries, "CMGI" or
the "Company") in accordance with accounting principles generally accepted in
the United States of America ("US GAAP"). In the opinion of management, the
accompanying condensed 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 condensed consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended July 31, 2002 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, 2002. The results for the three and six-month periods
ended January 31, 2003 are not necessarily indicative of the results to be
expected for the full fiscal year. Certain prior year amounts in the condensed
consolidated financial statements have been reclassified in accordance with US
GAAP to conform to the current year presentation. Discontinued operations
reporting has been applied for certain of the Company's subsidiaries that have
been disposed of or are held for sale(See note F).
Marketable securities held by the Company which meet the criteria for
classification as trading securities are carried at fair value. Unrealized
holding gains and losses on securities classified as trading are recorded as a
component of "Other gains (losses), net" in the accompanying condensed
consolidated statements of operations.
B. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 applies to all business combinations that the
Company enters into after June 30, 2001, and eliminates the pooling-of-interests
method of accounting. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Under the new statements, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests in accordance with the statements. Other intangible
assets continue to be amortized over their useful lives. The Company adopted
SFAS No. 142 on August 1, 2002 (see note D).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses the accounting treatment for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The provisions of the statement apply to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, or normal operation of a
long-lived asset. The statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 on
August 1, 2002. This statement did not have a material effect on the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later. It
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This
Statement also amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The adoption of this Statement did not have a material impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue 94-3. The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the statement include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activity. The provisions of
this Statement are required to be applied to exit or disposal activities that
are initiated after December 31, 2002. The adoption of this statement did not
have a material effect on the Company's financial position or results of
operations.
6
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material effect on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
does not anticipate that adoption of SFAS No. 148 will have a material effect on
the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1,
2003, it also applies to VIEs in which an interest is acquired before February
1, 2003. The Company may apply the Interpretation prospectively, with a
cumulative effect adjustment as of July 1, 2003, or by restating previously
issued financial statements with a cumulative effect adjustment as of the
beginning of the first year restated. The Company is in the process of
evaluating the effects of applying Interpretation No. 46. Based on our
preliminary analysis, the Company does not anticipate that adoption of
Interpretation No. 46 will have a material effect on the Company's financial
position or results of operations.
C. OTHER GAINS (LOSSES), NET
The following table reflects the components of "Other gains (losses), net":
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------- ------------
(in thousands)
Gain on derivative and sale of hedged Yahoo!, Inc. common
stock $ -- $ -- $ -- $ 53,897
Gain (loss) on sales of marketable securities 7,417 (3,478) 7,417 (31,003)
Gain (loss) on mark-to-market adjustment for trading
security 24,687 2,885 (6,329) 2,885
Loss on sale of Equilibrium Technologies, Inc. -- -- (3,527) --
Loss on sale of Activate.Net Corporation -- -- -- (20,743)
Loss on impairment of marketable securities (187) (1,708) (387) (1,708)
Loss on divestiture of investment in Signatures SNI, Inc. -- -- (14,056) --
Loss on impairment of investments in affiliates (7,876) (15,488) (14,051) (27,016)
Other, net (573) (97) (461) (2,058)
------------ ----------- ------------- ------------
$23,468 $(17,886) $(31,394) $(25,746)
============ =========== ============= ============
During the three months ended January 31, 2003 the Company recorded a gain
of approximately $24.7 million on the mark-to-market adjustment of a trading
security (see note L). The Company also recorded impairment charges of
approximately $7.9 million for other-than-temporary declines in the carrying
value of certain investments in affiliates. These charges were primarily
associated with investments made by CMGI@Ventures IV, LLC. During the three
months ended January 31, 2003, the Company recorded a gain on the sale of
marketable securities of approximately $7.4 million from the proceeds received
in the acquisition of Vicinity by Microsoft.
During the three months ended January 31, 2002 the Company recorded
impairment charges of approximately $15.5 million for other-than-temporary
declines in the carrying value of certain investments in affiliates.
These charges were primarily associated with investments made by
CMGI@Ventures IV, LLC.
7
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the six months ended January 31, 2003, the Company recorded a loss
of approximately $6.3 million on the mark-to-market adjustment of a trading
security (see note L). The Company also recorded impairment charges of
approximately $14.1 million for other-than-temporary declines in the carrying
value of certain investments in affiliates. These charges were primarily
associated with investments made by CMGI@Ventures IV, LLC.
On November 6, 2002, the Company divested of its equity and debt interests
in Signatures SNI, Inc. ("Signatures"). In connection with this transaction the
Company recorded a pre-tax loss of approximately $14.1 million during the six
months ended January 31, 2003 (see note F).
On October 17, 2002, the Company sold its interests in its majority-owned
subsidiary Equilibrium Technologies, Inc. ("Equilibrium") to a group led by the
current management of Equilibrium and recorded a pre-tax loss of approximately
$3.5 million (see note F).
On January 2003, the Company recorded a gain on the sale of marketable
securities of approximately $7.4 million from the proceeds received in the
acquisition of Vicinity by Microsoft.
During the six months ended January 31, 2002, the Company sold marketable
securities for total proceeds of approximately $19.4 million and recorded a net
pre-tax loss of approximately $31.0 million on these sales. These sales
primarily consisted of approximately 7.1 million shares of Primedia, Inc. common
stock for proceeds of approximately $15.9 million, approximately 356,000 shares
of Marketing Services Group, Inc. common stock for total proceeds of
approximately $1.1 million and approximately 3.2 million shares of Divine, Inc.
(Divine) common stock for total proceeds of approximately $2.4 million.
On August 1, 2001, the Company settled the final tranche of its borrowing
arrangement that hedged a portion of the Company's investment in Yahoo!, Inc.
(Yahoo!) common stock. The Company delivered 581,499 shares of Yahoo! Common
stock and recognized a pre-tax gain of approximately $53.9 million.
During the six months ended January 31, 2002, the Company recorded
impairment charges of approximately $27.0 million for other-than-temporary
declines in the carrying value of certain investments in affiliates. These
charges were primarily associated with investments made by CMGI@Ventures IV,
LLC.
In September 2001, the Company completed the sale of its majority-owned
subsidiary, Activate.Net Corporation to Loudeye Technologies, Inc. and recorded
a pre-tax loss of approximately $20.7 million.
D. IMPAIRMENT OF LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE ASSETS
Through July 31, 2002, the Company recorded impairment charges as a result
of management's ongoing business reviews and impairment analysis performed under
its policy regarding impairment, utilizing the guidance in SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121). Where impairment indicators were identified,
management evaluated whether the projected undiscounted cash flows were
sufficient to cover the particular long-lived asset being reviewed. If the
undiscounted cash flows were insufficient, management then determined the amount
of the impairment charge by comparing the carrying value of long-lived assets to
their fair value. Management determined fair value of goodwill and certain other
intangible assets based on a combination of the discounted cash flow
methodology, which was based upon converting expected cash flows to present
value, and the market approach, which included analysis of market price
multiples of companies engaged in lines of business similar to the Company. The
market price multiples were selected and applied to the Company based on the
relative performance, future prospects and risk profile of the Company in
comparison to the guideline companies. Management predominantly utilized
third-party valuation reports in its determination of fair value. Management
predominantly determined fair value of other long-lived assets, such as property
and equipment, based on third-party valuation reports.
On August 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Under SFAS No. 144, the Company is
required to test certain long-lived assets or group of assets for recoverability
whenever events or changes in circumstances indicate that the Company may not be
able to recover the asset's carrying amount. SFAS No. 144 defines impairment as
the condition that exists when the carrying amount of a long-lived asset or
group exceeds its fair value. When events or changes in circumstances dictate an
impairment review of a long-lived asset or group, the Company will evaluate
recoverability by determining whether the undiscounted cash flows expected to
result from the use and eventual disposition of that asset or group cover the
carrying value at the evaluation date. If the undiscounted cash flows are not
sufficient to cover the carrying value, the Company will measure any impairment
loss as the excess of the carrying amount of the long-lived asset or group over
its fair value.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statement. Other intangible assets will
continue to be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Accordingly, the Company adopted
SFAS No. 142 on August 1, 2002. SFAS No. 142 requires the Company to evaluate
its existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Accordingly, the Company is required to reassess the useful lives and
residual
8
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
values of all identifiable intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments. In
addition, to the extent an intangible asset is then determined to have an
indefinite useful life, the Company is required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142.
Under the provisions of SFAS No. 142, the Company is required to perform
transitional goodwill impairment tests as of August 1, 2002. To accomplish this,
the Company must identify its reporting units and determine the carrying value
of each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS No. 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss resulting from the completion of the
first step of the transitional goodwill impairment testing will be recognized as
the cumulative effect of a change in accounting principle in the Company's
condensed consolidated statements of operations.
In accordance with the provisions of SFAS No. 142, the Company has
designated reporting units for purposes of assessing goodwill impairment. The
standard defines a reporting unit as the lowest level of an entity that is a
business and that can be distinguished, physically and operationally and for
internal reporting purposes, from the other activities, operations, and assets
of the entity. Based on the provisions of the standard, the Company has
determined that it has two reporting units for purposes of goodwill impairment
testing. Additionally, the Company's policy will be to perform its annual
impairment testing for all reporting units as of the fourth quarter of each
fiscal year.
Following the adoption of SFAS No. 142, the Company completed the first
step of the required transitional impairment test during the second quarter of
2003, based on the comparison of the fair value of the reporting unit with their
respective carrying values as of August 1, 2002. The Company concluded that
there was no impairment indicated as of August 1, 2002. As of August 1, 2002,
the Company ceased the amortization of goodwill.
The changes in the carrying amount of goodwill for the six months ended
January 31, 2003 are as follows:
Enterprise
eBusiness Software
and and
Fulfillment Services
Segment Segment Total
----------- ----------- ---------
(in thousands)
Balance as of July 31, 2002 $ 22,123 $ 2,218 $ 24,341
Goodwill written off related to sale
of subsidiary -- (2,218) (2,218)
----------- ----------- ---------
Balance as of January 31, 2003 $ 22,123 -- $ 22,123
=========== =========== =========
9
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of net income (loss) available to common stockholders before
goodwill amortization expense, for the three and six months ended January 31,
2003 and 2002, is as follows:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Loss from continuing operations before extraordinary item
as reported $ (19,722) $ (18,503) $ (69,253) $ (77,543)
Add back: goodwill amortization expense, net of tax -- 1,696 -- 3,392
---------- ---------- ---------- ----------
Adjusted loss from continuing operations before
extraordinary item $ (19,722) $ (16,807) $ (69,253) $ (74,151)
========== ========== ========== ==========
Net income (loss) available to common stockholders as
reported $(183,266) $ 78,297 $(276,850) $(148,397)
Add back: goodwill amortization expense, net of tax -- 1,696 -- 3,392
---------- ---------- ---------- ----------
Adjusted net income (loss) available to common stockholders $(183,266) $ 79,993 $(276,850) $(145,005)
========== ========== ========== ==========
Basic income (loss) per share from continuing operations
before extraordinary item as reported $ (0.05) $ (0.05) $ (0.18) $ (0.21)
Add back: goodwill amortization expense, net of tax -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Adjusted basic income (loss) per share from continuing
operations before extraordinary item as reported $ (0.05) $ (0.04) $ (0.18) $ (0.20)
========== ========== ========== ==========
Diluted income (loss) per share from continuing operations
before extraordinary item as reported $ (0.05) $ (0.05) $ (0.18) $ (0.21)
Add back: goodwill amortization expense, net of tax -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Adjusted diluted income (loss) per share from continuing
operations before extraordinary item as reported $ (0.05) $ (0.04) $ (0.18) $ (0.20)
========== ========== ========== ==========
Basic income (loss) per share available to
common stockholders as reported $ (0.47) $ 0.20 $ (0.71) $ (0.40)
Add back: goodwill amortization expense, net of tax -- 0.01 -- --
---------- ---------- ---------- ----------
Adjusted basic income (loss) per share available to
common stockholders $ (0.47) $ 0.21 $ (0.71) $ (0.40)
========== ========== ========== ==========
Diluted income (loss) per share available to
common stockholders as reported $ (0.47) $ 0.20 $ (0.71) $ (0.40)
Add back: goodwill amortization expense, net of tax -- 0.01 -- --
---------- ---------- ---------- ----------
Adjusted diluted income (loss) per share available to
common stockholders $ (0.47) $ 0.21 $ (0.71) $ (0.40)
========== ========== ========== ==========
E. RESTRUCTURING CHARGES
The following tables summarize the activity in the restructuring accrual from
July 31, 2002 through January 31, 2003:
Employee
Related Contractual Asset
Expenses Obligations Impairments Total
------------- ------------ -------------- ---------
(in thousands)
Accrued restructuring balance at
July 31, 2002 $ 421 $ 23,362 $ -- $ 23,783
Q1 Restructuring 164 146 -- 310
Cash payments (168) (8,131) -- (8,299)
Non-cash charges -- -- -- --
10
Employee
Related Contractual Asset
Expenses Obligations Impairments Total
------------- ------------ -------------- -------
(in thousands)
Accrued restructuring balance at
October 31, 2002 417 15,377 -- 15,794
Q2 Restructuring 96 3,830 6,256 10,182
Restructuring adjustments -- (1,087) -- (1,087)
Cash payments (513) (5,441) -- (5,954)
Non-cash charges -- -- (6,256) (6,256)
------------- ------------ -------------- ---------
Accrued restructuring balance at
January 31, 2003 $ -- $ 12,679 $ -- $ 12,679
============= ============ ============== =========
11
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company anticipates that the remaining contractual obligation
restructuring accruals will be paid by February 2007. The remaining contractual
obligations primarily relate to facilities and equipment lease obligations.
The net restructuring charges (benefits) for the three and six months ended
January 31, 2003 and 2002, respectively, would have been allocated as follows
had the Company recorded the expense and adjustments within the functional
department of the restructured activities:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------------------------------
2003 2002 2003 2002
------- --------- ----------- -------------
(in thousands)
Cost of revenue $ -- $ (2,269) $ -- $(13,503)
Research and development 30 75 48 112
Selling 14 206 90 420
General and administrative 9,051 1,627 9,267 3,747
------- --------- ----------- -------------
$ 9,095 $ (361) $ 9,405 $ (9,224)
======= ========= =========== =============
The Company's restructuring initiatives during the six months ended January
31, 2003 and 2002, respectively, involved strategic decisions to exit certain
businesses and to reposition certain on-going businesses of the Company.
Restructuring charges consisted primarily of contract terminations, severance
charges and equipment charges incurred as a result of the cessation of
operations of certain subsidiaries and actions taken at several remaining
subsidiaries and at the Company's corporate headquarters to increase operational
efficiencies, improve margins and further reduce expenses. Severance charges
included employee termination costs as a result of workforce reductions.
Employees affected by the restructurings were notified both through direct
personal contact and by written notification. The contract terminations
primarily consisted of costs to exit facility and equipment leases and to
terminate bandwidth and other vendor contracts. The asset impairment charges
primarily related to the write-off of property and equipment.
During the three months ended January 31, 2003, the Company recorded net
restructuring charges of approximately $9.1 million. Of this amount, $5.0
million related to the recognition of the cumulative translation component of
equity as a result of the substantial completion of the shutdown of the
Company's European operations. The Company also recorded $1.2 million of
restructuring charges related to the write-off of certain software related
costs. In addition, the Company recorded additional facility lease obligation
charges related to vacant office space in San Francisco, CA.
Also, during the three months ended January 31, 2003, the Company settled
certain facility lease obligations related to its European operations for
amounts less than originally anticipated and recorded a reduction of previously
recorded restructuring estimates of approximately $1.1 million.
During the three months ended October 31, 2002, the Company recorded total
restructuring charges of approximately $0.3 million. Of this amount, $0.15
million related to severance costs associated with a workforce reduction at the
Company's majority owned subsidiary ProvisionSoft. Additionally, the Company
recorded a restructuring charge of $0.16 million related to facility and
equipment lease obligations that the Company assumed in connection with its sale
of Equilibrium.
During the three months ended January 31, 2002, the Company recorded a net
restructuring benefit of approximately ($0.3) million primarily at its corporate
headquarters and MyWay. The restructuring charge incurred at the Company's
headquarters, of approximately $2.9 million, related to severance costs from the
termination of approximately 70 employees as well as the costs for the future
rental obligations associated with office space located in San Francisco, CA.
MyWay incurred restructuring expenses of $0.4 million related to the termination
of certain customer and vendor contracts in connection with the cessation of its
operations.
12
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also during the three months ended January 31, 2002, the Company settled
certain vendor and customer contractual obligations for amounts less than
originally anticipated and recorded a reduction of previously recorded
restructuring estimates. These restructuring adjustments related to settlements
negotiated by NaviPath and MyWay with their respective customers and vendors for
amounts less than originally estimated.
During the three months ended October 31, 2001 the Company recorded a net
restructuring benefit of approximately ($8.9) million. Of this amount, MyWay
incurred approximately $5.9 million in restructuring charges primarily related
to the write-off of property and equipment, as well as the termination of
customer and vendor contracts. NaviPath incurred restructuring charges of
approximately $4.1 million that primarily related to severance costs, legal, and
other professional fees incurred in connection with the cessation of its
operations. The Company also recorded approximately $2.2 million in
restructuring charges related to the write-off of property and equipment, and
costs to exit facility leases in Europe.
Also, during the three months ended October 31, 2001, the Company settled
certain vendor and customer contractual obligations for amounts less than
originally estimated. As a result, the Company recorded a restructuring
adjustment of approximately $21.1 million to the accrued restructuring balance
at July 31, 2001, primarily related to payments by NaviPath to terminate
purchase commitments and service contracts for amounts less than originally
estimated.
F. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Under the provisions of SFAS No.
144, certain disposal activities that previously did not qualify for
discontinued operations accounting will now be required to be reported as
discontinued operations. SFAS No. 144 requires that a disposal of a component of
an entity comprising operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes from the rest
of the entity, shall be reported as discontinued operations if (a) the
operations of the component have been or will be eliminated from the ongoing
operations of the entity as a result of the disposition activity, and (b) the
entity will not have any significant continuing involvement in the operations of
the component after the disposal transaction.
During the quarter ended January 31, 2003, the Company determined to divest
of uBid either through the sale of its equity interests, or substantially all of
uBid's assets and liabilities. It is expected that the Company will sign a
definitive agreement in the near future.
On March 7, 2003, the Company sold all of its equity ownership interests in
Tallan, Inc. to a group (the "Tallan Buyer") led by management of Tallan. Under
the terms of the Transaction Agreement, the Company sold to the Tallan Buyer
100% of the issued and outstanding shares of Tallan. In consideration thereof,
the Company received, among other things, (i) approximately $7.1 million in
cash, (ii) a senior secured interest free promissory note due in March 2008 in
the principal amount of $3.0 million made by the Tallan Buyer, and (iii) a
warrant for the purchase of 9.0% of the issued and outstanding shares of Tallan
common stock, as of the earlier of the date of first exercise or merger or sale
of Tallan (on a fully diluted basis, giving effect to the exercise or conversion
of the Tallan) at an exercise price of $.01 per share. In addition, Tallan
agreed to pay to the Company up to an additional $5.0 million in earnout
payments commencing in fiscal 2004 based on Tallan's acheivement of certain
revenue thresholds.
On February 28, 2003, the Company sold all of its equity ownership interest
in Yesmail, Inc. for approximately $5.0 million in cash, subject to certain
adjustments and customary escrow arrangements.
On February 18, 2003, Overture Services, Inc. ("Overture"), and AltaVista
Company, a majority-owned operating company of CMGI ("AltaVista"), signed a
definitive agreement under which Overture will acquire AltaVista's business for
approximately $140 million in cash and stock. Under the terms of the agreement,
Overture will pay AltaVista in Overture common stock valued at approximately $80
million (provided that Overture will not be required to issue more than
4,274,670
13
shares or less than 3,001,364 shares), plus $60 million in cash, and will assume
certain of AltaVista's liabilities. The transaction, which is subject to
customary approvals and certain other conditions, is expected to close in April
2003.
The Company met the criteria specified in SFAS No. 144 in order to classify
each of the above listed subsidiaries (disposal groups) as held for sale at
January 31, 2003. With respect to each of these subsidiaries at January 31,
2003, management of the Company and the Board of Directors committed to a plan
to sell such entity, such entity was available for immediate sale, an active
program was initiated to locate a buyer, the Company believed that the sale of
such entity was probable and would be completed within one year. Additionally,
the Company was actively marketing each entity for sale at prices that were
reasonable in relation to its current fair value, and the actions required to
complete each plan indicated that it was unlikely that any of the plans would
change significantly. Therefore, for all periods presented, uBid, which was
previously included in the eBusiness and Fulfillment segment, and Tallan,
Yesmail and AltaVista, which were previously included in the Enterprise Software
and Services segment, have been classified as held-for-sale at January 31, 2003,
and have been reported as discontinued operations in the condensed consolidated
financial statements for all periods presented. The Company also plans to divest
of its interests in ProvisionSoft. However, the held for sale criteria outlined
above were not met by January 31, 2003.
On September 9, 2002, the Company sold all of its equity and debt ownership
interests in Engage. Under the terms of the Transaction Agreement, CMGI
transferred to Engage approximately 148.4 million shares of common stock of
Engage held by CMGI, representing approximately 76% of the issued and
outstanding shares of Engage, and cancelled approximately $60 million of debt,
including all convertible debt, owed to CMGI by Engage. In consideration of the
equity transfer and debt cancellation, Engage, among other things, (i) paid to
CMGI $2.5 million in cash, (ii) agreed to pay to CMGI up to an additional $6.0
million, comprised of a senior secured promissory note due in September 2006 and
earnout payments commencing in fiscal year 2004, and (iii) issued to CMGI a
warrant for the purchase of up to 9.9% of the issued and outstanding shares of
Engage common stock, as of the earlier of the date of first exercise or a merger
or sale of Engage (on a fully diluted basis, giving effect to the exercise or
conversion of all then outstanding convertible securities of Engage other than
stock options issued to employees and directors of Engage), at an exercise price
of $.048 per share. As a result of the divestiture, Engage, which was previously
included within the Enterprise Software and Services segment, has been accounted
for as a discontinued operation in accordance with the provisions of SFAS No.
144. Accordingly, Engage's operating results have been segregated from
continuing operations and have been reported as discontinued operations in the
accompanying condensed consolidated balance sheets and statements of operations
and cash flows, and related notes to the condensed consolidated financial
statements for all periods presented. The Company has recorded a loss on the
disposal of Engage of approximately $16.6 million (which included a $2.8 million
loss from discontinued operations and a $13.8 million loss on the sale).
On June 12, 2002 (the measurement date), CMGI's board of directors
authorized the divestiture of the Company's equity and debt ownership interests
in its subsidiary NaviSite. On September 11, 2002, the Company completed the
sale of all its equity and debt ownership interests in its subsidiary, NaviSite
to ClearBlue Technologies, Inc. ("ClearBlue"). In consideration thereof, the
Company received, among other things, 131,579 shares of common stock of
ClearBlue. On the measurement date, NaviSite comprised more than 90% of both the
total assets and operating losses of the Managed Application Services segment
and NaviSite's product offering represented both a major line of business and a
distinct class of customer. As a result, during the fourth quarter of the
Company's fiscal year ended July 31, 2002, the Company accounted for its
divestiture of NaviSite as discontinued operations in accordance with the
provisions of APB No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". At July 31, 2002, the Company
expected to record a net gain in the first quarter of fiscal year 2003 on the
sale of its debt and equity ownership interests in NaviSite. The estimated gain
on the sale of NaviSite included the results of operations from the measurement
date through the date of disposal. The results of operations of NaviSite from
the measurement date through July 31, 2002 were deferred and reflected as
deferred loss on disposal of subsidiary on the condensed consolidated balance
sheet at July 31, 2002. NaviSite's operating results have been segregated from
continuing operations and have been reported as discontinued operations in the
accompanying condensed consolidated balance sheets and statements of operations
and cash flows, and related notes to the condensed consolidated financial
statements for all periods presented. During the six months ended January 31,
2003, the Company recorded a gain of approximately $2.3 million on the disposal
of NaviSite. In December 2002, the Company received 213,437 shares of NaviSite
Common Stock upon distribution from ClearBlue.
Summarized financial information for the discontinued operations of
Yesmail, AltaVista, Tallan, uBid, Engage and NaviSite are as follows:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------------------------------------------
2003 2002 2003 2002
----------- ------------ ---------- -------------
(in thousands)
Results of operations:
Net revenue $ 61,321 $ 161,268 $ 143,525 $ 323,936
Total expenses 224,865 258,843 336,782 587,275
--------- --------- --------- ---------
Net loss (163,544) (97,575) (193,257) (263,339)
Gain on sale of NaviSite -- -- 2,291 --
Loss on sale of Engage -- -- (16,631) --
--------- --------- --------- ---------
Net loss from discontinued operations $(163,544) $ (97,575) $(207,597) $(263,339)
========= ========= ========= =========
14
January 31, 2003 July 31, 2002
---------------- -------------
(in thousands)
Financial position:
Current assets $ 59,196 $132,609
Property and equipment, net 14,650 34,351
Other assets 1,392 155,098
Total liabilities (54,792) (155,489)
-------- --------
Net assets of discontinued operations $ 20,446 $166,569
======== ========
On October 17, 2002, the Company sold all of its equity ownership interests
in Equilibrium to a group (the "Buyer") led by the management of Equilibrium.
Under the terms of the agreement, the Company sold to the Buyer 100% of the
issued and outstanding shares of Equilibrium. In consideration thereof, the
Company received, among other things, (i) a senior secured promissory note due
in October 2005 in the principal amount of $1.5 million, (ii) a warrant for the
purchase of 19.9% of the issued and outstanding shares of Equilibrium common
stock, as of the earlier of the date of first exercise or a merger or sale of
Equilibrium (on a fully diluted basis, giving effect to the exercise or
conversion of all then outstanding convertible securities of Equilibrium), at an
exercise price of $.01 per share, and (iii) a royalty-free, perpetual worldwide
license to use Equilibrium's MediaRich software. As a result of the sale, the
Company recorded a pre-tax loss of approximately $3.5 million. As a result of
the terms of the warrant received, the disposition of Equilibrium does not
qualify for discontinued operations reporting in accordance with SFAS No. 144.
On November 6, 2002, the Company entered into a Recapitalization Agreement
with Signatures SNI, Inc. ("Signatures") in which Signatures paid the Company a
total of $8.0 million to: (i) redeem all of the capital stock held by the
Company; (ii) retire a portion of the outstanding principal balance on the
promissory note held by the Company; and (iii) retire all of the outstanding
accrued interest relating to the promissory note. In addition, the Company
contributed the remaining promissory note principal balance to the capital of
Signatures and cancelled the outstanding warrants. As a result of this
transaction, during the six months ended January 31, 2003, the Company recorded
a pre-tax loss of approximately $14.1 million.
G. SEGMENT INFORMATION
Based on the information provided to the Company's chief operating
decision-maker for purposes of making decisions about allocating resources and
assessing performance, the Company's operations have been classified in two
operating segments offering distinctive products and services that are marketed
through different channels: Enterprise Software and Services and eBusiness and
Fulfillment.
In addition to its two current operating segments, the Company continues to
report a Portals segment (that consists of the operations of MyWay and iCAST)
and a Managed Application Services segment (that consists of the operations of
NaviPath, ExchangePath, 1stUp, and Activate), as these entities do not meet the
aggregation criteria under SFAS No. 131 with respect to the Company's current
reporting segments. The historical results of these companies will continue to
be reported in the Portals and
15
Managed Application Services segments, respectively, as will any residual
results from operations that exist through the cessation of operations of these
entities, each of which are in varying stages of being wound down.
Management evaluates segment performance based on segment net revenue,
operating loss and "pro forma operating income (loss)", which is defined as the
operating income (loss) excluding net charges related to in-process research and
development, depreciation, long-lived asset impairment, restructuring and
amortization of intangible assets and stock-based compensation.
"Other" includes certain corporate infrastructure expenses, which are not
identifiable to the operations of the Company's operating business segments.
Summarized financial information of the Company's continuing operations by
business segment is as follows:
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ -------------------------------
2003 2002 2003 2002
----------- ----------- ------------ ------------
(in thousands)
Net revenue:
Enterprise Software and Services $ - $ 393 $ 227 $ 704
eBusiness and Fulfillment 119,501 39,478 232,360 75,678
Managed Application Services 273 361 409 5,814
Portals (formerly Search and Portals) - 3,512 - 6,325
--------- --------- --------- ---------
$ 119,774 $ 43,744 $ 232,996 $ 88,521
========= ========= ========= =========
Operating income (loss):
Enterprise Software and Services $ (2,522) $ (4,400) $ (6,703) $ (9,295)
eBusiness and Fulfillment 1,761 (714) 2,043 (950)
Managed Application Services 264 1,300 400 2,109
Portals (formerly Search and Portals) 869 1,500 869 (6,296)
Other (17,898) (15,147) (33,251) (28,989)
--------- --------- --------- ---------
$ (17,526) $ (17,461) $ (36,642) $ (43,421)
========= ========= ========= =========
Pro forma operating income (loss):
Enterprise Software and Services $ (2,530) $ (4,172) $ (6,449) $ (8,229)
eBusiness and Fulfillment 3,149 1,077 4,890 2,331
Managed Application Services 288 500 424 (13,112)
Portals (formerly Search and Portals) 963 913 963 (293)
Other (6,991) (8,595) (20,845) (18,462)
--------- --------- --------- ---------
$ (5,121) $ (10,277) $ (21,017) $ (37,765)
========= ========= ========= =========
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ -------------------------------
2003 2002 2003 2002
----------- ----------- ------------ ------------
(in thousands)
GAAP operating loss $ (17,526) $ (17,461) $ (36,642) $ (43,421)
Adjustments:
Depreciation 3,232 3,466 6,087 9,051
Impairment of long-lived assets 24 2,328 24 2,328
Restructuring (adjustments), net 9,095 (361) 9,405 (9,224)
Amortization of intangible assets and
stock-based compensation 54 1,751 109 3,501
--------- --------- --------- ---------
Pro forma operating loss $ (5,121) $ (10,277) $ (21,017) $ (37,765)
========= ========= ========= =========
16
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents is included in the calculation of diluted earnings per share only
when the effect of the inclusion would be dilutive. Approximately 2.9 million
weighted average common stock equivalents were excluded from the denominator in
the diluted loss per share calculation for the three months ended January 31,
2003, as their inclusion would be antidilutive. Approximately 2.9 million and
4.6 million weighted average common stock equivalents were excluded from the
denominator in the diluted loss per share calculation for the six months ended
January 31, 2003 and 2002, respectively, as their inclusion would be
antidilutive.
Approximately 9.8 million and 9.6 million shares representing the weighted
average effect of assumed conversion of Series C Convertible Preferred Stock
were excluded from the denominator in the diluted loss per share calculation for
the three and six months ended January 31, 2002, respectively. These shares were
repurchased in November 2001 (see note L).
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss) the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial for the three and six months ended
January 31, 2003 and 2002, respectively.
I. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of income taxes, are as
follows:
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) $(183,266) $ 15,203 $(276,850) $(209,601)
Net unrealized holding gain (loss) arising during
the period (1,852) 6,113 3,991 (27,987)
Reclassification adjustment for net realized
(gains) losses included in net income (loss) (4,333) 3,489 (4,133) 13,044
--------- --------- --------- ---------
(6,185) 9,602 (142) (14,943)
--------- --------- --------- ---------
Net unrealized foreign currency translation
adjustment arising during the period (5,090) - (5,174) -
Reclassification adjustment for foreign currency
translation adjustment included in net income (loss) 5,040 - 5,040 -
--------- --------- --------- ---------
(50) - (134) -
--------- --------- --------- ---------
Comprehensive income (loss) $(189,501) $ 24,805 $(277,126) $(224,544)
========= ========= ========= =========
The components of accumulated other comprehensive income (loss) as of January
31, 2003 and July 31, 2002 are as follows:
January 31, January 31,
2003 2002
---------- ----------
Net unrealized holding gains $ 637 $ 779
Cumulative foreign currency translation adjustment (134) -
---------- ----------
$ 503 $ 779
========== ==========
J. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
Six Months Ended
January 31,
---------------------------
2003 2002
---------- ----------
(in thousands)
Cash paid during the period for:
Interest $ 155 $ 755
------- -------
Income taxes $ 130 $ 772
------- -------
Cash received during the period for:
Federal income tax refund $ -- $13,975
------- -------
During the six months ended January 31, 2003 significant non-cash financing
activities included the following:
In December 2002, the Company fulfilled its obligation to deliver
approximately 448.3 million shares of PCCW stock to the Holders (See note L).
This obligation had been classified as notes payable on the Company's condensed
consolidated balance sheet at July 31, 2002.
17
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the six months ended January 31, 2002, significant non-cash
investing activities included the following transactions:
In August 2001, the Company settled the final tranche of the borrowing
arrangement that hedged a portion of the Company's investment in the common
stock of Yahoo! through the delivery of 581,499 shares of Yahoo! common stock.
In August 2001, the Company issued approximately 5.4 million shares of its
common stock as payment for the first quarter fiscal 2002 interest on the Compaq
Computer Corporation (Compaq), now Hewlett-Packard Company (HP), note payable.
In October 2001, the Company's affiliate, CMG@Ventures I, LLC, distributed
approximately 1.7 million shares of Terra Networks, S.A. to certain of its
profit members. In November 2001, the company's affiliates, CMG@Ventures I, LLC
and CMG@Ventures II, LLC, distributed the following shares to certain of their
respective profit members: approximately 1.2 million shares of Terra Networks
stock, approximately 574,000 shares of Yahoo! common stock, approximately
257,000 shares of Vicinity Corporation common stock, approximately 178,000
shares of Kana Software, Inc. common stock, approximately 106,000 shares of
NexPrise common stock, approximately 80,000 shares of Hollywood Entertainment
common stock, approximately 66,000 shares of Critical Path, Inc. common stock,
approximately 12,000 shares of PTEK Holdings, Inc. common stock and
approximately 3,000 shares of MarchFirst, Inc. common stock. Certain portions of
these distributions were made to David Wetherell, CMGI's Chairman and former
Chief Executive Officer, in his capacity as a profit member of CMG@Ventures I,
LLC and CMG@Ventures II, LLC. These distributions resulted in a reduction in
"Other assets" and "Minority interest" in the accompanying condensed
consolidated balance sheets.
In November 2001, the Company retired its $220.0 million in aggregate face
amount of notes payable due to HP (See Note M).
Also in November 2001, the Company repurchased all of the outstanding
shares of its Series C Convertible Preferred Stock (see Note L).
K. INVENTORIES
Inventories at January 31, 2003 and July 31, 2002 consisted of the
following:
January 31, 2003 July 31, 2002
---------------- -------------
(in thousands)
Raw Materials $24,660 $24,276
Work-in-process 70 104
Finished Goods 10,830 7,797
------- -------
$35,560 $32,177
======= =======
L. RETIREMENT OF SERIES C CONVERTIBLE PREFERRED STOCK
On June 29, 1999, CMGI completed a $375 million private placement of
375,000 shares of newly issued Series C Redeemable, Convertible Preferred Stock
(Series C Preferred Stock). Each share of Series C Preferred Stock had a stated
value of $1,000 per share. The Company paid a semi-annual dividend of 2% per
annum, in arrears, on June 30 and December 30 of each year at the Company's
option, in cash or through an adjustment to the liquidation preference of the
Series C Preferred Stock. The Series C Preferred Stock was redeemable at the
option of the holders upon the occurrence of certain events.
In November 2001, the Company repurchased all of the outstanding shares of
its Series C Convertible Preferred Stock pursuant to privately negotiated stock
exchange agreements with the holders of the Series C Preferred Stock (the
"Holders"). Under these agreements, the Company repurchased all of the
outstanding shares of its Series C Preferred Stock for aggregate consideration
consisting of approximately $100.3 million in cash, approximately 34.7 million
shares of the Company's common stock, and an obligation to deliver, no later
than December 2, 2002, approximately 448.3 million shares of PCCW stock.
In addition, due to the delayed delivery obligation with respect to the
PCCW shares, the Company agreed to make cash payments to the Holders, on the
dates and in the aggregate amounts as follows: approximately $3.7 million on
February 19, 2002, approximately $3.5 million on May 17, 2002, approximately
$3.8 million on August 19, 2002, approximately $3.7 million on November 19, 2002
and approximately $0.5 million on December 2, 2002. The obligation to make
payments would cease upon delivery of the PCCW shares and any payment due for
the period during which the PCCW shares are delivered to the Holders would be
reduced on a pro rata basis.
18
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying value of the consideration exchanged approximated fair market
value at the date of the transaction. As a result, in November 2001, the Company
reclassified its investment in PCCW shares from "Other assets" to "Trading
security"in accordance with SFAS No. 115, and recorded the liability related to
the obligation to deliver the PCCW stock as a current note payable, both of
which were carried at market value. Changes in the fair value of the PCCW stock
and the note payable were recorded in the condensed consolidated statements of
operations as Other gains (losses), net and as adjustments to interest expense,
respectively. The fair market value adjustment of the note payable for the six
months ended January 31, 2003 was $6.3 million, and resulted in a $6.3 million
decrease to interest expense, which was offset by a loss of $6.3 million on the
fair value adjustment of the trading security which was included in Other gains
(losses), net.
On November 19, 2002 and December 2, 2002, respectively, the Company made
its final two cash interest payments to the Holders. In addition, on December 2,
2002, the Company fulfilled its obligation to deliver approximately 448.3
million shares of PCCW stock to the Holders. No gain or loss was recognized upon
settlement.
M. Agreements with Hewlett-Packard Company
In November 2001, Hewlett-Packard, a significant stockholder of the Company
(HP), agreed to deem the Company's $220.0 million in aggregate face amount of
notes payable, plus the accrued interest thereon, paid in full in exchange for
$75.0 million in cash, approximately 4.5 million shares of CMGI common stock and
CMGI's 49% ownership interest in its affiliate, B2E Solutions, LLC, of which HP
had previously owned the remaining 51%. As a result, the Company recorded an
extraordinary gain of approximately $133.1 million related to the extinguishment
of the Company's $220.0 million in face amounts notes payable to HP. The gain
was calculated as the difference between the carrying value of the notes payable
plus accrued interest thereon, less the carrying value of the consideration
exchanged. The carrying value of the consideration approximated fair market
value at the date of the transaction.
19
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
N. CONTINGENCIES
In December 1999, Neil Braun, a former officer of iCAST Corporation, a
wholly owned subsidiary of the Company ("iCAST"), filed a complaint in United
States District Court, Southern District of New York naming the Company, iCAST
and David S. Wetherell as defendants. In the complaint, Mr. Braun alleged breach
of contract regarding his termination from iCAST and claimed that he was
entitled to acceleration of options to purchase CMGI common stock and iCAST
common stock, upon his termination, under contract and promissory estoppel
principles. Mr. Braun also claimed that, under quantum meruit principles, he was
entitled to lost compensation. Mr. Braun sought damages of approximately $50
million and requested specific performance of the acceleration and exercise of
options. In August 2001, the Court (i) granted summary judgment dismissing Mr.
Wetherell as a defendant and (ii) granted summary judgment, disposing of Mr.
Braun's contract claim. In February 2002, the Court granted summary judgment
disposing of Mr. Braun's promissory estoppel claim. Trial on the quantum meruit
claim was held in March 2002 and the jury returned a verdict in favor of Mr.
Braun and against the Company in the amount of $113,482.24. As to iCAST, the
jury found that Mr. Braun had not proven his claim. The Company filed a motion
for directed verdict, which motion sought to set aside the jury verdict against
the Company. Such motion was denied. In May 2002, Mr. Braun appealed the Court's
dismissal of his contract and promissory estoppel claims against iCAST and the
Company. On February 11, 2003, the United States Court of Appeals for the Second
Circuit heard arguments on the appeal and took the case under advisement. No
decision on the appeal has been received.
In August 2001, Jeffrey Black, a former employee of AltaVista, filed a
complaint in Superior Court of the State of California (Santa Clara County) in
his individual capacity as well as in his capacity as a trustee of two family
trusts against the Company and AltaVista alleging certain claims arising out of
the termination of Mr. Black's employment with AltaVista. As set forth in the
complaint, Mr. Black is seeking monetary damages in excess of $70 million. In
March 2002, the court ordered the entire case to binding arbitration in
California. In June 2002, Mr. Black petitioned the California Court of Appeal
for a writ prohibiting enforcement of the order compelling arbitration of his
cause of action for wrongful termination in violation of public policy. In July
2002, the Court of Appeal denied Mr. Black's petition. In August 2002, Mr. Black
submitted the matter to the American Arbitration Association. An arbitrator was
appointed in January 2003 and an arbitration hearing is scheduled for August
2003. The Company and AltaVista each believes that these claims are without
merit and plans to vigorously defend against these claims.
On January 28, 2002, Mark Nutritionals, Inc. ("MNI") filed suit against
AltaVista in the United States District Court for the Western District of Texas,
San Antonio Division. The claims against AltaVista include unfair competition
and trademark infringement and dilution, under both federal law and the laws of
the State of Texas. MNI is seeking compensatory damages in the amount of $10.0
million and punitive damages. AltaVista believes that these claims are without
merit and plans to vigorously defend against these claims. AltaVista filed its
answer on March 1, 2002, denying the allegations. MNI has filed for Chapter 11
bankruptcy protection. AltaVista is entitled to indemnification by a third party
with respect to this matter.
On April 16, 2002, NCR Corporation filed a complaint in the United States
District Court for the Northern District of Illinois against uBid. The complaint
alleges that uBid has infringed four patents held by NCR and seeks unspecified
monetary damages and injunctive relief. On May 28, 2002, uBid filed its answer
to the complaint, denying the allegations and asserting counterclaims against
NCR. On December 5, 2002, NCR amended the complaint to add four additional
patents. On December 20, 2002, uBid filed its answer to the amended complaint,
denying the allegations and asserting counterclaims against NCR. On January 30,
2003, the parties agreed to settle this matter on mutually agreeable terms. The
Stipulation of Dismissal was filed on February 11, 2003 and was entered by the
Court on March 4, 2003.
The Company and its subsidiaries are from time-to-time subject to other
legal proceedings and claims which arise in the ordinary course of its business.
In the opinion of management, the amount of ultimate liability with respect to
these actions will not materially affect the financial position or results of
operations of the Company.
20
ITEM 2. 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 and the risks discussed in the
Company's other filings with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Basis of Presentation
The Company reports two current operating segments: (i) eBusiness and
Fulfillment, and (ii) Enterprise Software and Services. As of January 31, 2003,
ProvisionSoft was the only remaining subsidiary with continuing operations in
the Enterprise Software and Services segment. The Company has announced its
plans to divest of its interests in ProvisionSoft in the near future. Upon
completion of the disposition of its interests in ProvisionSoft, the Company
expects to experience declines in research and development expenses, selling
expenses, and general and administrative expenses within the Enterprise Software
and Services segment. The Other segment represents certain corporate cash and
cash equivalents, available-for-sale and trading securities, certain other
assets and liabilities, and marketing and administrative expenses and the
Company's venture capital affiliates.
In addition to its two current operating segments, the Company continues to
report a Portals segment (that consists of the operations of MyWay and iCAST)
and a Managed Application Services segment (that consists of the operations of
NaviPath, ExchangePath, 1stUp, and Activate), as these entities do not meet the
aggregation criteria under SFAS No. 131 with respect to the Company's current
reporting segments.The historical results of these companies will continue to be
reported in the Portals and Managed Application Services segments, respectively,
as will any residual results from operations that exist through the cessation of
operations.
On September 9, 2002, the Company sold all of its equity and debt ownership
interests in Engage. On September 11, 2002, the Company sold all of its equity
and debt ownership interests in NaviSite, pursuant to a plan approved on June
12, 2002. On February 18, 2003, Overture and AltaVista signed a definitive
agreement under which Overture will acquire AltaVista's business for
approximately $140 million in cash and stock, and will assume certain of
AltaVista's liabilities. Under the terms of the agreement, Overture will pay
AltaVista in Overture common stock valued at approximately $80 million (provided
that Overture will not be required to issue more than 4,274,670 shares or less
than 3,001,364 shares), plus $60 million in cash, and will assume certain of
AltaVista's liabilities. The transaction, which is subject to customary
approvals and certain other conditions, is expected to close in April 2003. On
February 28, 2003, the Company sold all of its equity ownership interests in
Yesmail, Inc. On March 7, 2003, the Company sold all of its equity ownership
interests in Tallan, Inc.
21
During the quarter ended January 31, 2003, the Company determined to divest
of uBid either through the sale of equity interests or substantially all of
uBid's assets and liabilities. It is expected that the Company will sign a
definitive agreement in the near future.
As a result, for all periods presented, Engage, AltaVista, Yesmail and
Tallan, which were previously included within the Enterprise Software and
Services segment, uBid, which was previously included within the eBusiness and
Fulfillment segment, and NaviSite, which was previously included within the
Managed Application Services segment, have been accounted for as discontinued
operations. Accordingly, the assets, liabilities and operating results of these
companies have been segregated from continuing operations and reported as
discontinued operations in the accompanying condensed consolidated balance sheet
and statements of operations and cash flows, and related notes to the condensed
consolidated financial statements for all periods presented.
Certain amounts for prior periods in the accompanying condensed
consolidated financial statements, and in the discussion below, have been
reclassified to conform to current period presentations.
In accordance with accounting principles generally accepted in the United
States of America, all significant intercompany transactions and balances have
been eliminated in consolidation. Accordingly, segment results reported by the
Company exclude the effect of transactions between the Company's subsidiaries.
22
Results of Operations
Three months ended January 31, 2003 compared to the three months ended
January 31, 2002
Net Revenue:
Three Months Three Months As a % of
Ended As a % of Ended Total
January 31, Total Net January 31, Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ ---------- -------- --------
(in thousands)
Enterprise Software and Services $ -- -- $ 393 1% $ (393) (100)%
eBusiness and Fulfillment 119,501 100% 39,478 90% 80,023 203%
Managed Application Services 273 -- 361 1% (88) (24)%
Portals -- -- 3,512 8% (3,512) (100)%
-------- -------- --------
Total $119,774 100% $ 43,744 100% $ 76,030 174%
======== ======== ========
The increase in net revenue for the three months ended January 31, 2003, as
compared to the same period in the prior year, was the result of a 203% increase
in net revenue within the eBusiness and Fulfillment segment, partially offset by
decreased net revenues in the Enterprise Software and Services, Managed
Application Services and Portals segments as a result of the divestiture and/or
cessation of business operations within these segments.
The increase in net revenue within the eBusiness and Fulfillment segment
was due to the net revenue contributions of SL Supply Chain Services
International Corp. (SL Supply Chain) through which the Company acquired
substantially all of the worldwide assets and operations of Software Logistics
Corporation d/b/a iLogistix during the fourth quarter of fiscal year 2002. The
increase in revenue resulting from the acquisition of iLogistix was partially
offset by a decline in net revenue at SalesLink. Net revenue at SalesLink
declined as compared to the same period in prior year, primarily due to volume
declines in supply chain management services. These declines are largely the
result of the continued difficult economic climate for many of the major OEMs
that comprise a large part of the revenue base for SalesLink. Sales to one
customer comprised approximately 73% of eBusiness and Fulfillment segment
revenue for the three months ended January 31, 2003.
The decrease in net revenue within the Enterprise Software and Services
segment was the result of the sale during the first quarter of fiscal 2003 of
Equilibrium. The decrease in net revenue within the Managed Application Services
segment was primarily due to the cessation of operations of NaviPath. The
decrease in net revenue within the Portals segment was primarily due to the
cessation of operations of MyWay during fiscal year 2002.
Cost of Revenue:
Three Months Three Months As a % of
Ended As a % of Ended Total
January 31, Total Net January 31, Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ --------- -------- --------
(in thousands)
Enterprise Software and Services $ -- -- $ (120) (31)% $ 120 100%
eBusiness and Fulfillment 110,549 93% 34,522 87% 76,027 220%
Managed Application Services -- -- 62 17% (62) (100)%
Portal -- -- 1,657 47% (1,657) (100)%
-------- -------- --------
Total $110,549 92% $ 36,121 83% $ 74,428 206%
======== ======== ========
Cost of revenue consists primarily of expenses related to the cost of
products purchased for sale or distribution as well as salaries and benefit
expenses, consulting and contract labor costs, fulfillment and shipping costs,
and applicable facilities costs. The increase in cost of revenue for the three
months ended January 31, 2003, as compared to the same period in the prior year,
was attributable to the cost of revenue of the SL Supply Chain business, which
the Company acquired during the fourth quarter of fiscal year 2002. The increase
in cost of revenue from the acquisition of the SL Supply Chain business was
partially offset by a reduced cost of revenue at SalesLink, due to volume
declines in supply chain management services, and decreased cost of revenue as a
result the Company's restructuring efforts, which included the sale or cessation
of operations of several companies.
The Company's cost of revenue as a percentage of net revenue increased to
approximately 92% for the three months ended January 31, 2003 from approximately
83% in the same period in the prior fiscal year. The increase in cost of revenue
for the three months ended January 31, 2003, compared to the same period in
fiscal 2002, is the result of both a 6% decrease in gross margins in the
eBusiness and Fulfillment segment as well as the cessation of operations within
the higher-margin Managed Application Services and Portals segments.
23
Cost of revenue as a percentage of net revenue within the eBusiness and
Fulfillment segment increased to approximately 93% for the three months ended
January 31, 2003 from approximately 87% in the same period of the prior fiscal
year, as a result of lower gross margins at SalesLink as well as the impact of
the SL Supply Chain business, which has lower margins than the SalesLink
business. During the three months ended January 31, 2003, SalesLink settled a
royalty dispute for an amount less than originally estimated, which partially
offset the increase in cost of revenue within the eBusiness and Fulfillment
segment by approximately $1.0 million. The gross margins at SalesLink decreased
primarily due to lower sales levels and reduced pricing of its services within
the supply chain management and literature distribution businesses,
respectively, and increased costs related to amortization associated with a new
Enterprise Resource Planning (ERP) system.
The decrease in cost of revenue as a percentage of net revenue within the
Managed Application Services segment was due to the cessation of operations of
NaviPath during fiscal year 2002. The decrease in cost of revenue as a
percentage of net revenue within the Portals segment was due to the cessation of
operations of MyWay during fiscal year 2002.
Research and Development Expenses:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Total Net January 31, Total Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ ---------- -------- --------
(in thousands)
Enterprise Software and Services $ 1,423 -- $ 1,901 484% $ (478) (25)%
Managed Application Services 22 8% -- -- 22 --
Portals -- -- 548 16% (548) (100)%
------- ------- -------
Total $ 1,445 1% $ 2,449 6% $(1,004) (41)%
======= ======= =======
Research and development expenses consist primarily of personnel and
related costs to design, develop, enhance, test and deploy the Company's
products and services either prior to the development efforts reaching
technological feasibility or once the product had reached the maintenance phase
of its life cycle. Research and development expenses are primarily related to
the operations of the Company's ProvisionSoft subsidiary. Research and
development expenses during the three months ended January 31, 2003 decreased
compared to the same period in the prior fiscal year primarily due to the sale
of the Company's ownership interests in Equilibrium during the first quarter of
fiscal year 2003 and the cessation of operations at MyWay.
The decrease in research and development expenses within the Enterprise
Software and Services segment during the three months ended January 31, 2003, as
compared to the same period in the prior fiscal year, was primarily the result
of the sale of Equilibrium during the first quarter of fiscal 2003. The decrease
was partially offset by increased research and development expenses at
ProvisionSoft due to increased personnel and related costs to design, develop
and test ProvisionSoft's new software product. The decrease in research and
development expense within the Portals segment was due to the cessation of
operations of MyWay.
Selling Expenses:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Total Net January 31, Total Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ --------- -------- --------
(in thousands)
Enterprise Software and Services $667 -- $1,711 435% $(1,044) (61)%
eBusiness and Fulfillment 1,019 1% 592 1% 427 72%
Managed Application Services -- -- -- -- -- --
Portals -- -- 252 7% (252) (100)%
Other 1,174 -- 438 -- 736 168%
------ ------ -------
Total $2,860 2% $2,993 7% $ (133) (4)%
====== ====== =======
Selling expenses consist primarily of advertising and other general
marketing related expenses, compensation and employee-related expenses, sales
commissions, facilities costs, and travel costs. Selling expenses decreased
during the three months ended January 31, 2003, as compared to the same period
in the prior fiscal year, by approximately 4%. The decrease was primarily due to
headcount reductions, lower sales commissions as a result of lower net revenue,
reductions in marketing campaigns, the cessation of operations at MyWay in
fiscal 2002 and the sale of the Company's equity ownership interests in
Equilibrium during the first quarter of fiscal 2003.
The decrease within the Enterprise Software and Services segment was
primarily the result of the sale of the Company's equity ownership interests in
Equilibrium. Selling expenses within the Enterprise Software and Services
segment are primarily related to the operations of ProvisionSoft.
24
The increase in selling expenses within the eBusiness and Fulfillment segment
was primarily attributable to the Company's acquisition of the SL Supply Chain
business during the fourth quarter of fiscal year 2002. The acquisition resulted
in increased headcount and personnel-related costs within the eBusiness and
Fulfillment segment. The decrease in selling expense within the Portals segment
was the result of the cessation of operations of MyWay.
Selling expense within the Other segment was primarily related to the
Company's amended sponsorship arrangement with the New England Patriots, under
which the Company receives certain limited marketing rights in exchange for a
series of payments of $1.6 million per year beginning in January of 2003 and
ending in July of 2015. During the three months ended January 31, 2003,
approximately $0.7 million in interest and other costs were included in selling
expenses related to this arrangement.
General and Administrative Expenses:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
------------ ----------- ------------ ----------- -------- --------
(in thousands)
Enterprise Software and Services $ 378 -- $ 1,146 292% $ (768) (67)%
eBusiness and Fulfillment 6,172 5% 4,530 11% 1,642 36%
Managed Application Services (37) (14)% (201) (56)% 164 82%
Portals (963) -- 583 17% (1,546) (265)%
Other 7,723 -- 9,866 -- (2,143) (22)%
------- ------- -------
Total $13,273 11% $15,924 36% $(2,651) (17)%
======= ======= =======
General and administrative expenses consist primarily of compensation and
other employee-related costs, facilities costs, bad debt expense, depreciation
expense and fees for professional services. General and administrative expenses
decreased by 17% during the three months ended January 31, 2003, as compared to
the same period in the prior fiscal year. General and administrative expenses
for the three months ended January 31, 2003 decreased primarily as a result of
a reduction in headcount and related expenses at the Company's corporate
headquarters, the sale of the Company's equity interests in Equilibrium during
the first quarter of fiscal 2003, and the cessation of operations of MyWay
within the Portals segment. The overall decrease in general and administrative
expenses was partially offset by an increase in general and administrative
expenses as a result of the Company's acquisition of the SL Supply Chain
business during the fourth quarter of fiscal year 2002.
The decrease in general and administrative expenses within the Enterprise
Software and Services segment was primarily the result of the sale of the
Company's equity interests in Equilibrium. General and administrative expenses
within the Enterprise Software and Services segment are primarily related to the
operations of ProvisionSoft. The increase in general and administrative expenses
within the eBusiness and Fulfillment segment was primarily attributable to the
Company's acquisition of the SL Supply Chain business during the fourth quarter
of fiscal year 2002.
The increase in general and administrative expenses in the Managed
Application Services segment was due to the cessation of operations at NaviPath
and the sale of Activate. The decrease in the general and administrative
expenses within the Portals segment was the result of a benefit during fiscal
2003 of restructuring-related costs accrued during fiscal 2002 that were settled
during fiscal 2003 for amounts less than originally estimated.
The general and administrative expenses within the Other segment primarily
reflect the cost of the Company's directors and officers insurance, costs
related to the Company's Corporate headquarters facility, and costs associated
with maintaining certain of the Company's Information technology systems.
General and administrative expenses also include certain corporate
administrative functions such as legal, finance and business development which
are not fully allocated to the Company's subsidiary companies. General and
administrative expenses decreased compared to the same period in the prior
fiscal year, primarily as a result of restructuring initiatives at the Company's
corporate headquarters.
Amortization of Intangible Assets and Stock-Based Compensation:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
------------ ----------- ------------ ----------- -------- --------
(in thousands)
Enterprise Software and Services $-- -- $1,148 292% $(1,148) (100)%
eBusiness and Fulfillment -- -- 548 1% (548) (100)%
Other 54 -- 55 -- (1) (2)%
--- ------ -------
Total $54 -- $1,751 4% $(1,697) (97)%
=== ====== =======
Amortization of intangible assets and stock-based compensation during the three
months ended January 31, 2003 consisted primarily of amortization expense
related to stock-based compensation expenses. Amortization of intangible assets
and stock-
25
based compensation during the same period in the prior fiscal year consisted
primarily of goodwill amortization expense related to acquisitions made by the
Company during fiscal year 2000.
The overall decrease in amortization of intangible assets and stock-based
compensation during the three months ended January 31, 2003, as compared to the
same period in the prior fiscal year, was primarily the result of the Company's
adoption of SFAS Nos. 141 and 142 on August 1, 2002. In accordance with the
provisions of these statements, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to periodic
impairment tests. Other intangible assets will continue to be amortized over
their estimated useful lives. Amortization expense within the Enterprise
Software and Services segment during the quarter ended January 31, 2002 related
to goodwill amortization for Equilibrium, which was subsequently sold during the
first quarter of fiscal 2003. Amortization expense within the eBusiness and
Fulfillment segment during the quarter ended January 31, 2002 related to
goodwill amortization for SalesLink.
Impairment of Long-Lived Assets:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
------------ ----------- ------------ ----------- -------- --------
(in thousands)
eBusiness and Fulfillment $ -- -- $ -- $ -- --%
Managed Application Services 24 9% -- -- 24 100%
Other -- -- 2,328 -- (2,328) (100)%
----- ------ -------
Total $ 24 -- $2,328 5% $(2,304) (99)%
===== ====== =======
26
During the three months ended January 31, 2003, the Company recorded
approximately $24 thousand in impairment charges. During the three months ended
January 31, 2002, the Company recorded impairment charges totaling approximately
$2.3 million. The decrease in impairment charges in the first quarter of fiscal
year 2003 as compared to the same period in the prior fiscal year entirely
relates to impairment charges recorded during fiscal 2002 for the write-off of
capitalized costs related to internally developed software, computer equipment,
and furniture and fixtures at the Company's headquarters (see Note D).
Restructuring (adjustments), net:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
------------ ----------- ------------ ----------- -------- --------
(in thousands)
Enterprise Software and Services $ 54 -- $ (993) (253)% $1,047 105%
Managed Application Services -- -- (800) (222)% 800 100%
Portals 94 -- (1,028) (29)% 1,122 109%
Other 8,947 -- 2,460 -- 6,487 264%
------ ------ ------
Total $9,095 8% $ (361) (1)% $9,456 2,619%
====== ====== ======
27
The Company's restructuring initiatives during the three months ended
January 31, 2003 and 2002, respectively, involved strategic decisions to exit
certain businesses, reposition certain on-going businesses, and to remove the
Company's corporate infrastructure costs. Restructuring charges consisted
primarily of contract terminations, severance charges and equipment charges
incurred as a result of the cessation of operations of certain subsidiaries and
actions taken at several remaining subsidiaries and at the Company's corporate
headquarters to increase operational efficiencies, improve margins and further
reduce expenses. Severance charges included employee termination costs as a
result of workforce reductions. Employees affected by the restructurings were
notified both through direct personal contact and by written notification. The
contract terminations primarily consisted of costs to exit facility and
equipment leases and to terminate bandwidth and other vendor contracts. The
asset impairment charges primarily related to the write-off of equipment.
The Company expects to incur additional restructuring charges during the
remainder of fiscal 2003 related to equipment and facility lease obligations as
well as workforce reductions.
The restructuring charge incurred in the Other segment for the three months
ended January 31, 2003 primarily relates to charges incurred at the Company's
corporate headquarters for contract terminations related to costs to exit
facility and equipment leases, the realization through operations of the
cumulative foreign currency translation adjustment as a result of the completion
of the liquidation and wind-down of our European subsidiary, and asset
impairment costs related to the write-off of capitalized costs, principally
internally developed software and idle equipment.
During the three months ended January 31, 2002, the restructuring benefit
in the Enterprise Software and Services segment primarily related to the
recovery of previously recorded restructuring charges incurred at ProvisionSoft.
The restructuring benefit recorded by ProvisionSoft related to the early
termination of equipment leases that were settled during the three months ended
January 31, 2002 for amounts less than originally estimated.
During the three months ended January 31, 2002, the restructuring benefit
in the Managed Application Services segment primarily related to a recovery of
previously recorded restructuring charges at NaviPath. The restructuring benefit
recorded related to the settlement by NaviPath during the three months ended
January 31, 2002 of certain contractual purchase commitments, breakage fees and
service contracts for amounts less than originally estimated.
During the three months ended January 31, 2002, the restructuring benefit
in the Portals segment related to the settlement by MyWay of customer and vendor
contracts for amounts less than originally estimated.
During the three months ended January 31, 2002, the restructuring charge in
the Other segment primarily related to charges of approximately $2.5 million
related to the write-off of property and equipment.
Other Income/Expense:
Interest income decreased $1.9 million to $0.8 million for the three months
ended January 31, 2003 from $2.7 million for the same period in fiscal year
2002, reflecting decreased interest income associated with lower average cash
and cash equivalent balances and lower interest rates in the first quarter of
fiscal year 2003 as compared to the same period in the prior fiscal year.
Interest (expense) recovery, totalled $(25.7) million for the three months
ended January 31, 2003 as compared to a net benefit of $13.5 million for the
same period in fiscal year 2002. The expense is due to the unfavorable fair
market value adjustment of approximately $24.7 million in the second quarter of
fiscal 2003 related to the increase in value of the obligation to the former
holders of the Series C Preferred Stock (the "Holders"). In connection with the
repurchase of the outstanding shares of its Series C Preferred Stock in November
2001, the Company incurred an obligation to deliver approximately 448.3 million
shares of its PCCW stock holdings to the Holders no later than December 2, 2002.
During the three months ended January 31, 2003, the Company fulfilled its
obligation to deliver approximately 448.3 million shares of PCCW to the Holders.
Prior to the satisfaction of the obligation to deliver the shares, the Company
had accounted for the 448.3 million shares of PCCW stock as a trading security
and the liability related to the obligation to deliver the PCCW stock as a
current note payable, both of which were carried at market value. Changes in the
fair value of the PCCW stock and the note payable have been recorded in the
condensed consolidated statements of operations as Other gains (losses), net and
as adjustments to interest expense, respectively. The fair market value
adjustment of the note payable through January 31, 2003 resulted in a $24.7
million increase to interest expense, offset by a gain of $24.7 million on the
fair value adjustment of the trading security, which was included in Other gains
(losses), net.
For the three months ended January 31, 2002, the interest (expense)
recovery, net, of $13.5 million was primarily due to a favorable fair market
value adjustment of approximately $16.7 million related to the decrease in value
of the obligation to the former holders of the Series C Preferred Stock and the
retirement of the notes payable to Hewlett Packard Company (HP) in November
2001. These decreases were offset slightly by interest expense resulting from
the obligation to the former holders of the Series C Preferred Stock.
28
Other gains (losses), net, totaled $23.5 million for the three months ended
January 31, 2003 as compared to a net loss of $(17.9) million in the same period
of the prior fiscal year. Other gains (losses), net, for the three months ended
January 31, 2003 primarily consisted of a pre-tax gain of approximately $24.7
million related to the fair value adjustment on the Company's trading security
PCCW, a pre-tax gain of approximately $7.4 million from proceeds received in the
acquisition of Vicinity by Microsoft, partially offset by a $7.9 million loss on
impairment of certain investments in affiliates.
For the three months end January 31, 2002, other losses was primarily
comprised of a $(3.5) million loss on marketable securities, a $(15.5) million
loss on impairment of investments in affiliates, offset by a $2.9 million gain
on the mark-for-market adjustment for trading security.
Equity in losses of affiliates, net, resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method.
Under the equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates decreased $0.7 million
to $0.4 million for the three months ended January 31, 2003, from $1.1 million
for the same period in fiscal year 2002, primarily reflecting a decreased number
of investments accounted for under the equity method as compared to the same
period in the prior fiscal year. The Company expects its affiliate companies to
continue to invest in the development of their products and services, and to
recognize operating losses, which will result in future charges recorded by the
Company to reflect its proportionate share of such losses.
Minority interest was $0.3 million for the three months ended January 31,
2003, as compared to $0.02 million in the same period in the prior fiscal year.
Minority interest for three months ended January 31, 2003 reflects the minority
interest related to ProvisionSoft's results of operations during that period.
Income Tax Expense:
Income tax expense recorded for the three months ended January 31, 2003 was
$0.7 million. Exclusive of taxes provided for significant, unusual or
extraordinary items that will be reported separately, the Company provides for
income taxes on a year to date basis at an effective rate based upon its
estimate of full year earnings. Income tax expense in the second quarter of
fiscal year 2003 differs from the amount computed by applying the U.S. federal
income tax rate of 35 percent to pre-tax loss, primarily as a result of
non-deductible intangible asset and stock-based compensation amortization and
valuation allowances recognized on deferred tax assets. The income tax expense
recorded includes a provision for foreign taxes associated with the Company's
operations outside of the United States.
Results of Operations
Six months ended January 31, 2003 compared to the six months ended January
31, 2002
Net Revenue:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $ 227 -- $ 704 1% $ (477) (68)%
eBusiness and Fulfillment 232,360 100% 75,678 85% 156,682 207%
Managed Application Services 409 -- 5,814 7% (5,405) (93)%
Portals -- -- 6,325 7% (6,325) (100)%
-------- ------- --------
Total $232,996 100% $88,521 100% $144,475 163%
======== ======= ========
The increase in net revenue for the six months ended January 31, 2003, as
compared to the same period in the prior year, was the result of a 207% increase
in net revenue within the eBusiness and Fulfillment segment, partially offset by
decreased net revenues in the Enterprise Software and Services, Managed
Application Services and Portals segments, which was the result of the
divestiture and/or cessation of business operations within these segments.
The increase in net revenue within the eBusiness and Fulfillment segment
was due to the net revenue contributions of SL Supply Chain Services
International Corp. (SL Supply Chain), through which the Company acquired
substantially all of the worldwide assets and operations of Software Logistics
Corporation d/b/a iLogistix during the fourth quarter of fiscal year 2002. The
increase in revenue resulting from the acquisition of iLogistix was partially
offset by a decline in net revenue at SalesLink. Net revenue at SalesLink
declined as compared to the same period in prior year, primarily due to volume
declines in supply chain management services. These declines are largely the
result of the continued difficult economic climate for many of the major OEMs
that comprise a large part of the revenue base for SalesLink. Sales to one
customer comprised approximately 71% of eBusiness and Fulfillment segment
revenue for the six months ended January 31, 2003.
The decrease in net revenue within the Enterprise Software and Services
segment was the result of the sale during the first quarter of fiscal 2003 of
all equity ownership interests in Equilibrium. The decrease in net revenue
within the Managed
29
Application Services segment was primarily due to the cessation of operations of
NaviPath The decrease in net revenue within the Portals segment was due to the
cessation of operations of MyWay during fiscal year 2002.
Cost of Revenue:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $ 15 7% $ (68) -- $ 83 122%
eBusiness and Fulfillment 214,897 92% 65,330 86% 149,567 229%
Managed Application Services -- -- 15,563 268% (15,563) (100)%
Portal -- -- 3,985 63% (3,985) (100)%
-------- ------- --------
Total $214,912 92% $84,810 96% $130,102 153%
======== ======= ========
Cost of revenue consists primarily of expenses related to the cost of
products purchased for sale or distribution as well as salaries and benefit
expenses, consulting and contract labor costs, fulfillment and shipping costs,
and applicable facilities costs. The increase in cost of revenue for the six
months ended January 31, 2003, as compared to the same period in the prior year,
was attributable to the cost of revenue of the SL Supply Chain business, which
the Company acquired during the fourth quarter of fiscal year 2002. The increase
in cost of revenue from the SL Supply Chain acquisition was partially offset by
a reduced cost of revenue at SalesLink due to volume declines in supply chain
management services, and decreased cost of revenue as a result the Company's
restructuring efforts, which included the sale or cessation of operations of
several companies, and actions taken to increase operational efficiencies,
improve margins and further reduce expenses. The remainder of the offset was
primarily the result of a cessation of operations of NaviPath and MyWay and the
sale of Activate during fiscal 2002.
The Company's cost of revenue as a percentage of net revenue decreased to
approximately 92% for the six months ended January 31, 2003 from approximately
96% in the same period in the prior fiscal year.
Cost of revenue as a percentage of net revenue within the eBusiness and
Fulfillment segment increased to approximately 92% for the six months ended
January 31, 2003 from approximately 86% in the same period of the prior fiscal
year, as a result of both lower gross margins at SalesLink as well as the impact
of the low margin SL Supply Chain business, which the Company acquired during
the fourth quarter of fiscal year 2002. During the six months ended January 31,
2003, the Company settled a royalty dispute for an amount less than originally
estimated, which partially offset the increase in cost of revenue within the
eBusiness and Fulfillment segment by approximately $1.0 million. The gross
margins at SalesLink decreased primarily due to lower sales levels and reduced
pricing of its services within the supply chain management and literature
distribution businesses, respectively, and increased costs related to
amortization associated with a new Enterprise Resource Planning (ERP) system.
The decrease in cost of revenue as a percentage of net revenue within the
Managed Application Services segment was due to the cessation of operations of
NaviPath, and the sale of Activate in the first quarter of fiscal year 2002. The
decrease in cost of revenue as a percentage of net revenue within the Portals
segment was due to the cessation of operations of MyWay during fiscal year 2002.
Research and Development Expenses:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $3,477 1,532% $3,510 499% $ (33) (1)%
eBusiness and Fulfillment -- -- 507 1% (507) (100)%
Managed Application Services 22 5% -- -- 22 100%
Portals -- -- 1,694 27% (1,694) (100)%
------ ------ -------
Total $3,499 2% $5,711 6% $(2,212) (39)%
====== ====== =======
Research and development expenses consist primarily of personnel and
related costs to design, develop, enhance, test and deploy the Company's
products and services either prior to the development efforts reaching
technological feasibility or once the product had reached the maintenance phase
of its life cycle. Research and development expenses are primarily related to
the operations of the Company's ProvisionSoft subsidiary. Research and
development expenses for the six months ended January 31, 2003 decreased as
compared to the same period during the prior year, primarily due to the sale of
the Company's ownership interests in Equilibrium during the first quarter of
fiscal year 2003 and the cessation of operations at MyWay.
30
The decrease in research and development expenses within the Enterprise
Software and Services segment during the six months ended January 31, 2003, as
compared to the same period in the prior fiscal year, was primarily the result
of the sale of Equilibrium during the first quarter of fiscal 2003. The decrease
in research and development expense within the Portals segment was due to the
cessation of operations of MyWay. This decrease was partially offset by an
increase in research and development expenses at ProvisionSoft due to increased
personnel and related costs to design, develop and test ProvisionSoft's new
software product.
Selling Expenses:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $2,242 988% $3,216 457% $ (974) (30)%
eBusiness and Fulfillment 1,929 1% 1,145 2% 784 68%
Managed Application Services -- -- 1,128 19% (1,128) (100)%
Portals -- -- 837 13% (837) (100)%
Other 1,887 -- 1,198 -- 689 58%
------ ------ -------
Total $6,058 3% $7,524 8% $(1,466) (19)%
====== ====== =======
Selling expenses consist primarily of advertising and other general
marketing related expenses, compensation and employee-related expenses, sales
commissions, facilities costs, and travel costs. Selling expenses decreased
during the six months ended January 31, 2003, as compared to the same period in
the prior fiscal year by approximately 19%. The decrease was primarily due to
the cessation of operations at NaviPath and MyWay and the sale of Activate in
fiscal 2002 and the sale of the Company's equity ownership interests in
Equilibrium during the first quarter of fiscal 2003, partially offset by higher
selling expenses at ProvisionSoft and the Company's corporate location.
The decrease within the Enterprise Software and Services segment was
primarily the result of the sale of the Company's equity ownership interests in
Equilibrium. Selling expenses within the Enterprise Software and Services
segment are primarily related to the operations of ProvisionSoft.
The increase in selling expenses within the eBusiness and Fulfillment
segment was primarily attributable to the Company's acquisition of the SL Supply
Chain business during the fourth quarter of fiscal year 2002. The acquisition
resulted in increased headcount and personnel-related costs within the eBusiness
and Fulfillment segment. The decrease in selling expenses within the Managed
Application Services segment was the result of the cessation of operations of
NaviPath and the sale of Activate. The decrease in selling expense within the
Portals segment was the result of the cessation of operations of MyWay.
Selling expense within the Other segment was primarily related to the
Company's amended sponsorship arrangement with the New England Patriots, under
which the Company receives certain limited marketing rights in exchange for a
series of payments of $1.6 million per year beginning in January of 2003 and
ending in July of 2015. During the six months ended January 31, 2003,
approximately $1.7 million in interest and other costs were included in
selling expenses with respect to this arrangement.
31
General and Administrative Expenses:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $ 997 439% $ 2,407 342% $(1,410) (59)%
eBusiness and Fulfillment 13,491 6% 9,057 12% 4,434 49%
Managed Application Services (37) (9)% 3,972 68% (4,009) (101)%
Portals (963) -- 1,188 19% (2,151) (181)%
Other 22,143 -- 20,668 -- 1,475 7%
------- ------- -------
Total $35,631 15% $37,292 42% $(1,661) (4)%
======= ======= =======
General and administrative expenses consist primarily of compensation and
other employee-related costs, facilities costs, bad debt expense, depreciation
expense and fees for professional services. General and administrative expenses
decreased by 4% for the six months ended January 31, 2003, as compared to the
same period in the prior fiscal year. General and administrative expenses for
the six months ended January 31, 2003 decreased as a result of the sale of
Activate in fiscal 2002, the sale of the Company's equity interests in
Equilibrium during the first quarter of fiscal 2003, and the cessation of
operations of NaviPath with the Managed Application Services segment and MyWay
within the Portals segment. The overall decrease in general and administrative
expenses was partially offset by an increase in general and administrative
expenses as a result of the Company's acquisition of the SL Supply Chain
business during the fourth quarter of fiscal year 2002.
The decrease in general and administrative expenses within the Enterprise
Software and Services segment was primarily the result of the sale of the
Company's equity interests in Equilibrium. General and administrative expenses
within the Enterprise Software and Services segment are primarily related to the
operations of ProvisionSoft. The increase in general and administrative
expenses within the eBusiness and Fulfillment segment was primarily attributable
to the Company's acquisition of the SL Supply Chain business during the fourth
quarter of fiscal year 2002.
The decrease in general and administrative expenses in the Managed
Application Services segment was due to the cessation of operations at NaviPath
and the sale of Activate. The decrease in the general and administrative
expenses within the Portals segment was the result of the cessation of
operations of MyWay. The results for the six months ended January 31, 2003
include the impact of a reversal of $1.0 million in general and administrative
expenses due to the settlement of certain contractual obligations of MyWay at
amounts less than originally anticipated.
The general and administrative expenses within the Other segment primarily
reflect the cost of the Company's directors and officers insurance, costs
related to the Company's Corporate headquarters facility, and costs associated
with maintaining certain of the Company's Information technology systems.
General and administrative expenses also include certain corporate
administrative functions such as legal, finance and business development which
are not fully allocated to the Company's subsidiary companies. General and
administrative expenses increased compared to the same period in the prior
fiscal year, primarily as a result of a charge recorded for an executory
contract for leased office space for which no future economic benefit is
expected.
Amortization of Intangible Assets and Stock-Based Compensation:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $ -- -- $2,296 326% $(2,296) (100)%
eBusiness and Fulfillment -- -- 1,096 1% (1,096) (100)%
Other 109 -- 109 -- -- --
---- ------ -------
Total $109 -- $3,501 4% $(3,392) (97)%
==== ====== =======
32
Amortization of intangible assets and stock-based compensation during the
six months ended January 31, 2003 consisted primarily of amortization expense
related to stock-based compensation expenses. Amortization of intangible assets
and stock-based compensation during the same period in the prior fiscal year
consisted primarily of goodwill amortization expense related to acquisitions
made by the Company during fiscal year 2000. Included within amortization of
intangible assets and stock-based compensation expenses was approximately $0.1
million of stock-based compensation for the six months ended January 31, 2003
and January 31, 2002.
The overall decrease in amortization of intangible assets and stock-based
compensation during the six months ended January 31, 2003, as compared to the
same period in the prior fiscal year, was primarily the result of the Company's
adoption of SFAS Nos. 141 and 142. In accordance with the provisions of these
statements, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized as of August 1, 2002 but will be subject to periodic
impairment tests. Other intangible assets will continue to be amortized over
their estimated useful lives.
The decrease in amortization of intangible assets and stock-based
compensation within the Enterprise Software and Services segment during the six
months ended January 31, 2003, as compared to the same period in the prior
fiscal year, was primarily the result of the adoption of SFAS Nos. 141 and 142,
which requires that goodwill and indefinite lived intangible assets no longer be
amortized, but rather periodically tested for impairment. As a result of
adoption of SFAS Nos. 141 and 142, during the six months ended January 31, 2003
there was no amortization of intangible assets with indefinite lives.
Amortization of intangible assets during the same period in the prior fiscal
year related to goodwill amortization for Equilibrium, which was sold during the
first quarter of fiscal 2003.
Amortization of intangible assets in the eBusiness and Fulfillment segment
in the prior fiscal year related to goodwill amortization for SalesLink.
Impairment of Long-Lived Assets:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Managed Application Services $24 6% $ -- -- $ 24 100%
Other -- -- 2,328 -- (2,328) (100)%
--- ------ -------
Total $24 -- $2,328 3% $(2,304) (99)%
=== ====== =======
33
During the six months ended January 31, 2003, the Company recorded
approximately $.02 million in impairment charges. During the six months ended
January 31, 2002, the Company recorded impairment charges totaling approximately
$2.3 million. The decrease in impairment charges during the six months ended
January 31, 2003 as compared to the same period in the prior fiscal year relates
to impairment charges recorded during fiscal 2002 for the write-off of
capitalized costs related to internally developed software, computer equipment
and furniture and fixtures at the Company's corporate headquarters (See Note D).
Restructuring (adjustments), net:
Six Months Six Months
Ended As a % of Ended As a % of
January 31, Segment Net January 31, Segment Net
2003 Revenue 2002 Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Enterprise Software and Services $ 199 88% $(1,362) (193)% $ 1,561 115%
Managed Application Services -- -- (17,465) (300)% 17,465 100%
Portals 94 -- 4,917 78% (4,823) (98)%
Other 9,112 -- 4,686 -- 4,426 94%
------ ------- -------
Total $9,405 4% $(9,224) (10)% $18,629 202%
====== ======= =======
34
The Company's restructuring initiatives during the six months ended January
31, 2003 and 2002, respectively, involved strategic decisions to exit certain
businesses and to reposition certain on-going businesses of the Company.
Restructuring charges consisted primarily of contract terminations, severance
charges and equipment charges incurred as a result of the cessation of
operations of certain subsidiaries and actions taken at several remaining
subsidiaries to increase operational efficiencies, improve margins and further
reduce expenses. Severance charges included employee termination costs as a
result of workforce reductions. Employees affected by the restructurings were
notified both through direct personal contact and by written notification. The
contract terminations primarily consisted of costs to exit facility and
equipment leases and to terminate bandwidth and other vendor contracts. The
asset impairment charges primarily related to the write-off of equipment.
The Company expects to incur additional restructuring charges during the
remainder of fiscal 2003 for costs related to the early termination of equipment
leases, further reductions in workforce, and the disposition of excess and idle
equipment.
During the six months ended January 31, 2003, the restructuring charge in
the Enterprise Software and Services segment primarily relates to costs incurred
for severance charges at ProvisionSoft. During the six months ended January 31,
2003, the restructuring charge in the Portals segment relates to cessation of
operations of MyWay and iCast. The restructuring charge incurred at the Other
segment for the three months ended January 31, 2003 primarily relates to charges
incurred at the Company's corporate headquarters for contract terminations
related to costs to exit facility and equipment leases, the realization through
operations of the cumulative foreign currency translation adjustment as a result
of the completion of the liquidation and wind-down of our European subsidiary,
and asset impairment costs related to the write-off of capitalized costs,
internally developed software and equipment.
During the six months ended January 31, 2002, the restructuring benefit in
the Enterprise Software and Services segment primarily related to the reversal
of restructuring costs recorded during fiscal 2002. The restructuring benefit
recorded by ProvisionSoft related to the early termination of equipment leases
that were settled for amounts less than originally estimated.
During the six months ended January 31, 2002, the restructuring benefit in
the Managed Application Services segment primarily related to charges of
approximately $0.5 million recorded by Activate and 1stUp, offset by a net
reversal of approximately $18.0 million of previously recorded restructuring
charges at NaviPath. The $0.5 million restructuring charge recorded by Activate
and 1stUp during the six months ended January 31, 2002 primarily related to
severance costs and legal and other professional fees incurred in connection
with the cessation of operations. The restructuring benefit recorded by NaviPath
related to the settlement by NaviPath of certain contractual purchase
commitments, breakage fees and service contracts for amounts less than
originally estimated.
During the six months ended January 31, 2002, the restructuring charge in
the Portals segment related to charges at MyWay for the write-off of property
and equipment and the termination of customer and vendor contracts during the
first quarter of fiscal 2002. During the six months ended January 31, 2002, the
restructuring charge in the Other segment primarily related to charges for the
write-off of property and equipment and costs incurred to exit facility leases
in Europe and severance costs related to the termination of employees at the
Company's headquarters.
Other Income/Expense:
Interest income decreased $6.6 million to $2.1 million for the six months
ended January 31, 2003 from $8.7 million for the same period in fiscal year
2002, reflecting decreased interest income associated with lower average cash
and cash equivalent balances and lower interest rates in the first six months of
fiscal year 2003 as compared to the same period in the prior fiscal year.
Interest (expense) recovery net, totalled $1.2 million for the six months
ended January 31, 2003 as compared to a net recovery of $7.1 million for the
same period in fiscal year 2002. The recovery is due to a favorable net fair
market value adjustment of approximately $6.3 million during the six months
ended January 31, 2003, related to the decrease in value of the obligation to
the former holders of the Series C Preferred Stock (the "Holders"). In
connection with the repurchase of the outstanding shares of its Series C
Preferred Stock in November 2001, the Company incurred an obligation to deliver
approximately 448.3 million shares of its PCCW stock holdings to the Holders no
later than December 2, 2002. On December 2, 2002 the Company fulfilled its
obligation to deliver approximately 448.3 million shares of PCCW stock to the
Holders. Prior to the satisfaction of the obligation to the deliver the shares,
the Company had accounted for the 448.3 million shares of PCCW stock as a
trading security and the liability related to the obligation to deliver the PCCW
stock as a current note payable, both of which were carried at market value.
Changes in the fair value of the PCCW stock and the note payable were recorded
in the condensed consolidated statements of operations as Other gains (losses),
net and as adjustments to interest expense, respectively. The fair market value
adjustment of the note payable for the six months ended January 31, 2003
resulted in a $6.3 million decrease to interest expense, which was offset by a
loss of $6.3 million on the fair value adjustment of the trading security, which
was included in Other gains (losses), net. Additionally, the settlement of the
underlying debt associated with the Company's borrowing arrangement entered into
in connection with a hedge of the Company's investment in Yahoo! common stock
occurred during the first quarter of fiscal year 2002.
35
Other gains (losses), net, totalled $(31.4) million for the six months
ended January 31, 2003 as compared to a loss of $(25.7) million in the same
period in the prior fiscal year. Other gains (losses), net for the six months
ended January 31, 2003 primarily consisted of a pre-tax loss of approximately
$6.3 million related to the fair value adjustment on the Company's trading
security PCCW, a pre-tax gain of approximately $7.4 million from the proceeds
received in the acquisition of Vicinity by Microsoft, a pre-tax loss of
approximately $14.1 million from the divestiture of the Company's debt and
equity interests in Signatures SNI, Inc., a pre-tax loss of approximately $14.1
million related to impairment charges for other-than-temporary declines in the
carrying value of certain investments in affiliates, and a pre-tax loss of
approximately $3.5 million on the Company's sale of its majority-owned
subsidiary Equilibrium. Other gains (losses), net, of $(25.7) million for the
six months ended January 31, 2002, primarily consisted of a loss of
approximately $27.5 million on the sale of Primedia, Inc. stock, a loss of
approximately $20.7 million resulting from the sale of its subsidiary Activate
and a loss of approximately $27.0 million related to impairment charges for
other-than-temporary declines in the carrying value of certain investments in
affiliates, offset by a pre-tax gain of approximately $53.9 million on the
arrangement that hedged the Company's investment in Yahoo! common stock which
was settled during the six months ended January 31, 2002.
Equity in losses of affiliates, net resulted from the Company's minority
ownership in certain investments that are accounted for under the equity method.
Under the equity method of accounting, the Company's proportionate share of each
affiliate's operating losses and amortization of the Company's net excess
investment over its equity in each affiliate's net assets is included in equity
in losses of affiliates. Equity in losses of affiliates decreased $12.5 million
to $0.9 million for the six months ended January 31, 2003, from $13.4 million
for the same period in fiscal year 2002, primarily reflecting a decreased number
of investments accounted for under the equity method as compared to the same
period in the prior fiscal year. The Company expects its affiliate companies to
continue to invest in the development of their products and services, and to
recognize operating losses, which will result in future charges recorded by the
Company to reflect its proportionate share of such losses.
Minority interest was $(2.0) million for the six months ended January 31,
2003, compared to $(0.05) million in the same period in the prior fiscal year.
Minority interest for the six months ended January 31, 2003 primarily reflects
the minority interest related to ProvisionSoft's results of operations during
that period.
Income Tax Expense:
Income tax expense recorded for the six months ended January 31, 2003 was
$1.6 million. Exclusive of taxes provided for significant, unusual or
extraordinary items that will be reported separately, the Company provides for
income taxes on a year to date basis at an effective rate based upon its
estimate of full year earnings. Income tax expense for the six months of fiscal
year 2003 differs from the amount computed by applying the U.S. federal income
tax rate of 35 percent to pre-tax loss, primarily as a result of non-deductible
intangible asset and stock-based compensation amortization and valuation
allowances recognized on deferred tax assets. The income tax recorded includes a
provision for foreign taxes associated with the Company's operations outside of
the United States.
Discontinued Operations:
36
During the six months ended January 31, 2003, the Company determined to
divest of uBid either through the sale of its equity interests, or substantially
all of uBid's assets and liabilities. It is expected that the Company will sign
a definitive agreement in the near future. Accordingly, the Company has reported
uBid as a discontinued operation at January 31, 2003. The Company recorded a
loss from discontinued operations related to uBid of approximately $130.0
million, of which $96.7 million related to the impairment of goodwill and
long-lived assets. On March 7, 2003 and February 28, 2003, respectively, the
Company sold all of its equity interests in Tallan, Inc. and Yesmail, Inc. and
on February 18, 2003 a definitive agreement was signed under which Overture will
acquire AltaVista's business. As a result, each of these entities has been
reported as discontinued operations at January 31, 2003. The Company recorded
losses on discontinued operations related to Tallan of approximately $39.8
million, of which approximately $32.1 million related to impairment of goodwill,
fixed assets, and other assets. The Company recorded losses on discontinued
operations related to Yesmail of approximately $11.8 million, of which
approximately $7.4 million related to the impairment of goodwill. The Company
recorded losses on discontinued operations of $10.7 million related to
AltaVista.
37
Liquidity and Capital Resources
Working capital at January 31, 2003 decreased to approximately $104.5
million compared to $203.9 million at July 31, 2002. At January 31, 2003,
working capital included approximately $6.1 million of working capital
attributable to discontinued operations. The remainder of the net decrease in
working capital is primarily attributable to a $40.4 million decrease in cash
and cash equivalents. The Company's principal sources of capital during the six
months ended January 31, 2003 related to $15.4 million in proceeds that the
Company received in the acquisition of Vicinity by Microsoft, and $8.0 million
of proceeds that the Company received from the sale of its equity and debt
interests in Signatures. The Company's principal uses of capital during the six
months ended January 31, 2003 were for funding continuing operations. In
addition, the Company used approximately $6.0 million during the period for the
purchase of property and equipment.
The Company believes that existing working capital and the availability of
marketable securities, which could be sold or posted as collateral for cash
loans, will be sufficient to fund its operations, investments and capital
expenditures for at least the next twelve months. Should additional capital be
needed to fund future investment and acquisition activity, the Company may seek
to raise additional capital through the sale of certain subsidiaries, through
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, or at all.
Contractual Obligations
The Company leases facilities and certain other machinery and equipment
under various non-cancelable operating leases and executory contracts expiring
through June 2015. The Company's SalesLink subsidiary has a long-term debt
arrangement with a bank. Future minimum payments as of January 31, 2003 are as
follows:
Other
Operating Debt
Leases Stadium Obligations Total
--------- ------- ----------- --------
(in thousands)
For the remainder of fiscal year 2003 $12,590 $ 800 $ 883 $ 14,273
For the fiscal years ending July 31:
2004 17,600 1,600 1,866 21,066
2005 13,890 1,600 1,621 17,111
2006 13,880 1,600 3,469 18,949
2007 9,640 1,600 164 11,404
Thereafter 23,450 12,800 1,037 37,287
--------- ------- ----------- --------
$91,050 $20,000 $9,040 $120,090
========= ======= =========== ========
Total future minimum lease payments have been reduced by future minimum
sub-lease rentals of approximately $6 million.
The Company leases facilities and certain machinery and equipment under
non-cancelable capital lease arrangements, which are not included in the table
above. The present value of net minimum capital lease obligations is $1.0
million as of January 31, 2003.
Total rent and equipment lease expense charged to continuing operations was
approximately $6.3 million as of January 31, 2003.
In August 2000, the Company announced it had acquired the exclusive naming
and sponsorship rights to the New England Patriots' new stadium, for a period of
fifteen years. In August 2002, the Company finalized an agreement with the owner
of the stadium to amend the sponsorship agreement. Under the terms of the
amended agreement, the Company relinquished the stadium naming rights and
retained more limited marketing rights in exchange for a series of annual
payments of $1.6 million per year beginning in 2003 and ending in 2015.
From time to time the Company provides guarantees of payment to vendors
doing business with certain of the Company's subsidiaries. These guarantees
require that in the event that the subsidiary cannot satisfy its obligations
with certain of its vendors, the Company will be required to settle the
obligation. As of January 31, 2003, the Company had outstanding guarantees of
subsidiary indebtedness totaling approximately $13.9 million.
38
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, product returns, bad
debts, inventories, investments, intangible assets, income taxes, restructuring,
and contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. There can be no assurance that actual results will not
differ from those estimates.
The Company has identified the accounting policies below as the policies
most critical to its business operations and the understanding of our results of
operations. The impact and any associated risks related to these policies on our
business operations is discussed throughout Management's Discussion and Analysis
of Financial Condition and Results of Operations where such policies affect our
reported and expected financial results. Certain of the critical accounting
policies related to revenue recognition outlined below relate only to the
activities of subsidiaries that have been reported as discontinued operations in
our condensed consolidated financial statements. The discussions related to
software license, software and other types of services and support activities,
and advertising impression and e-mail based direct marketing revenue recognition
relate only to subsidiaries that are currently reported as discontinued
operations. The discussions outlined below reflect the Company's application of
these policies through the respective disposal dates of these entities. Our
critical accounting policies are as follows:
. Revenue recognition
. Excess and obsolete inventory
. Restructuring expenses
. Accounting for the allowance for doubtful accounts and sales returns
. Loss contingencies
. Accounting for impairment of long-lived assets
Revenue Recognition. The Company derives its revenue from three primary
sources: (i) sale of products, both merchandise and software licenses; (ii)
services and support revenue, which includes software maintenance; and (iii) the
delivery of advertising impressions and e-mail based direct marketing. As
described below, significant management judgments and estimates must be made and
used in connection with the revenue recognized in any accounting period.
Material differences may result in the amount and timing of our revenue for any
period if our management made different judgments or utilized different
estimates. For most of its transactions, the Company applies the provisions of
SEC Staff Accounting Bulletin 101 Revenue Recognition. However, revenue from
sales of software is recognized in accordance with AICPA Statement of Position
(SOP) 98-9, Software Revenue Recognition with Respect to Certain Arrangements.
Revenue from sales of merchandise is recognized upon shipment of the
merchandise and verification of the customer's credit card authorization or
receipt of cash. All shipping and handling fees billed to customers are
recognized as revenue and related costs as costs of revenue when incurred, for
products which the Company takes title to or assumes the risks and rewards of
ownership.
Revenue from software product licenses, database services and website
traffic audit reports are generally recognized when (i) a signed non-cancelable
software license exists, (ii) delivery has occurred, (iii) the Company's fee is
fixed or determinable, and (iv) collection is probable.
Revenue from software maintenance is deferred and recognized ratably over
the term of each maintenance agreement, typically twelve months. Revenue from
professional services is recognized as the services are performed, collection is
probable and such revenues are contractually nonrefundable. Revenue from
multiple element arrangements involving products, services and support elements
is recognized in accordance with SOP 98-9, Software Revenue Recognition with
Respect to Certain Arrangements, when vendor-specific objective evidence of fair
value does not exist for the delivered element. As required by SOP 98-9, under
the residual method, the fair value of the undelivered elements are deferred and
subsequently recognized. The Company establishes sufficient vendor-specific
objective evidence of fair value for services and support elements based on the
price charged when these elements are sold separately. Accordingly, software
license revenue for products developed is recognized under the residual method
in arrangements in which the software is sold with one or both of the other
elements. Revenue from license agreements that require significant
customizations and modifications to the software product is deferred and
recognized using the percentage of completion method. For license arrangements
involving customizations for which the amount of customization effort cannot be
reasonably estimated or when license arrangements provide for customer
acceptance, we recognize revenue under the completed contract method of
accounting.
39
Excess and Obsolete Inventory. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of the inventory and its estimated net realizable value based upon
assumptions about future demand and market conditions. If actual future demand
or market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Such adjustments are
considered permanent adjustments to the cost basis of the inventory.
Restructuring Expenses. The Company assesses the need to record
restructuring charges in accordance with Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" (EITF 94-3), EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination" and Staff Accounting Bulletin
(SAB) No. 100, "Restructuring and Impairment Charges." In accordance with this
guidance, management must execute an exit plan that will result in the
incurrence of costs that have no future economic benefit. Also under the terms
of EITF 94-3, a liability for the restructuring charges is recognized in the
period management approves the restructuring plan. The Company records
liabilities that primarily includes the estimated severance and other costs
related to employee benefits and certain estimated costs to exit equipment and
facility lease obligations, bandwidth agreements and other service contracts.
These estimates are based on the remaining amounts due under various contractual
agreements, adjusted for any anticipated contract cancellation penalty fees or
any anticipated or unanticipated event or changes in circumstances that would
reduce these obligations. In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" which
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue 94-3. The statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the statement include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activity. The
provisions of this Statement will be applied by the Company to exit or disposal
activities that are initiated after December 31, 2002.
Accounting for the Allowance for Doubtful Accounts and Sales Returns. The
allowance for doubtful accounts is based on our assessment of the collectibility
of specific customer accounts and the aging of the accounts receivable. If there
is a deterioration of a major customer's credit worthiness or actual defaults
are higher than our historical experience, our estimates of the recoverability
of amounts due to us could be adversely affected. A reserve for sales returns is
established based on historical trends in product returns. If the actual or
future returns do not reflect the historical data, our net revenue could be
affected.
Loss Contingencies. The Company is subject to the possibility of various
loss contingencies arising in the ordinary course of business. The Company
considers the likelihood of the loss or impairment of an asset or the incurrence
of a liability as well as our ability to reasonably estimate the amount of loss
in determining loss contingencies. An estimated loss contingency is accrued when
it is probable that a liability has been incurred or an asset has been impaired
and the amount of the loss can be reasonably estimated. The Company regularly
evaluates the current information available to us to determine whether such
accruals should be adjusted.
Accounting for Impairment of Long-Lived Assets. Through July 31, 2002, the
Company recorded impairment charges as a result of management's ongoing business
review and impairment analysis performed under its policy regarding impairment,
utilizing the guidance in SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121).
Where impairment indicators were identified, management evaluated whether the
projected undiscounted cash flows were sufficient to cover the particular
long-lived asset being reviewed. If the undiscounted cash flows were
insufficient, management then determined the amount of the impairment charge by
comparing the carrying value of long-lived assets to their fair value. Other
intangible assets will continue to be amortized over their useful lives. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
Accordingly, the Company adopted SFAS No. 142 on August 1, 2002. SFAS No. 142
requires the Company to evaluate its existing intangible assets and goodwill
that were acquired in prior purchase business combinations, and to make any
necessary reclassifications in order to conform with the new criteria in SFAS
No. 141 for recognition apart from goodwill. Accordingly, the Company is
required to reassess the useful lives and residual values of all identifiable
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments. In addition, to the extent an
intangible asset is then determined to have an indefinite useful life, the
Company is required to test the intangible asset for impairment in accordance
with the provisions of SFAS No. 142.
Under the provisions of SFAS No. 142, the Company is required to perform
transitional goodwill impairment tests as of August 1, 2002 within the first six
months of adopting the standard. The Company completed the transitional goodwill
impairment tests during the fiscal quarter ended January 31, 2003 and concluded
that goodwill is not impaired. In order to complete the transitional goodwill
impairment tests as required by SFAS No. 142, the Company identified its
reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of adoption. The
Company determined the fair value of each reporting unit and compared it to the
reporting unit's carrying amount.
In accordance with the provisions of SFAS No. 142, the Company has
designated reporting units for purposes of assessing goodwill impairment. The
standard defines a reporting unit as the lowest level of an entity that is a
business and that can be distinguished, physically and operationally and for
internal reporting purposes, from the other activities, operations, and assets
of the entity. Based on the provisions of the standard, the Company has
determined that it has two reporting units for purposes of goodwill impairment
testing. Additionally, the Company's policy will be to perform its annual
impairment testing for all reporting units in the fourth quarter of each fiscal
year.
40
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later. It
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement also amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The adoption of this Statement did not have a material impact on the
Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
does not anticipate that adoption of SFAS No. 148 will have a material effect on
the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1,
2003, it also applies to VIEs in which an interest is acquired before February
1, 2003. The Company may apply the Interpretation prospectively, with a
cumulative effect adjustment as of July 1, 2003, or by restating previously
issued financial statements with a cumulative effect adjustment as of the
beginning of the first year restated. The Company is in the process of
evaluating the effects of applying Interpretation No. 46. Based on our
preliminary analysis, the Company does not anticipate that adoption of
Interpretation No. 46 will have a material effect on the Company's financial
position or results of operations.
41
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. Forward-looking statements
represent management's current expectations and are inherently uncertain. CMGI
does not undertake any obligation to update forward-looking statements. Factors
that could cause actual results to differ materially from results anticipated in
forward-looking statements include, but are not limited to, the following:
CMGI may not be profitable in the future.
During the three and six months ended January 31, 2003, CMGI had an
operating loss of approximately $17.5 million and $36.6 million, respectively.
CMGI anticipates that it will continue to incur significant operating expenses
in the future, including significant costs of revenue and selling, general and
administrative and impairment and restructuring expenses. CMGI also has
significant commitments and contingencies, including with respect to real
estate, machinery and equipment leases, continuing stadium sponsorship
obligations, and guarantees entered into by CMGI on behalf of itself and current
and former operating companies. As a result, CMGI expects to continue to incur
significant operating expenses and can give no assurance that it will achieve
profitability or be capable of sustaining profitable operations. At January 31,
2003, CMGI had a consolidated cash and cash equivalents balance of approximately
$174.7 million. Total cash and cash equivalents usage was approximately $40.4
million for the six months ended January 31, 2003, which included the net
benefit of approximately $15.0 million received during the six months ended
January 31, 2003 from the sale of certain investments. If CMGI is unable to
reach and sustain profitability, it risks depleting its working capital balances
and its business will be materially adversely affected.
CMGI has in the past, and may in the future, sell or divest, or attempt to
sell or divest its interests in certain of its subsidiaries, if, among other
reasons, management of CMGI deems the business of the subsidiary to be
sufficiently unrelated to CMGI's core businesses or if the subsidiary is
underperforming from a financial or business point of view. Unprofitable
non-core businesses and underperforming businesses pose a substantial risk to
CMGI's ability to reduce its cash burn or reach profitability, both of which are
stated goals of CMGI. CMGI's inability to sell or divest its interest in such
non-core or underperforming subsidiaries, in the desired timeframe or on terms
acceptable to CMGI, will adversely affect CMGI's results of operations and could
cause such results to be lower than expected by securities analysts and
investors.
CMGI derives substantially all of its revenue from a small number of
customers and the loss of any of those customers could significantly damage
CMGI's business.
A limited number of customers account for substantially all of CMGI's
consolidated net revenue and the loss of any one or more of these customers
would cause its revenue to decline below expectations. One customer accounted
for approximately 73% and 71% for the three months and six months ended January
31, 2003, respectively. On July 11, 2002, CMGI acquired the assets of iLogistix,
through its wholly-owned subsidiary, SL Supply Chain. Nearly all of the revenues
of SL Supply Chain are accounted for by sales to Hewlett-Packard and Microsoft.
Similarly, nearly all of the revenues of SalesLink are accounted for by sales to
a limited number of customers. CMGI currently does not have any agreements which
obligate any customer to buy a minimum amount of products or services from CMGI
or to designate CMGI as its sole supplier of any particular products or
services. The loss of a significant amount of business with Hewlett-Packard or
Microsoft, or any other key customer, would have a material adverse effect on
CMGI. CMGI believes that it will continue to derive the vast majority of its
operating revenue from sales to a small number of customers. There can be no
assurance that CMGI's revenue from key customers will not decline in future
periods.
CMGI may have problems raising money it needs in the future.
CMGI from time to time seeks opportunities to provide capital to support
CMGI's growth through the selective sale of investments or minority or majority
interests in subsidiaries or affiliates to outside investors. In recent years,
CMGI has generally financed its operations with proceeds from selling shares of
stock of companies in which CMGI had invested directly or through its @Ventures
venture capital affiliates. The aggregate holdings and market value of the
shares of stock held by CMGI has declined significantly over the past two plus
years, due to market conditions and continued sales. At January 31, 2003, CMGI
held approximately $1.8 million in available-for-sale securities. Market and
other conditions largely beyond CMGI's control may affect its ability to engage
in future sales of such securities, the timing of any such sales, and the amount
of proceeds therefrom. Even if CMGI is able to sell any such securities in the
future, CMGI may not be able to sell at favorable prices or on favorable terms.
In addition, this funding source may not be sufficient in the future, and CMGI
may need to obtain funding from outside sources. However, CMGI may not be able
to obtain funding from outside sources. In addition, even if CMGI finds outside
funding sources, CMGI may be required to issue to such outside sources
securities with greater rights than those currently possessed by holders of
CMGI's common stock. CMGI may also be required to take other actions, which may
lessen the value of its common stock or dilute its common stockholders,
including borrowing money on terms that are not favorable to CMGI or issuing
additional shares of common stock. If CMGI experiences difficulties raising
money in the future, its business will be materially adversely affected.
42
If the market for supply chain management services declines, the demand for
CMGI's services and its financial results could suffer.
CMGI derives substantially all of its revenue from the supply chain
management services provided by SalesLink and SL Supply Chain. CMGI's business
and future growth will depend in large part on the industry trend towards
outsourcing supply chain management and other business processes. If this trend
does not continue or declines, demand for CMGI's supply chain management
services would decline and its financial results could suffer.
A decline in the technology sector could reduce CMGI's revenue.
A large portion of CMGI's supply chain management revenue comes from
clients in the technology sector which is intensely competitive and highly
volatile. Declines in the overall performance of the technology sector have in
the past and could in the future adversely affect the demand for supply chain
management services and reduce CMGI's revenues from such clients.
CMGI and its operating companies depend on third-party software, systems
and services.
CMGI and its operating companies rely on products and services of
third-party providers in their business operations. There can be no assurance
that CMGI or its operating companies will not experience operational problems
attributable to the installation, implementation, integration, performance,
features or functionality of such third-party software, systems and services.
Any interruption in the availability or usage of the products and services
provided by third parties could have a material adverse effect on the business
or operations of CMGI or its operating companies.
CMGI depends on certain important employees, and the loss of any of those
employees may harm CMGI's business.
CMGI's performance is substantially dependent on the performance of its
executive officers and other key employees, as well as management of its
operating companies. The familiarity of these individuals with
technology-related industries makes them especially critical to CMGI's success.
In addition, CMGI's success is dependent on its ability to attract, train,
retain and motivate high quality personnel, especially for its operating
companies' management teams. The loss of the services of any of CMGI's executive
officers or key employees may harm its business. CMGI's success also depends on
its continuing ability to attract, train, retain and motivate other highly
qualified technical and managerial personnel. Competition for such personnel is
intense.
There may be conflicts of interest among CMGI, CMGI's subsidiaries and
their respective officers, directors and stockholders.
Some of CMGI's officers and directors also serve as officers or directors
of one or more of CMGI's subsidiaries. In addition, David S. Wetherell, CMGI's
Chairman of the Board, has significant compensatory interests in certain of
CMGI's @Ventures venture capital affiliates. As a result, CMGI, CMGI's officers
and directors, and CMGI's subsidiaries and venture capital affiliates may face
potential conflicts of interest with each other and with stockholders.
Specifically, CMGI's officers and directors may be presented with situations in
their capacity as officers, directors or management of one of CMGI's
subsidiaries and venture capital affiliates that conflict with their fiduciary
obligations as officers or directors of CMGI or of another subsidiary or
affiliate.
CMGI's strategy of expanding its business through acquisitions of other
businesses and technologies presents special risks.
CMGI intends to continue to expand its business in certain areas through
the acquisition of businesses, technologies, products and services from other
businesses. Acquisitions involve a number of special problems, including:
. difficulty integrating acquired technologies, operations and personnel
with the existing businesses;
. diversion of management attention in connection with both negotiating
the acquisitions and integrating the assets;
. strain on managerial and operational resources as management tries to
oversee larger operations;
. the funding requirements for acquired companies may be significant;
. exposure to unforeseen liabilities of acquired companies;
. increased risk of costly and time-consuming litigation, including
stockholder lawsuits;
. potential issuance of securities in connection with an acquisition
with rights that are superior to the rights of holders of CMGI's
common stock, or which may have a dilutive effect on the common
stockholders;
. the need to incur additional debt or use cash; and
. the requirement to record potentially significant additional future
operating costs for the amortization of intangible assets.
43
CMGI may not be able to successfully address these problems. Moreover,
CMGI's future operating results will depend to a significant degree on its
ability to successfully integrate acquisitions and manage operations while also
controlling expenses and cash burn.
CMGI must develop and maintain positive brand name awareness.
CMGI believes that establishing and maintaining its brand name and the
brand names of its operating companies is essential to expanding its business
and attracting new customers. CMGI also believes that the importance of brand
name recognition will increase in the future as technology-related companies
continue to differentiate themselves. Promotion and enhancement of CMGI's brand
names will depend largely on its ability to provide consistently high-quality
products and services. If CMGI is unable to provide high-quality products and
services, the value of its brand names will suffer and CMGI's business prospects
may be adversely affected.
CMGI's quarterly results may fluctuate significantly.
CMGI's operating results have fluctuated widely on a quarterly basis during
the last several years, and it expects to experience significant fluctuations in
future quarterly operating results. Many factors, some of which are beyond
CMGI's control, have contributed to these quarterly fluctuations in the past and
may continue to do so. Such factors include:
. demand for its products and services;
. payment of costs associated with its acquisitions, sales of assets and
investments;
. timing of sales of assets and marketable securities;
. market acceptance of new products and services;
. seasonality;
. charges for impairment of long-lived assets in future periods;
. potential restructuring charges in connection with CMGI's continuing
restructuring efforts;
. specific economic conditions in the industries in which CMGI competes;
and
. general economic conditions.
CMGI believes that period-to-period comparisons of its results of
operations will not necessarily be meaningful and should not be relied upon as
indicative of its future performance. It is also possible that in some fiscal
quarters, CMGI's operating results will be below the expectations of securities
analysts and investors. In such circumstances, the price of CMGI's common stock
may decline.
The price of CMGI's common stock has been volatile and may fluctuate based
on the value of its assets.
The market price of CMGI's common stock has been, and is likely to continue
to be, volatile, experiencing wide fluctuations. In recent years, the stock
market has experienced significant price and volume fluctuations, which have
particularly impacted the market prices of equity securities of many companies
providing technology-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of such
companies. Future market movements may adversely affect the market price of
CMGI's common stock. In addition, should the market price of CMGI's common stock
remain below $1.00 per share for an extended period, it risks Nasdaq delisting,
which would have an adverse effect on CMGI's business. In order to maintain
compliance with Nasdaq listing standards, CMGI may consider several strategies,
including without limitation a reverse stock split.
In addition, a portion of CMGI's assets includes the equity securities of
both publicly traded and privately held companies. The market price and
valuations of the securities that CMGI holds may fluctuate due to market
conditions and other conditions over which CMGI has no control. Fluctuations in
the market price and valuations of the securities that CMGI holds in other
companies may result in fluctuations of the market price of CMGI's common stock
and may reduce the amount of working capital available to CMGI.
CMGI's operating companies are subject to intense competition.
The markets for the products and services of CMGI's operating companies are
highly competitive and often lack significant barriers to entry, enabling new
businesses to enter these markets relatively easily. Numerous well-established
companies and smaller entrepreneurial companies are focusing significant
resources on developing and marketing products and services that will compete
with the products and services of CMGI's operating companies. The market for
supply chain management products and services is very competitive, and the
intensity of the competition is expected to continue to increase. Any failure to
maintain and enhance the competitive position of CMGI's supply chain management
operating companies will limit its ability to maintain and increase market
share, which would result in serious harm to CMGI's business. Increased
competition may also result in price
44
reductions, reduced gross margins and loss of market share. In addition, many of
the current and potential competitors of CMGI's operating companies have greater
financial, technical, operational and marketing resources than those of CMGI's
operating companies. CMGI's operating companies may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for supply chain management products and services down and such price
reductions may reduce CMGI's revenues.
To succeed, CMGI's operating companies must respond to the rapid changes in
the technology sector.
The markets for the technology-related products and services of CMGI's
operating companies are characterized by:
. rapidly changing technology;
. evolving industry standards;
. frequent new product and service introductions;
. shifting distribution channels; and
. changing customer demands.
The success of CMGI's operating companies will depend on their ability to
adapt to this rapidly evolving marketplace. They may not be able to adequately
adapt their products and services or to acquire new products and services that
can compete successfully. In addition, CMGI's operating companies may not be
able to establish and maintain effective distribution channels.
The success of the global operations of CMGI's operating companies is
subject to special risks and costs.
CMGI's operating companies intend to continue to expand their operations
outside of the United States. This international expansion will require
significant management attention and financial resources. The operations of
CMGI's supply chain management operating companies are subject to numerous and
varied regulations worldwide, some of which may have an adverse effect on CMGI's
ability to develop its international operations. In addition, CMGI and its
operating companies have limited experience in such international activities.
Accordingly, CMGI and its operating companies will need to commit substantial
time and development resources to customizing the products and services of its
operating companies for selected international markets and to developing
international sales and support channels.
CMGI expects that the export sales of its operating companies will be
denominated predominantly in United States dollars. As a result, an increase in
the value of the United States dollar relative to other currencies may make the
products and services of its operating companies more expensive and, therefore,
potentially less competitive in international markets. As CMGI's operating
companies increase their international sales, their total revenues may also be
affected to a greater extent by seasonal fluctuations resulting from lower sales
that typically occur during the summer months in Europe and other parts of the
world.
CMGI's operating companies could be subject to infringement claims and
other liabilities.
From time to time, CMGI's operating companies have been, and expect to
continue to be, subject to third-party claims in the ordinary course of
business, including claims of alleged infringement of intellectual property
rights. Any such claims may damage the businesses of CMGI's operating companies
by:
. subjecting them to significant liability for damages;
. resulting in invalidation of their proprietary rights;
. resulting in costly license fees in order to settle such claims;
. being time-consuming and expensive to defend even if such claims are
not meritorious; and
. resulting in the diversion of management time and attention.
45
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to equity price risks on the marketable portion of
its equity securities. The Company's available-for-sale securities at
January 31, 2003 primarily consisted of investments in companies in the Internet
and technology industries which have experienced significant historical
volatility in their stock prices. The Company typically does not attempt to
reduce or eliminate its market exposure on these securities. A 20% adverse
change in equity prices, based on a sensitivity analysis of the equity component
of the Company's available-for-sale securities portfolio as of January 31, 2003,
would result in an approximate $0.4 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 from time to time uses derivative financial instruments
primarily to reduce exposure to adverse fluctuations in interest rates on its
borrowing arrangements. The Company does not enter into derivative financial
instruments for trading purposes. As a matter of policy, derivative positions
are used to reduce risk by hedging underlying economic or market exposure. The
derivatives the Company uses are straightforward instruments with liquid
markets. At January 31, 2003, the Company was primarily exposed to the London
Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR)
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. The Company may
consider utilizing derivative instruments to mitigate the risk of foreign
currency exchange rate fluctuations in the future.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this report, the Company's
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Exchange Act) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses in the Company's internal
controls, and therefore there were no corrective actions taken.
46
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In December 1999, Neil Braun, a former officer of iCAST Corporation, a
wholly owned subsidiary of the Company ("iCAST"), filed a complaint in United
States District Court, Southern District of New York naming the Company, iCAST
and David S. Wetherell as defendants. In the complaint, Mr. Braun alleged breach
of contract regarding his termination from iCAST and claimed that he was
entitled to acceleration of options to purchase CMGI common stock and iCAST
common stock, upon his termination, under contract and promissory estoppel
principles. Mr. Braun also claimed that, under quantum meruit principles, he was
entitled to lost compensation. Mr. Braun sought damages of approximately $50
million and requested specific performance of the acceleration and exercise of
options. In August 2001, the Court (i) granted summary judgment dismissing Mr.
Wetherell as a defendant and (ii) granted summary judgment, disposing of Mr.
Braun's contract claim. In February 2002, the Court granted summary judgment
disposing of Mr. Braun's promissory estoppel claim. Trial on the quantum meruit
claim was held in March 2002 and the jury returned a verdict in favor of Mr.
Braun and against the Company in the amount of $113,482.24. As to iCAST, the
jury found that Mr. Braun had not proven his claim. The Company filed a motion
for directed verdict, which motion sought to set aside the jury verdict against
the Company. Such motion was denied. In May 2002, Mr. Braun appealed the Court's
dismissal of his contract and promissory estoppel claims against iCAST and the
Company. On February 11, 2003, the United States Court of Appeals for the Second
Circuit heard argument on the appeal and took the case under advisement. No
decision on the appeal has been received.
In August 2001, Jeffrey Black, a former employee of AltaVista, filed a
complaint in Superior Court of the State of California (Santa Clara County) in
his individual capacity as well as in his capacity as a trustee of two family
trusts against the Company and AltaVista alleging certain claims arising out of
the termination of Mr. Black's employment with AltaVista. As set forth in the
complaint, Mr. Black is seeking monetary damages in excess of $70 million. The
Company and AltaVista each believes that these claims are without merit and
plans to vigorously defend against these claims. In March 2002, the court
ordered the entire case to binding arbitration in California. In June 2002, Mr.
Black petitioned the California Court of Appeal for a writ prohibiting
enforcement of the order compelling arbitration of his cause of action for
wrongful termination in violation of public policy. In July 2002, the Court of
Appeal denied Mr. Black's petition. In August 2002, Mr. Black submitted the
matter to the American Arbitration Association. A date for the arbitration has
not yet been set. An arbitrator was appointed in January 2003 and an arbitration
hearing is scheduled for August 2003.
On January 28, 2002, Mark Nutritionals, Inc. ("MNI") filed suit against
AltaVista in the United States District Court for the Western District of Texas,
San Antonio Division. The claims against AltaVista include unfair competition
and trademark infringement and dilution, under both federal law and the laws of
the State of Texas. MNI is seeking compensatory damages in the amount of $10.0
million and punitive damages. AltaVista believes that these claims are without
merit and plans to vigorously defend against these claims. AltaVista filed its
answer on March 1, 2002, denying the allegations. MNI has filed for Chapter 11
bankruptcy protection. AltaVista is entitled to indemnification by a third party
with respect to this matter.
On April 16, 2002, NCR Corporation filed a complaint in the United States
District Court for the Northern District of Illinois against uBid. The complaint
alleges that uBid has infringed four patents held by NCR and seeks unspecified
monetary damages and injunctive relief. On May 28, 2002, uBid filed its answer
to the complaint, denying the allegations and asserting counterclaims against
NCR. On December 5, 2002, NCR amended the complaint to add four additional
patents. On December 20, 2002, uBid filed its answer to the amended complaint,
denying the allegations and asserting counterclaims against NCR. On January 30,
2003, the parties agreed to settle this matter on mutually agreeable terms. The
Stipulation of Dismissal was filed on February 11, 2003 and was entered by the
Court on March 4, 2003.
47
Item 4. Submission of Matters to a Vote of Security Holders
At the 2002 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") on January 14, 2003, the following matters were acted upon by the
stockholders of the Company:
1. The election of two Class III Directors (David S. Wetherell and
Jonathan Kraft) for the ensuing three years;
2. The authorization of the Board of Directors, in its discretion, should
it deem it to be appropriate and in the best interests of the Company
and its stockholders, to amend the Company's Restated Certificate of
Incorporation, as amended, to effect a reverse stock split of the
Company's issued and outstanding shares of Common Stock by a ratio of
between 1-for-2 and 1-for-25, inclusive, without further approval or
authorization of the Company's stockholders; and
3. Ratification of the appointment of KPMG LLP as independent auditors of
the Company for the current year.
The number of shares of Common Stock issued, outstanding and eligible to
vote as of the record date of November 19, 2002 was 392,957,429. The other
directors of the Company, whose terms of office as directors continued after the
Annual Meeting, are George A. McMillan, Anthony J. Bay and Virginia G. Bonker.
In addition, on March 12, 2003, Peter J. McDonald, a director of the Company
since April 2001, resigned from the Board of Directors due to time constraints
with his position as Senior Vice President of R.H. Donnelley, an independent
marketer of yellow pages advertising, and President of Donnelley Media, a
division of R.H. Donnelley. Subsequent to the Annual Meeting, Francis J. Jules
was elected to the Board of Directors on February 3, 2003. The results of the
voting on each of the matters presented to stockholders at the Annual Meeting
are set forth below:
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
1. Election of two Class III Directors:
David S. Wetherell 299,046,350 5,483,314 N.A. N.A. N.A.
Jonathan Kraft 300,085,707 4,443,957 N.A. N.A. N.A.
2. Authorization of the reverse stock
split 291,004,017 N.A. 12,693,252 832,395 N.A.
3. Ratification of Independent Auditors 301,926,981 N.A. 1,853,222 749,461 N.A.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed with or incorporated by reference in this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 17, 2003
CMGI, Inc.
By: /S/ THOMAS OBERDORF
----------------------------------
Thomas Oberdorf
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
49
CERTIFICATION
I, George A. McMillan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CMGI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
By: /S/ GEORGE A. MCMILLAN
----------------------------------------
George A. McMillan
President and Chief Executive Officer
50
CERTIFICATION
I, Thomas Oberdorf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CMGI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
By: /S/ THOMAS OBERDORF
--------------------------------------
Thomas Oberdorf
Chief Financial Officer and Treasurer
51
EXHIBIT INDEX
Item Description
2.1 Asset Purchase Agreement, by and among Overture Services, Inc., AltaVista
Company, Aurora I, LLC (a wholly owned limited liability company of
AltaVista) and the Registrant, dated as of February 18, 2003, is
incorporated herein by reference to Exhibit 2.1 to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 of Overture
Services, Inc. (File No. 000-26365).
2.2 Registration Rights Agreement between Overture Services, Inc. and
AltaVista Company, dated as of February 18, 2003, is incorporated herein
by reference to Exhibit 2.2 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 of Overture Services, Inc. (File
No. 000-26365).
10.1 Third Amendment to Loan and Security Agreement, dated as of November 12,
2002, by and among SalesLink Corporation, InSolutions Incorporated,
On-Demand Solutions, Inc., Pacific Direct Marketing Corp., and SalesLink
Mexico Holding Corp., as Borrowers, and LaSalle Bank National
Association, as a Lender and as Agent for the Lenders.
52