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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended October 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-23262
CMGI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Brickstone Square 01810
Andover, Massachusetts (Zip Code)
(Address of principal executive
offices)
(978) 684-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of the issuer's common stock, $0.01 par value per
share,
as of December 13, 2001 is 392,092,884
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1
CMGI, INC.
FORM 10-Q
INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets October 31, 2001
(unaudited) and July 31, 2001................................ 3
Condensed Consolidated Statements of Operations Three months
ended
October 31, 2001 and 2000 (unaudited)........................ 4
Condensed Consolidated Statements of Cash Flows Three months
ended
October 31, 2001 and 2000 (unaudited)........................ 5
Notes to Interim Unaudited Condensed Consolidated Financial
Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................. 33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 34
Item 2. Changes in Securities and Use of Proceeds................. 34
Item 6. Exhibits and Reports on Form 8-K.......................... 34
SIGNATURE........................................................... 35
EXHIBIT INDEX....................................................... 36
2
CMGI, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
October 31, July 31,
2001 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 650,829 $ 710,704
Available-for-sale securities..................... 13,655 110,134
Accounts receivable, trade, net of allowance for
doubtful accounts................................ 84,221 111,593
Inventories....................................... 58,770 40,141
Prepaid expenses and other current assets......... 53,480 53,132
----------- -----------
Total current assets............................ 860,955 1,025,704
----------- -----------
Property and equipment, net......................... 156,550 209,554
Investments in affiliates........................... 216,160 239,127
Goodwill and other intangible assets, net of
accumulated amortization........................... 398,105 464,867
Other assets........................................ 129,364 149,679
----------- -----------
$ 1,761,134 $ 2,088,931
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................... $ -- $ 33,594
Current installments of long-term debt............ -- 6,213
Due to Compaq Computer Corporation................ 220,000 --
Accounts payable.................................. 57,499 69,841
Accrued expenses.................................. 281,680 280,023
Other current liabilities......................... 31,983 54,717
----------- -----------
Total current liabilities....................... 591,162 444,388
----------- -----------
Long-term debt, less current installments........... 7,749 1,814
Deferred income taxes............................... -- 20,795
Other long-term liabilities......................... 16,538 19,097
Due to Compaq Computer Corporation and Compaq
Financial Services Corporation..................... 35,000 220,000
Minority interest................................... 149,923 186,440
Commitments and contingencies
Preferred stock, $0.01 par value. Authorized
5,000,000 shares; issued 375,000 Series C
convertible, redeemable preferred stock at October
31, 2001 and July 31, 2001, dividend at 2% per
annum; carried at liquidation value................ 392,531 390,640
Stockholders' equity:
Common stock, $0.01 par value per share.
Authorized 1,400,000,000 shares; issued and
outstanding 352,569,529 shares at October 31,
2001 and 346,725,404 shares at July 31, 2001..... 3,526 3,467
Additional paid-in capital........................ 7,151,677 7,138,132
Deferred compensation............................. (182) (291)
Accumulated deficit............................... (6,579,927) (6,353,233)
----------- -----------
575,094 788,075
Accumulated other comprehensive income (loss)....... (6,863) 17,682
----------- -----------
Total stockholders' equity...................... 568,231 805,757
----------- -----------
$ 1,761,134 $ 2,088,931
=========== ===========
see accompanying notes to interim unaudited condensed consolidated financial
statements
3
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended
October 31,
---------------------
2001 2000
--------- ----------
Net revenue............................................. $ 200,679 $ 358,050
Operating expenses:
Cost of revenue....................................... 181,535 325,087
Research and development.............................. 18,795 51,669
In-process research and development................... -- 1,462
Selling............................................... 42,840 131,322
General and administrative............................ 44,429 84,250
Amortization of intangible assets and stock-based
compensation......................................... 65,925 582,533
Impairment of long-lived assets....................... 36,622 69,606
Restructuring......................................... 17,608 8,841
--------- ----------
Total operating expenses............................ 407,754 1,254,770
--------- ----------
Operating loss.......................................... (207,075) (896,720)
--------- ----------
Other income (expense):
Interest income....................................... 6,620 12,119
Interest expense...................................... (8,158) (22,588)
Other gains (losses), net............................. (8,621) 197,338
Gains on issuance of stock by subsidiaries............ -- 126,589
Equity in losses of affiliates, net................... (12,249) (15,872)
Minority interest, net................................ 17,258 88,852
--------- ----------
(5,150) 386,438
--------- ----------
Loss before income taxes................................ (212,225) (510,282)
Income tax expense...................................... 12,579 126,282
--------- ----------
Net loss................................................ (224,804) (636,564)
Preferred stock accretion............................... (1,890) (1,890)
--------- ----------
Net loss available to common stockholders............... $(226,694) $ (638,454)
========= ==========
Basic and diluted loss per share........................ $ (0.65) $ (2.07)
========= ==========
Shares used in computing basic and diluted loss per
share.................................................. 351,052 307,873
========= ==========
see accompanying notes to interim unaudited condensed consolidated financial
statements
4
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended
October 31,
---------------------
2001 2000
--------- ----------
Cash flows from operating activities:
Net loss............................................... $(224,804) $ (636,564)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation, amortization and impairment charges..... 146,547 680,893
Deferred income taxes................................. 12,579 42,541
Non-operating (gains) losses, net..................... 5,899 (323,927)
Equity in losses of affiliates........................ 12,249 15,872
Minority interest..................................... (17,258) (88,852)
In-process research and development................... -- 1,462
Changes in operating assets and liabilities, excluding
effects from acquired and divested subsidiaries:
Trade accounts receivable............................ 26,309 19,548
Prepaid expenses..................................... 1,785 8,816
Inventories.......................................... (18,629) (12,365)
Accounts payable and accrued expenses................ (37,518) 80,925
Other assets and liabilities, net.................... (1,563) 788
--------- ----------
Net cash used for operating activities.................. (94,404) (210,863)
Cash flows from investing activities:
Additions to property and equipment.................... (15,010) (42,202)
Net proceeds from maturities of (purchases of)
available-for-sale securities......................... 36,395 19,923
Proceeds from liquidation of stock investments......... 15,947 844,016
Investments in affiliates.............................. (978) (46,173)
Cash impact of acquisitions and divestitures of
subsidiaries.......................................... 431 (12,460)
Other, net............................................. (102) (8)
--------- ----------
Net cash provided by investing activities............... 36,683 763,096
--------- ----------
Cash flows from financing activities:
Repayments of notes payable............................ -- (33,570)
Payments of obligations under capital leases........... (2,422) (3,857)
Net proceeds from issuance of common stock............. 506 6,795
Net proceeds from issuance of stock by subsidiaries.... 40 4,382
Other.................................................. (278) (1,931)
--------- ----------
Net cash used for financing activities.................. (2,154) (28,181)
--------- ----------
Net increase (decrease) in cash and cash equivalents.... (59,875) 524,052
Cash and cash equivalents at beginning of period........ 710,704 639,666
--------- ----------
Cash and cash equivalents at end of period.............. $ 650,829 $1,163,718
========= ==========
see accompanying notes to interim unaudited condensed consolidated financial
statements
5
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by CMGI, Inc. ("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, 2001 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, 2001 (as amended on December
12, 2001). The results for the three-month period ended October 31, 2001 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
current year presentation.
Certain costs related to the purchase price of products sold, inbound and
outbound shipping charges, packing supplies and other costs associated with
marketplace business of the Company's eBusiness and Fulfillment segment are
classified as cost of revenue. Certain costs related to fulfillment, including
warehousing costs related to activities such as receiving goods and the picking
and packing of goods for shipment within the Company's eBusiness and
Fulfillment segment are classified as selling expenses. The Company's inventory
balances principally consist of finished goods.
B. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 will apply to all business combinations that the Company enters into
after June 30, 2001, and eliminates the pooling-of-interests method of
accounting. SFAS 142 is effective for fiscal years beginning after December 15,
2001. Under the new statements, 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 statements. Other intangible assets
will continue to be amortized over their useful lives.
The Company is required to adopt these statements for accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
year 2003. Application of the non-amortization provisions of the statement is
indeterminable at October 31, 2001 as the Company intends to continue to
perform an impairment analysis of the remaining goodwill and other intangible
assets through the end of fiscal year 2002 under its existing policy. Upon
adoption on August 1, 2002, the Company will perform the required impairment
tests of goodwill and indefinite lived intangible assets under SFAS No. 142 and
has not yet determined what effect these tests will have on the operations and
financial position of the Company.
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 has not completed its
analysis of the impact of adopting SFAS No. 143, but does not expect this
statement to have a material impact on its operations or financial position.
6
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
In October 2001, the FASB issued SFAS No. 144, "Impairment on Disposal of
Long-Lived Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, the criteria required for classifying an asset as
held-for-sale have been significantly changed. Assets held-for-sale are stated
at the lower of their fair values or carrying amounts, and depreciation is no
longer recognized. In addition, the expected future operating losses from
discontinued operations will be displayed in discontinued operations in the
period in which the losses are incurred rather than as of the measurement date.
More dispositions will qualify for discontinued operations treatment in the
statement of operations under the new rules. The Company is currently
evaluating the impact of SFAS No. 144 to its condensed consolidated financial
statements.
C. Other Gains (Losses), Net
The following schedule reflects the components of "Other gains (losses),
net":
Three Months Ended
October 31,
-------------------
2001 2000
--------- --------
(in thousands)
Gain (loss) on sales of marketable securities......... $ (27,525) $202,328
Gain on derivative and sale of hedged Yahoo!, Inc.
common stock......................................... 53,897 87,832
Gain on sale of investment in eGroups, Inc............ -- 8,114
Loss on impairment of marketable securities........... -- (90,183)
Loss on impairment of investments in affiliates....... (11,528) (3,562)
Loss on sale of Activate, Inc......................... (20,743) --
Other................................................. (2,722) (7,191)
--------- --------
$ (8,621) $197,338
========= ========
During the three months ended October 31, 2001, the Company sold
approximately 7.1 million shares of Primedia, Inc. (Primedia) common stock for
total proceeds of approximately $15.9 million and recorded a pre-tax loss of
approximately $27.5 million on these sales.
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 in the condensed consolidated statement of
operations of approximately $53.9 million.
During the three months ended October 31, 2001, the Company completed the
sale of its majority-owned subsidiary, Activate, Inc. (Activate), to Loudeye
Technologies, Inc. and recorded a pre-tax loss of approximately $20.7 million.
During the three months ended October 31, 2001, the Company recorded
impairment charges of approximately $11.5 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.
During the three months ended October 31, 2000, the Company sold marketable
securities for total proceeds of approximately $844.0 million and recorded a
net pre-tax gain of approximately $202.3 million on these sales. These sales
primarily consisted of approximately 8.4 million shares of Lycos, Inc. (Lycos)
stock for proceeds of approximately $394.7 million, approximately 241.0 million
shares of Pacific Century CyberWorks Limited (PCCW) stock for proceeds of
approximately $190.2 million, approximately 3.7 million shares of Kana
Communications, Inc. (Kana) stock for proceeds of approximately $137.6 million,
approximately 1.3 million shares of Critical Path, Inc. (Critical Path) stock
for proceeds of approximately $72.8 million.
7
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
In August 2000, Yahoo! acquired eGroups, Inc. (eGroups) and in connection
therein, the shares of eGroups held by CMG@Ventures III, LLC (CMG@Ventures III)
were converted into shares of Yahoo! common stock. The Company recorded a pre-
tax gain of $8.1 million on the conversion of its investment in eGroups during
the fiscal quarter ended October 31, 2000. Such gain was recorded net of the
18% interest attributable to CMG@Ventures III's profit members.
Also, included in "Other gains (losses), net" during the three months ended
October 31, 2000 were impairment charges of approximately $90.2 million related
to the Company's holdings of available-for-sale securities to reflect other-
than-temporary impairment. These charges primarily consisted of impairment
charges of approximately $45.4 million and $37.3 million related Hollywood
Entertainment Corporation and Marketing Services Group Inc., common stock,
respectively.
During the three months ended October 31, 2000, the Company settled the
first and second tranche of this agreement under its borrowing agreement that
hedged a portion of the Company's investment in Yahoo! common stock. The
Company recognized a pre-tax gain of approximately $87.7 million related to the
settlement of the first and second tranche.
D. Gains on Issuance of Stock by Subsidiaries
During the three months ended October 31, 2000, the Company recognized gains
on issuance of stock by subsidiaries primarily related to the issuance of
approximately 14.9 million shares by Engage, Inc. (Engage), a majority-owned
subsidiary of the Company, valued at approximately $257.2 million in its
acquisitions of Space Media Holdings Limited and MediaBridge Technologies, Inc.
With these transactions, the Company's ownership interest in Engage decreased
from approximately 86% to approximately 78%. The Company provided for deferred
income taxes resulting from the gain on issuance of stock by Engage.
E. Impairment of Long-Lived Assets
The Company records impairment charges as a result of management's ongoing
business review and impairment analysis performed under its existing policy
regarding impairment of long-lived assets. Where impairment indicators were
identified, management determined the amount of the impairment charge by
comparing the carrying value of long-lived assets to their fair value.
Management determines fair value of goodwill and certain other intangible
assets based on a combination of the discounted cash flow methodology, which is
based upon converting expected cash flows to present value, and the market
approach, which includes analysis of market price multiples of companies
engaged in lines of business similar to the Company. The market price multiples
are 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 predominately utilizes third-party valuation reports in
its determination of fair value. Management determines fair value of other
long-lived assets, such as property and equipment, based on third party
valuation reports.
During the first quarter of fiscal year 2002, the Company recorded
impairment charges of approximately $36.6 million. These charges included asset
impairment charges of $27.4 million and $6.5 million related to the purchase of
certain leased equipment previously held under operating and capital leases by
NaviSite, Inc. (NaviSite) and AltaVista Company (AltaVista), respectively (see
Note L). The Company also recorded approximately $2.8 million related to
impairment of customer base and workforce in place intangible assets at Tallan,
Inc. (Tallan).
During the first quarter of fiscal 2001, the Company recorded impairment
charges totaling approximately $69.6 million. Subsequent to October 31, 2000,
CMGI announced its decisions to exit the businesses conducted
8
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
by its subsidiaries iCAST Corporation (iCAST) and 1stUp.com Corporation
(1stUp). In connection with these decisions, management determined that the
carrying value of certain intangible assets, principally goodwill, were
permanently impaired and recorded impairment charges of approximately $3.6
million and $23.3 million related to iCAST and 1stUp, respectively. The Company
also recorded other impairment charges during the first quarter of fiscal 2001
totaling approximately $42.7 million, consisting primarily of $16.8 million
related to intangible assets of Engage, $8.9 million related to intangible
assets of MyWay.com Corporation (MyWay), and $10.1 million related to
intangible assets of AdForce, Inc. (AdForce), a subsidiary of ProvisionSoft,
Inc. (formerly CMGion, Inc.), a subsidiary of the Company.
F. Restructuring Charges
During the three months ended October 31, 2001, the Company recorded net
restructuring charges totaling approximately $17.6 million in accordance with
Emerging Issues Task Force (EITF) Issue No. 94-3, EITF Issue No. 95-3 and Staff
Accounting Bulletin No. (SAB) 100.
The Company's restructuring initiatives involved strategic decisions to exit
certain businesses or to re-evaluate the current state of on-going businesses.
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 include employee termination costs as a
result of a reduction in workforce and salary expense for certain employees
involved in the restructuring efforts. Employees affected by the restructuring
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.
The restructuring charges incurred at Engage of approximately $12.5 million
are primarily a result of the closing of its on-line advertising operations and
its implementation of a restructuring plan designed to reduce its corporate
overhead costs through reductions in the size of its finance and marketing
staffs. The closing of the on-line advertising business resulted in severance
costs incurred in connection with the termination of approximately 232
employees and contract termination costs in connection with the costs to exit
facility and equipment leases. The restructuring charges incurred by AltaVista
of approximately $10.0 million primarily relate to severance costs associated
with a reduction in the workforce of approximately 120 persons, costs
associated with the closing of its Irving, California office location, and the
write-off of an information systems software package. The restructuring charges
incurred by MyWay of approximately $5.9 million primarily relate to the write-
off of property and equipment, as well as the termination of customer and
vendor contracts. The restructuring charges incurred at Tallan of approximately
$4.0 million are primarily related to severance costs associated with a
reduction in the workforce of approximately 72 persons, as well as costs
associated with the closing of five office locations.
During the first quarter of fiscal 2002, the Company settled certain vendor
and customer contractual obligations for amounts less than originally
anticipated. As a result, the Company recorded a net restructuring adjustment
of approximately $17.7 million to the accrued restructuring balance of July 31,
2001, primarily related to a reduction in payments by NaviPath, Inc. (NaviPath)
to third parties to terminate purchase commitments and service contracts from
the amounts originally estimated. NaviPath was successful in negotiating
termination payments on certain purchase commitments and service contracts for
amounts less than originally estimated. This was slightly offset by an
additional restructuring charge recorded as an adjustment by NaviPath in the
first quarter of fiscal year 2002 related to severance costs and legal and
other professional fees incurred in connection with the closing of its
operations.
9
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
The following tables summarizes the restructuring accrual included as a
component of accrued expenses from July 31, 2001 through October 31, 2001:
Employee
Related Contractual Asset
Expenses Obligations Impairments Total
-------- ----------- ----------- --------
(in thousands)
Accrued restructuring balance
at July 31, 2001.............. $ 4,168 $ 91,384 $ -- $ 95,552
Q1 Restructuring............... 5,916 10,822 18,589 35,327
Restructuring adjustments to Q4
2001 charges.................. -- (17,719) -- (17,719)
Cash charges................... (6,120) (12,597) -- (18,717)
Non-cash charges............... -- (6,056) (18,589) (24,645)
------- -------- -------- --------
Accrued restructuring balance
at October 31, 2001........... $ 3,964 $ 65,834 $ -- $ 69,798
======= ======== ======== ========
The Company anticipates that the remaining restructuring charges will be
settled by February 2003. It is expected the payments of employee related
expenses will be substantially complete within three months. The remaining
contractual obligation payments are primarily related to lease obligations for
facilities or equipment.
The net restructuring charges and adjustments for the three months ended
October 31, 2001 and 2000 would have been allocated as follows had the Company
recorded the expense and adjustment within the functional department of the
restructured activities:
Three months
ended October
31,
---------------
2001 2000
------- ------
(in thousands)
Cost of revenue............................................. $(9,288) $ 498
Research and development.................................... 3,313 1,602
Selling..................................................... 8,061 5,944
General and administrative.................................. 15,522 797
------- ------
$17,608 $8,841
======= ======
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 five operating
segments that are strategic business units offering distinctive products and
services that are marketed through different channels.
The five operating segments are: (i) Interactive Marketing, (ii) eBusiness
and Fulfillment, (iii) Search and Portals, (iv) Infrastructure and Enabling
Technologies and (v) Internet Professional Services. Management evaluates
segment performance based on segment net revenue, operating income (loss) and
"pro forma operating income (loss)", which is defined as the operating income
(loss) excluding expenses related to in-process research and development,
depreciation, long-lived asset impairment and amortization of intangible assets
and stock-based compensation.
10
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
Summarized financial information of the Company's operations by business
segment is as follows:
Three Months Ended
October 31,
---------------------
2001 2000
---------- ---------
(in thousands)
Net revenue:
Interactive Marketing.............................. $ 14,848 $ 48,685
eBusiness and Fulfillment.......................... 132,698 180,532
Search and Portals................................. 21,859 60,439
Infrastructure and Enabling Technologies........... 20,365 35,053
Internet Professional Services..................... 10,909 33,341
---------- ---------
$ 200,679 $ 358,050
========== =========
Operating loss:
Interactive Marketing.............................. $ (36,193) $(240,919)
eBusiness and Fulfillment.......................... (40,743) (40,594)
Search and Portals................................. (56,039) (353,656)
Infrastructure and Enabling Technologies........... (44,991) (193,725)
Internet Professional Services..................... (15,267) (45,731)
Other.............................................. (13,842) (22,095)
---------- ---------
$(207,075) $(896,720)
========== =========
Pro forma operating income (loss):
Interactive Marketing.............................. $ (10,836) $ (54,763)
eBusiness and Fulfillment.......................... (8,123) (2,126)
Search and Portals................................. (11,834) (52,745)
Infrastructure and Enabling Technologies........... (25,797) (83,841)
Internet Professional Services..................... (1,651) 2,109
Other.............................................. (9,867) (20,032)
---------- ---------
$ (68,108) $(211,398)
========== =========
H. Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed based on the
weighted average number of common shares outstanding during the period. The
dilutive effect of common stock equivalents and convertible preferred stock are
included in the calculation of diluted earnings per share only when the effect
of their inclusion would be dilutive. Approximately 4.5 million and 10.3
million weighted average common stock equivalents and approximately 9.8 million
and 9.6 million shares representing the weighted average effect of assumed
conversion of convertible preferred stock were excluded from the denominator in
the diluted loss per share calculation for the three months ended October 31,
2001 and 2000, respectively.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss) the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial for the three months ended October
31, 2001 and 2000.
Subsequent to October 31, 2001, the Company issued a total of approximately
4.5 million and 34.7 million shares of its common stock as a result of the
transactions described in Notes L and N below, respectively.
11
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
I. Comprehensive Loss
The components of comprehensive loss, net of income taxes, are as follows:
Three months ended
October 31,
----------------------
2001 2000
--------- -----------
(in thousands)
Net loss........................................... $(224,804) $ (636,564)
Net unrealized holding loss arising during period.. (34,100) (453,118)
Reclassification adjustment for net (gain) loss
realized in net loss.............................. 9,555 (7,572)
--------- -----------
Comprehensive loss................................. $(249,349) $(1,097,254)
========= ===========
J. Condensed Consolidated Statements of Cash Flows Supplemental Information
Three months
ended
October 31,
--------------
2001 2000
------- ------
(in thousands)
Cash paid during the period for:
Interest..................................................... $ 503 $1,942
======= ======
Income taxes................................................. $ 614 $4,738
======= ======
Cash received during the period for:
Federal income tax refund.................................... $13,975 $ --
======= ======
During the three months ended October 31, 2001, 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 to Compaq Computer Corporation (Compaq), a significant stockholder
of CMGI, as a semi-annual interest payment valued at approximately $11.5
million related to notes payable issued in the acquisition of AltaVista.
Effective August 1, 2001, the Company's subsidiary, NaviSite, restructured
certain operating lease agreements with Compaq Financial Services Corporation,
a wholly-owned subsidiary of Compaq (see Note L).
In October 2001, the Company's subsidiary, CMG@Ventures I, LLC, distributed
approximately 1.7 million shares of Terra Networks, S.A. to certain of its
profit members.
K. Derivative Financial Instruments
In April 2000, the Company entered into a borrowing arrangement that hedged
a portion of the Company's investment in common stock of Yahoo!. Under the
terms of the contract, the Company agreed to deliver, at its discretion, either
cash or Yahoo! common stock in three separate tranches, with maturity dates
ranging from August 2000 to February 2001. The Company executed the first
tranche in April 2000 and received approximately $106.4 million. The Company
subsequently settled this tranche through the delivery of 581,499 shares of
Yahoo! common stock in August 2000. In May 2000, the Company received
approximately $68.5
12
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
million and $5.7 million upon the execution of the second and third tranches,
respectively. The Company settled the second tranche for cash totaling
approximately $33.6 million in October 2000. The Company settled the third
tranche through the delivery of 47,684 shares of Yahoo! common stock in
February 2001. In November 2000, the Company entered into a new agreement to
hedge the Company's investment in 581,499 shares of Yahoo! common stock. The
Company received approximately $31.5 million of cash in connection with this
new agreement. Under the terms of the new contract, the Company delivered
581,499 shares of Yahoo! common stock on August 1, 2001, and recognized a pre-
tax gain in the consolidated statement of operations of approximately $53.9
million. The net gain is included in "Other gains (losses), net", in the
consolidated statement of operations.
L. Agreements with Compaq Computer Corporation and Compaq Financial Services
Corporation
On October 29, 2001, the Company and its majority-owned subsidiaries,
AltaVista and NaviSite entered into agreements with Compaq, a significant
stockholder of CMGI, and Compaq's wholly-owned subsidiary, Compaq Financial
Services Corporation (CFS). The Company's subsidiary, NaviSite purchased and
recorded equipment from CFS effective August 1, 2001, with a fair market value
of $9.6 million, previously leased by NaviSite under operating lease agreements
expiring through 2003, in exchange for a note payable of approximately $35.0
million. Accordingly, as the fair value of the equipment, based on a
preliminary independent appraisal, was less than the associated debt
obligation, NaviSite recorded an impairment charge on long-lived assets in the
first quarter of fiscal 2002 of approximately $27.4 million. The $35.0 million
due to CFS was executed in the form of a convertible note payable to CFS in the
total amount of $55.0 million on November 8, 2001, as described below. As of
October 31, 2001, the $35.0 million due to CFS has been classified as long term
Due to Compaq Computer Corporation and Compaq Financial Services Corporation in
the accompanying condensed consolidated balance sheets.
Additionally, under the terms of these agreements, AltaVista agreed to
purchase certain equipment which it had previously leased from CFS under
operating and capital lease agreements in exchange for a cash payment of $20.0
million. Based on a preliminary independent appraisal, the fair market value of
the equipment was determined to be $7.9 million. As the fair market value of
the equipment was less than the sum of the cash payment and the carrying value
of the equipment under capital lease agreements, net of the remaining
obligations, AltaVista recorded an impairment charge on long-lived assets in
the first quarter of fiscal 2002 of approximately $6.5 million. Subsequent to
October 31, 2001, AltaVista completed and recorded the purchase of this
equipment.
Subsequent to October 31, 2001, as part of the agreement with CFS, NaviSite
received $20.0 million in cash from CFS in exchange for a six-year convertible
note payable, which was executed on November 8, 2001. This note, which also
relates to the $35.0 million equipment purchase described above, bears interest
at 12% and requires payment of interest only for the first three years from the
date of issuance. A portion of the interest payable to CFS in the first two
years may be paid in NaviSite common stock. Principal and interest payments are
due on a straight-line basis commencing in year four until maturity on the
sixth anniversary from the issuance date. The convertible note payable is
secured by substantially all assets of NaviSite and cannot be prepaid. Subject
to NaviSite stockholder approval, being sought in December 2001, the principal
balance may be converted into NaviSite common stock at the option of the holder
at any time prior to maturity at a conversion rate of $0.26 per share. Should
CFS convert its note payable into NaviSite's common stock, CFS would own a
controlling interest in NaviSite.
Also, subsequent to October 31, 2001, as part of these agreements, Compaq
agreed to deem the Company's $220.0 million in face amounts 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.
13
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
M. Contingencies
In December 1999, Neil Braun, a former officer of iCAST, a wholly-owned
subsidiary of the Company, 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 alleges breach of contract regarding
his termination from iCAST and claims that he is 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
claims that, under quantum meruit principles, he is entitled to lost
compensation. Mr. Braun seeks damages of approximately $50 million and requests
specific performance of the acceleration and exercise of options. On February
2, 2001, the Court heard oral argument on defendant's Motion for Summary
Judgment and took the matter under advisement.
In October 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. Mr. Braun's promissory estoppel claim and quantum
meruit claim were not disposed of on summary judgment. Trial on these claims is
currently scheduled to begin in January 2002. The Company and iCAST believe
these claims are without merit and plan to vigorously defend against these
claims.
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 believe these claims are without merit and plan to
vigorously defend against these claims. On November 29, 2001, the Court
sustained the defendants' demurrers regarding, among other things, Black's
breach of contract claims against the Company and allegations made on behalf of
the "trust plaintiffs," but granted Black leave to amend the complaint.
The Company is also subject to a number of actions brought by former
employees as well as other disputes that arise in the ordinary course of
business.
Although the Company believes that, as to each of these actions, the cases
have no merit, and that the ultimate resolution of these disputes will not have
a material adverse impact on its financial position, results of operations, or
cash flows, any adverse trial or jury verdicts could result in a material loss
to the Company. The costs and other effects of pending or future litigation,
claims, settlements, and judgments, and changes in those matters, could have a
material adverse effect on the Company's business, financial condition and
operating results. At this time, the Company is unable to predict the outcomes
of the litigation and cannot reasonably estimate a range of possible loss given
the current status of the cases.
N. Subsequent Events
In November 2001, the Company completed the agreements with Compaq and CFS
which are described in Note L.
In November 2001, the Company consummated the repurchase of all the
outstanding shares of its Series C Convertible Preferred Stock (Series C
Preferred Stock) pursuant to privately negotiated stock exchange agreements
with the holders of the Series C Preferred Stock. In connection therewith, the
Company announced the retirement of the Series C Preferred Stock effective
immediately. Under these agreements, the Company repurchased all of the
outstanding shares of 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.
14
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
In addition, due to the delayed delivery obligation with respect to the PCCW
shares, the Company agreed to make cash payments to the former holders of the
Series C Preferred Stock, 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 ceases upon delivery of the PCCW shares
and any payment due for the period during which the PCCW shares are delivered
to the former holders of the Series C Preferred Stock will be reduced on a pro
rata basis.
Subsequent to October 31, 2001, the Company announced its decision to cease
funding its subsidiary MyWay. As a result, MyWay management has begun to
migrate customers in advance of an expected wind-down of operations currently
expected to be completed during the second quarter of fiscal 2002.
15
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended, that
involve risks and uncertainties. All statements other than statements of
historical information provided herein may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes",
"anticipates", "plans", "expects" and similar expressions are intended to
identify forward-looking statements. Factors that could cause actual results to
differ materially from those reflected in the forward-looking statements
include, but are not limited to, those discussed in this section under the
heading "Factors That May Affect Future Results" and elsewhere in this report
and the risks discussed in the Company's other filings with the SEC. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
Basis of Presentation
The Company reports five operating segments: i) Interactive Marketing, ii)
eBusiness and Fulfillment, iii) Search and Portals, iv) Infrastructure and
Enabling Technologies, and v) Internet Professional Services. CMGI also invests
in companies involved in various aspects of the Internet through its affiliated
venture capital arm, CMGI@Ventures. In accordance with 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 CMGI exclude the effect of
transactions between CMGI's subsidiaries.
Three months ended October 31, 2001 compared to three months ended October 31,
2000
NET REVENUE:
Three As a% Three As a%
Months of Months of
Ended Total Ended Total
October 31, Net October 31, Net
2001 Revenue 2000 Revenue $ Change % Change
----------- ------- ----------- ------- --------- --------
(in thousands)
Interactive Marketing... $ 14,848 7% $ 48,685 14% $ (33,837) (70)%
eBusiness and
Fulfillment............ 132,698 66% 180,532 50% (47,834) (26)%
Search and Portals...... 21,859 11% 60,439 17% (38,580) (64)%
Infrastructure and
Enabling Technologies.. 20,365 10% 35,053 10% (14,688) (42)%
Internet Professional
Services............... 10,909 6% 33,341 9% (22,432) (67)%
-------- -------- ---------
Total................... $200,679 100% $358,050 100% $(157,371) (44)%
======== === ======== === ========= ===
The decrease in net revenue for the three months ended October 31, 2001 as
compared to the prior year was primarily a result of the effects of the sale or
closing of operations of several companies in fiscal 2001 and decreased net
revenue at existing companies during the first quarter of fiscal year 2002. The
decrease in net revenue within the Interactive Marketing segment was primarily
due to the continued decline in the on-line advertising market as well as the
decision by Engage to exit its on-line advertising business during the first
quarter of fiscal year 2002. This decrease was also due to an approximate 88%
decrease in license revenue at Engage related to its AdManager software, and to
a lesser extent, its ProfileServer and ContentServer products, offset slightly
by an increase in its service revenue. The decrease in net revenue within the
eBusiness and Fulfillment segment was primarily the result of the impact of the
sale of the Company's majority interest in Signatures SNI, Inc. (Signatures) in
February 2001 and decreased net revenue at SalesLink Corporation
16
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
(SalesLink) and uBid, Inc. (uBid). Net revenue at Saleslink declined as a
result of the decline in volume within SalesLink's supply chain management
business due to continued softness in the technology sector. Net revenue at
uBid decreased due to an increase in drop shipment sales as a percent of total
sales from the first quarter of fiscal 2001 to the first quarter of fiscal
2002. Drop shipment sales result in uBid recording its net fee on the
transaction as revenue as opposed to direct shipment sales which result in uBid
recording the gross merchandise sale as revenue. This decrease was partially
offset by an increase in the average order value of items sold during the
period. The decrease in net revenue within the Search and Portals segment was
primarily the result of a decrease in net revenue at AltaVista. During the
second half of fiscal 2001, AltaVista made changes in its business strategy
from one that focused on on-line advertising to one that focuses on enterprise
search software. As a result of this change and the continued softness in the
on-line advertising market, first quarter advertising net revenue decreased
versus the same period in the prior year. This decrease in on-line advertising
was slightly offset by an increase in AltaVista's software license net revenue.
The decrease in net revenue within the Infrastructure and Enabling Technologies
segment was primarily the result of the closing of operations at AdForce and
1stUp during fiscal year 2001, as well as to a decrease in net revenue at
Activate and NaviSite. Activate was sold in September 2001, therefore the first
quarter of fiscal year 2002 reflected only a partial quarter of net revenue
while the net revenue from Activate in the prior year reflects a full quarter
of net revenue. The decrease in net revenue at NaviSite was due to an
approximate 44% decrease in its unaffiliated customer base as compared to the
same period in the prior year. The decrease in net revenue within the Internet
Professional Services segment was primarily due to the decline in the custom
programming segment of information technology services. This decline resulted
in a decrease in the billable rates at Tallan. Additionally, Tallan completed
or reduced the scope of a number of projects prior to the first quarter of
fiscal 2002. The decline in billable hours combined with reduced billable rates
resulted in reduced net revenue as compared to the same period of the prior
year. The Company expects to report future consolidated net revenue growth as a
result of increased net revenue from certain existing companies, in particular
uBid, which is anticipated to benefit from the completion of the implementation
of its order management and warehouse information system as well as from the
completion of the build out of a computer and consumer electronics
refurbishment center.
COST OF REVENUE:
Three Three
Months Months
Ended As a% of Ended As a% of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- --------- --------
(in thousands)
Interactive Marketing... $ 9,940 67% $ 35,184 72% $ (25,244) (72)%
eBusiness and
Fulfillment............ 120,291 91% 158,762 88% (38,471) (24)%
Search and Portals...... 10,498 48% 35,086 58% (24,588) (70)%
Infrastructure and
Enabling Technologies.. 32,252 158% 73,498 210% (41,246) (56)%
Internet Professional
Services............... 8,554 78% 22,557 68% (14,003) (62)%
-------- -------- ---------
Total................... $181,535 90% $325,087 91% $(143,552) (44)%
======== === ======== === ========= ===
Cost of revenue consisted primarily of expenses related to the cost of
products purchased for sale or distribution. Additionally, cost of revenue
included expenses related to the content, connectivity and production
associated with delivering the Company's products and services. The Company's
gross margin increased to approximately 10% for the quarter ended October 31,
2001 from 9% in the same period of the prior fiscal year, primarily due to the
shift in focus from lower margin on-line advertising business models to higher
margin
17
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
software business models at Engage and AltaVista, as well as the effects of the
closing of operations of iCAST, 1stUp and ExchangePath, LLC (ExchangePath)
during fiscal year 2001. Gross margins within the Interactive Marketing segment
increased to approximately 33% for the period ending October 31, 2001 from
approximately 28% in the same period of the prior year primarily due to
increased margins at Engage as a result of its decision to cease operations of
its lower margin on-line advertising business and to focus on its higher margin
software business. Gross margins within the eBusiness and Fulfillment segment
decreased to approximately 9% from approximately 12% in the same period of the
prior year primarily due to lower sales levels and decreased pricing of
SalesLink's services within the supply chain management business, complications
with the implementation of a new order management system at uBid and the effect
of the deconsolidation of Signatures. The decrease in gross margins at
SalesLink was due to decreased pricing, increased depreciation and increased
cost of shipping supplies and outside labor associated with the transition to
its new distribution center in Memphis, Tennessee. The decrease in gross
margins at uBid is primarily a result of higher inventory and inventory related
costs as a percentage of sales during the current period, due largely to costs
associated with the conversion to a new order management system and a new
warehouse facility. Gross margins within the Search and Portals segment
increased to approximately 52% from approximately 42% in the same period of the
prior year primarily as a result of AltaVista's shift in its business focus to
the higher margin search software business model from the lower margin on-line
advertising and portal-based business model. Gross margins within the
Infrastructure and Enabling Technologies segment increased to approximately
(58%) from approximately (110%) in the same period from the prior year
primarily as a result of the closing of operations at 1stUp and improvement of
margins at NaviSite. The improvement at NaviSite was a result of restructuring
efforts that lowered labor costs through increased efficiencies and headcount
reductions and reduced equipment expenses resulting from the restructuring of
certain operating leases. Gross margins within the Internet Professional
Services segment have decreased to approximately 22% from approximately 32% for
the same period of the prior fiscal year primarily as a result of the decline
in net revenue and the fixed cost structure at Tallan.
RESEARCH AND DEVELOPMENT EXPENSES:
Three Three
Months Months
Ended As a % of Ended As a % of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Interactive Marketing... $ 4,978 34% $14,968 31% $ (9,990) (67)%
eBusiness and
Fulfillment............ -- -- 523 -- (523) (100)%
Search and Portals...... 9,724 44% 24,103 40% (14,379) (60)%
Infrastructure and
Enabling Technologies.. 4,093 20% 12,075 34% (7,982) (66)%
Internet Professional
Services............... -- -- -- -- -- N/A
------- ------- --------
Total................... $18,795 9% $51,669 14% $(32,874) (64)%
======= === ======= === ======== ====
Research and development expenses consisted 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 decreased primarily due to
the shift in business focus at Engage and AltaVista and the closing of
operations at iCAST, 1stUp and ExchangePath. The decrease within the
Interactive Marketing segment was primarily the result of the effects of the
closing of Engage's on-line advertising operations during the first quarter of
fiscal year 2002. The decrease within the Search and Portals segment was
primarily the result of management's restructuring initiatives at AltaVista,
the closing of operations at iCAST and the consolidation of
18
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
technology platforms at MyWay. The decrease at AltaVista was primarily related
to a reduction of headcount and a reduction in the development efforts of the
AltaVista portal site in connection with the change in focus from an on-line
advertising and portal-based business model to a search software business
model. The decrease in the Infrastructure and Enabling Technologies segment was
primarily the result of the closing of operations at AdForce, ExchangePath and
1stUp during fiscal year 2001.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES:
For the three months ended October 31, 2001 the Company did not incur any
in-process research and development expense. In-process research and
development expense totaled $1.5 million for the three months ended October 31,
2000. The in-process research and development expenses in the first quarter of
fiscal 2001 related to the one-time charges taken in connection with the
acquisition of MediaBridge Technologies, Inc. by Engage in September 2000 and
the Company's investment in Avamar Technologies, Inc.
SELLING EXPENSES:
Three Three
Months Months
Ended As a % of Ended As a % of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Interactive Marketing... $ 8,123 55% $ 37,535 77% $(29,412) (78)%
eBusiness and
Fulfillment............ 13,697 10% 14,660 8% (963) (7)%
Search and Portals...... 14,147 65% 50,188 83% (36,041) (72)%
Infrastructure and
Enabling Technologies.. 5,269 26% 23,720 68% (18,451) (78)%
Internet Professional
Services............... 844 8% 1,934 6% (1,090) (56)%
Other................... 760 -- 3,285 -- (2,525) (77)%
------- -------- --------
Total................... $42,840 21% $131,322 37% $(88,482) (67)%
======= === ======== === ======== ===
Selling expenses consisted primarily of advertising and other general
marketing related expenses, compensation and employee-related expenses, sales
commissions, facilities costs, credit card processing fees, tradeshow expenses
and travel costs. Certain costs related to fulfillment, including warehousing
costs related to activities such as receiving goods and the picking and packing
of goods for shipment within the Company's eBusiness and Fulfillment segment
are classified as selling expenses. Selling expenses decreased during the three
months ended October 31, 2001 as compared to the same period in the prior year
primarily due to headcount reductions, lower sales commissions as a result of
lower net revenue and reduced headcount, a reduction of marketing campaigns,
the closing of the operations of AdForce, ExchangePath, 1stUp, the closing of
Engage's on-line advertising business and the effect of the deconsolidation of
Signatures and the sale of Activate. The decrease within the Interactive
Marketing segment was primarily the result of a decrease in headcount and
associated sales commissions and the consolidation of office facilities at
Engage as a result of the closing of its on-line advertising business, as well
as reductions in travel and consulting expenses and advertising and trade show
expenses for its continuing operations. The decrease in the eBusiness and
Fulfillment segment was primarily the result of the sale of the Company's
majority interest in Signatures in February 2001. The decrease within the
Search and Portals segment was primarily the result of the decrease in
headcount and the reduction in scope of certain sales and marketing campaigns
at AltaVista, the closing of operations at iCAST and a reduction in spending at
MyWay due to the Company's decision to close the operations of MyWay. The
decrease in the Infrastructure and Enabling Technologies segment was primarily
the
19
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
result of the decrease in headcount, sales commissions and a reduction of
expenses for marketing programs, advertising and product literature at
NaviSite, the closing of operations at NaviPath, the closing of operations at
AdForce, ExchangePath and 1stUp and the sale of Activate. The decrease within
the Internet Professional Services segment was primarily the result of the
decrease in headcount and the reduction in scope of certain sales and marketing
campaigns at Tallan. The decrease in the Other expenses was primarily the
result of a reduction in corporate marketing department headcount and other
costs associated with the Company's corporate marketing programs.
GENERAL AND ADMINISTRATIVE EXPENSES:
Three Three
Months Months
Ended As a % of Ended As a % of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Interactive Marketing... $ 3,979 27% $19,449 40% $(15,470) (80)%
eBusiness and
Fulfillment............ 8,457 6% 10,126 6% (1,669) (16)%
Search and Portals...... 5,364 25% 11,331 19% (5,967) (53)%
Infrastructure and
Enabling Technologies.. 12,158 60% 18,054 52% (5,896) (33)%
Internet Professional
Services............... 3,669 34% 7,298 22% (3,629) (50)%
Other................... 10,802 -- 17,992 -- (7,190) (40)%
------- ------- --------
Total................... $44,429 22% $84,250 24% $(39,821) (47)%
======= === ======= === ======== ===
General and administrative expenses consist primarily of compensation and
related costs, facilities costs, bad debt expenses and fees for professional
services. General and administrative expenses decreased during the three months
ended October 31, 2001 as compared to the same period in the prior year
primarily due to headcount reductions, the consolidation of office space,
reduced information systems costs, the closing of the operations of AdForce,
ExchangePath, 1stUp, the closing of the on-line advertising operations of
Engage and the effect of the deconsolidation of Signatures and sale of
Activate. The decrease in the Interactive Marketing segment was primarily the
result of the decrease in headcount and the consolidation of office facilities
at Engage, primarily as a result of the closing of its on-line advertising
business. The decrease in the eBusiness and Fulfillment segment was primarily
the result of the sale of the Company's majority interest in Signatures. The
decrease in the Search and Portals segment was primarily the result of
headcount reductions and management's restructuring initiatives at AltaVista
and MyWay, as well as the closing of operations at iCAST. The decrease at
AltaVista reflects reduced information system costs, reduced headcount costs
and reduced costs related to the consolidation of office space. The decrease at
MyWay was primarily the result of a reduction in spending at MyWay due to the
Company's determination to cease funding the operations of MyWay. The decrease
in the Infrastructure and Enabling Technologies segment was primarily due to
the closing of operations at AdForce, ExchangePath and 1stUp, the sale of
Activate and the closing of operations at NaviPath, partially offset by a
slight increase at NaviSite. The increase at NaviSite was primarily due to
increased professional fees, partially offset by a decrease in headcount
related expenses. The decrease in the Internet Professional Services segment
was primarily the result of a decrease in headcount and a reduction in overall
spending at Tallan. The decrease in the Other expenses, which includes certain
corporate administrative functions such as legal, finance and business
development was primarily the result of a decrease in headcount as part of an
effort to reduce spending across all Corporate administrative functions.
20
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
AMORTIZATION OF INTANGIBLE ASSETS AND STOCK-BASED COMPENSATION:
Three Three
Months Months
Ended As a % of Ended As a % of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- --------- --------
(in thousands)
Interactive Marketing... $11,546 78% $160,859 330% $(149,313) (93)%
eBusiness and
Fulfillment............ 30,996 23% 33,555 19% (2,559) (8)%
Search and Portals...... 15,732 72% 276,240 457% (260,508) (94)%
Infrastructure and
Enabling Technologies.. 1,259 6% 64,540 184% (63,281) (98)%
Internet Professional
Services............... 6,338 58% 47,283 142% (40,945) (87)%
Other................... 54 -- 56 -- (2) (4)%
------- -------- ---------
Total................... $65,925 33% $582,533 163% $(516,608) (89)%
======= === ======== === ========= ===
Amortization of intangible assets and stock-based compensation consisted
primarily of goodwill amortization expense related to acquisitions made during
fiscal year 2000. Included within amortization of intangible assets and stock-
based compensation expenses was approximately $1.9 million and $13.2 million of
stock-based compensation for the three months ended October 31, 2001 and 2000,
respectively. The overall decrease in amortization of intangible assets was
primarily the result of intangible asset impairment charges recorded during
fiscal 2001. These impairment charges reduced the carrying amounts of goodwill
and other intangible assets to be amortized over their remaining useful lives.
The decrease in the Interactive Marketing segment primarily resulted from
impairment charges recorded during fiscal year 2001 related to certain
intangible assets of Engage and Yesmail. The decrease in the eBusiness and
Fulfillment segment primarily resulted from a decrease in the amortization of
stock-based compensation as a result of the sale of the Company's majority
interest in Signatures. The decrease in the Search and Portals segment
primarily resulted from impairment charges recorded during fiscal year 2001
related to certain intangible assets of AltaVista and MyWay. The decrease in
the Infrastructure and Enabling Technologies segment primarily resulted from
impairment charges recorded during fiscal year 2001 related to the closing of
operations at 1stUp, AdForce and ExchangePath during fiscal year 2001. The
decrease in the Internet Professional Services segment primarily resulted from
impairment charges recorded during fiscal year 2001 related to certain
intangible assets of Tallan.
IMPAIRMENT OF LONG-LIVED ASSETS:
Three Three
Months Months
Ended As a % of Ended As a % of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Interactive Marketing... $ -- -- $16,779 34% $(16,779) N/A
eBusiness and
Fulfillment............ -- -- 3,500 2% (3,500) N/A
Search and Portals...... 6,462 30% 12,436 21% (5,974) (48)%
Infrastructure and
Enabling Technologies.. 27,359 134% 36,891 105% (9,532) (26)%
Internet Professional
Services............... 2,801 26% -- -- 2,801 N/A
Other................... -- -- -- -- -- --
------- ------- --------
Total................... $36,622 18% $69,606 19% $(32,984) (47)%
======= === ======= === ======== ===
21
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The Company records impairment charges as a result of management's ongoing
business review and impairment analysis performed under its existing policy
regarding impairment of long-lived assets. Where impairment indicators were
identified, management determined the amount of the impairment charge by
comparing the carrying value of long-lived assets to their fair value.
Management determines fair value of goodwill and certain other intangible
assets based on a combination of the discounted cash flow methodology, which is
based upon converting expected cash flows to present value, and the market
approach, which includes analysis of market price multiples of companies
engaged in lines of business similar to the Company. The market price multiples
are 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 predominately utilizes third-party valuation reports in
its determination of fair value. Management determines fair value of other
long-lived assets, such as property and equipment, based on third party
valuation reports. As a result, during management's quarterly review of the
value and periods of amortization and depreciation of long-lived assets, it was
determined that the carrying value of certain long-lived assets was not fully
recoverable. During the first quarter of fiscal year 2002, the Company recorded
impairment charges totaling approximately $36.6 million. The impairment of
long-lived assets charge recorded within the Infrastructure and Enabling
Technologies segment reflects an asset impairment charge related to the
purchase of certain equipment by NaviSite which it previously leased under
operating leases expiring through 2003. NaviSite purchased and recorded
equipment, effective August 1, 2001, with a fair market value of $9.6 million,
in exchange for a note payable of approximately $35.0 million. Accordingly, as
the fair value of the equipment, based on a preliminary independent appraisal,
was less than the associated debt obligation, NaviSite recorded an impairment
charge on long-lived assets in the first quarter of fiscal 2002 of
approximately $27.4 million. The impairment of long-lived assets charge
recorded in the Search and Portals segment reflects an asset impairment charge
related to AltaVista's agreement to purchase certain equipment which it had
previously leased under operating and capital lease agreements in exchange for
a cash payment of $20.0 million. Based on a preliminary independent appraisal,
the fair market value of the equipment was determined to be $7.9 million. Since
the fair market value of the equipment was less than the sum of the cash
payment and the carrying value of the equipment under capital lease agreements,
net of the remaining obligations, AltaVista recorded an impairment charge on
long-lived assets in the first quarter of fiscal 2002 of approximately $6.5
million. Subsequent to October 31, 2001, AltaVista completed and recorded the
purchase of this equipment. The charge in the Internet and Professional
Services segment of $2.8 million is primarily due to the carrying value of
certain other intangible assets, specifically the customer base and workforce
in place as of the acquisition date at Tallan, exceeding their estimated fair
value at October 31, 2001.
RESTRUCTURING CHARGES:
Three Three
Months Months
Ended As a % of Ended As a % of
October 31, Segment October 31, Segment
2001 Net Revenue 2000 Net Revenue $ Change % Change
----------- ----------- ----------- ----------- -------- --------
(in thousands)
Interactive Marketing... $ 12,475 84 % $4,130 8% $ 8,345 202%
eBusiness and
Fulfillment............ -- -- -- -- -- N/A
Search and Portals...... 15,971 73 % 4,711 8% 11,260 239%
Infrastructure and
Enabling Technologies.. (17,034) (84)% -- -- (17,034) N/A
Internet Professional
Services............... 3,970 36 % -- -- 3,970 N/A
Other................... 2,226 N/A -- -- 2,226 N/A
-------- ------ --------
Total................... $ 17,608 9 % $8,841 2% $ 8,767 99%
======== === ====== === ======== ===
22
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The Company's restructuring initiatives involved strategic decisions to exit
certain businesses or to re-evaluate the current state of on-going businesses.
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 include employee termination costs as a
result of a reduction in workforce and salary expense for certain employees
involved in the restructuring efforts. Employees affected by the restructuring
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 relate to the write-off of property and
equipment. The restructuring charges incurred in the Interactive Marketing
segment primarily related to approximately $12.5 million at Engage due to the
closing of its on-line advertising operations and implementation of a
restructuring plan designed to reduce its corporate overhead costs through
reductions in the size of its finance and marketing staffs. The closing of the
on-line advertising business resulted in severance costs incurred in connection
with the termination of approximately 232 employees and contract termination
costs in connection with the costs to exit facility and equipment leases. The
restructuring charges incurred in the Search and Portals segment primarily
related to restructuring efforts at AltaVista and MyWay. The restructuring
charges incurred by AltaVista of approximately $10.0 million primarily related
to severance costs associated with a reduction in the workforce of
approximately 120 persons, costs associated with the closing of its Irving,
California office location, and the write-off of an information systems
software package. The restructuring charges incurred by MyWay of approximately
$5.9 million primarily relate to the write-off of property and equipment, as
well as the termination of customer and vendor contracts. The restructuring
charges in the Infrastructure and Enabling Technologies segment reflect the
reversal of an accrual of approximately $17.7 million to adjust a restructuring
charge previously recorded at NaviPath in the fourth quarter of fiscal 2001, as
NaviPath was successful in negotiating termination payments on certain purchase
commitments and service contracts for amounts less than originally estimated.
This was slightly offset by additional restructuring charges recorded as an
adjustment by NaviPath of approximately $3.1 million in the first quarter of
fiscal year 2002 related to severance costs and legal and other professional
fees incurred in connection with the closing of its operations. The
restructuring charges incurred in the Internet Professional Services segment
primarily related to severance costs associated with a reduction in the
workforce of approximately 72 persons, as well as costs associated with the
closing of five office locations at Tallan.
OTHER INCOME/EXPENSE:
Interest income decreased $5.5 million to $6.6 million for the three months
ended October 31, 2001 from $12.1 million for the same period in fiscal year
2001, reflecting decreased interest income associated with lower average
corporate cash and cash equivalent balances and a decline in interest rates.
Interest expense decreased $14.4 million to $8.2 million for the first quarter
of fiscal 2002 from $22.6 million for the first quarter of fiscal year 2001,
primarily due to the payment in full in fiscal 2001 of the principal on the
notes issued in connection with the acquisition of Tallan and due to the
settlement of the underlying debt associated with the borrowing arrangement
entered into in connection with a hedge of the Company's investment in Yahoo!
common stock.
Other gains (losses), net decreased $204.0 million, or 104%, to ($8.6)
million for the quarter ended October 31, 2001 from $197.3 million for the same
period in fiscal 2001. Other gains (losses), net for the quarter ended October
31, 2001 primarily consisted of a pre-tax loss of approximately $27.5 million
on the sale of Primedia, Inc. stock, a pre-tax loss of approximately $20.7
million resulting from the sale of its subsidiary Activate and a pre-tax loss
of approximately $11.5 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
23
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
approximately $53.9 million on the arrangement that hedged the Company's
investment in Yahoo! common stock which was settled during the first quarter of
fiscal 2002.
There were no gains on issuance of stock by subsidiaries in the first
quarter of fiscal year 2002. Gains on issuance of stock by subsidiaries in the
first quarter of fiscal year 2001 primarily reflects the pre-tax gain of $125.9
on the issuance of stock by Engage in its acquisitions of MediaBridge
Technologies, Inc. and Space Media Holdings Limited.
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 $3.6 million to $12.2 million for the three months ended October 31,
2001, from $15.9 million for the same period in fiscal year 2001, primarily
reflecting a decreased number of investments accounted for under the equity
method compared to last year's first fiscal quarter. 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, net decreased to $17.3 million for the three months ended
October 31, 2001 from $88.9 million for the same period of fiscal year 2001.
Minority interest for the first quarter of fiscal year 2002 primarily reflects
the Company's minority interest in the net losses of two subsidiaries, Engage
and AltaVista.
INCOME TAX EXPENSE:
Income tax expense recorded in the first quarter of fiscal 2002 was $12.6
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 in the first quarter of fiscal 2002 differs
from the amount computed by applying the U.S. federal income tax rate of 35
percent to pre-tax loss primarily as a result of non-deductible goodwill
amortization and impairment charges, and valuation allowances recognized on
deferred tax assets. During the three months ended October 31, 2001, the
Company recorded tax expense of approximately $12.6 million for the recognition
of valuation allowances to continuing operations due to the reduction in
expected future taxable income related to unrealized gains in "Accumulated
other comprehensive income (loss)".
Liquidity and Capital Resources
Working capital at October 31, 2001 decreased to approximately $269.8
million compared to $581.3 million at July 31, 2001. The net decrease in
working capital is primarily attributable to a $96.5 million decrease in
available-for-sale securities, a $220.0 million increase in the current portion
of the Company's payable to Compaq Computer Corporation and a $59.9 million
decrease in cash and cash equivalents. The Company's principal sources of
capital during the three months ended October 31, 2001 were from the sales of
approximately 7.1 million shares of Primedia, Inc. common stock for proceeds of
approximately $15.9 million and from the maturity of other available-for-sale
securities investments for proceeds of approximately $36.4 million. The
Company's principal uses of capital during the three months ended October 31,
2001 were $94.4 million for funding operations and $15.0 million for purchases
of property and equipment.
On August 1, 2001, the Company settled the final tranche of the borrowing
arrangement that hedged the Company's investment in the common stock of Yahoo!
through the delivery of 581,499 shares of Yahoo! common stock.
24
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On August 18, 2001, the Company issued approximately 5.4 million shares of
its common stock to Compaq , as a semi-annual interest payment of approximately
$11.5 million related to notes payable issued to Compaq in the acquisition of
AltaVista.
In September 2001, the Company received a federal income tax refund of
approximately $14.0 million as a result of overpayment of the prior year's
estimated tax payments.
On October 29, 2001, the Company and its majority-owned subsidiaries,
AltaVista and NaviSite entered into agreements with Compaq, a significant
stockholder of CMGI, and Compaq's wholly-owned subsidiary, CFS. Under certain
terms of these agreements NaviSite purchased and recorded equipment from CFS
effective August 1, 2001, previously leased by NaviSite under operating lease
agreements expiring through 2003, in exchange for a note payable of
approximately $35.0 million. The $35.0 million due to CFS was executed in the
form of a convertible note payable to CFS in the total amount of $55.0 million
on November 8, 2001, as described below. As of October 31, 2001, the $35.0
million due to CFS has been classified as long term Due to Compaq Computer
Corporation and Compaq Financial Services Corporation in the accompanying
condensed consolidated balance sheets.
Additionally, under the terms of these agreements, AltaVista agreed to
purchase certain equipment, which it had previously leased from CFS under
operating and capital lease agreements, in exchange for a cash payment of $20.0
million. Subsequent to October 31, 2001, AltaVista completed and recorded the
purchase of this equipment.
Subsequent to October 31, 2001, as part of the agreement with CFS, NaviSite
received $20.0 million in cash from CFS in exchange for a six-year convertible
note payable, which was executed on November 8, 2001. This note, which also
relates to the $35.0 million equipment purchase described above, bears interest
at 12% and requires payment of interest only for the first three years from the
date of issuance. A portion of the interest payable to CFS in the first two
years may be paid in NaviSite common stock. Principal and interest payments are
due on a straight-line basis commencing in year four until maturity on the
sixth anniversary from the issuance date. The convertible note payable is
secured by substantially all assets of NaviSite and cannot be prepaid. Subject
to NaviSite stockholder approval, being sought in December 2001, the principal
balance may be converted into NaviSite common stock at the option of the holder
at any time prior to maturity at a conversion rate of $0.26 per share. Should
CFS convert its note payable into the NaviSite's common stock, CFS would own a
controlling interest in NaviSite.
Also, subsequent to October 31, 2001, as part of this agreement, Compaq
agreed to deem the Company's $220.0 million in face amounts 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.
In November 2001, the Company consummated the repurchase of all the
outstanding shares of its Series C Preferred Stock pursuant to privately
negotiated stock exchange agreements with the holders of the Series C Preferred
Stock. In connection therewith, the Company announced the retirement of the
Series C Preferred Stock effective immediately. Under this agreement, the
Company repurchased all of the outstanding shares of 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 former holders of the Series C Preferred Stock, 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
25
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
December 2, 2002. The obligation to make payments ceases upon delivery of the
PCCW shares and any payment due for the period during which the PCCW shares are
delivered to the former holders of the Series C Preferred Stock will be reduced
on a pro rata basis.
The Company believes that existing working capital and the availability of
marketable securities, which could be sold or posted as collateral for
additional 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 public or private offerings of the Company's or its
subsidiaries' stock, or through debt financing. There can be no assurance,
however, that the Company will be able to raise additional capital on terms
that are favorable to the Company, or at all.
Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. Forward-
looking statements in this document and those made from time to time by the
Company through its senior management are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements concerning the expected future revenues or earnings or
concerning projected plans, performance, product development, product release
or product shipment, as well as other estimates related to future operations
are necessarily only estimates of future results and there can be no assurance
that actual results will not materially differ from expectations.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to, the
following:
CMGI may not have operating income or net income in the future.
During the fiscal year ended July 31, 2001, CMGI had an operating loss of
approximately $5.87 billion, and a net loss available to common stockholders of
approximately $5.50 billion. During the three months ended October 31, 2001,
CMGI had an operating loss of approximately $207.1 million, and a net loss
available to common stockholders of approximately $226.7 million. CMGI
anticipates continuing to incur significant operating expenses in the future,
including significant costs of revenue and selling, general and administrative
and amortization expenses. As a result, CMGI expects to continue to incur
operating losses and may not have enough money to grow its business in the
future. CMGI can give no assurance that it will achieve profitability or be
capable of sustaining profitable operations.
CMGI may have problems raising money it needs in the future.
In recent years, CMGI has financed its operating losses in part with profits
from selling some of the stock of companies in which CMGI had invested directly
or through the @Ventures funds. This funding source may not be sufficient in
the future, and CMGI may need to obtain funding from outside sources. However,
CMGI may not be able to obtain funding from outside sources. In addition, even
if CMGI finds outside funding sources, CMGI may be required to issue to such
outside sources securities with greater rights than those currently possessed
by holders of CMGI's currently outstanding securities. CMGI may also be
required to take other actions, which may lessen the value of its common stock,
including borrowing money on terms that are not favorable to CMGI.
If CMGI fails to successfully execute on its segmentation strategy, its
revenue, earnings prospects and business may be materially and adversely
affected.
Fulfillment; Search and Portals; Infrastructure and Enabling Technologies; and
Internet Professional Services--as well as CMGI's affiliated venture capital
arm, @Ventures. To successfully implement its segmentation strategy, CMGI must
achieve each of the following:
26
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
. overcome the difficulties of integrating its operating companies;
. decrease its cash burn rate;
. attain an optimal number of operating companies through acquisitions,
consolidations, dispositions and divestitures; and
. improve its cash position and revenue base.
If CMGI fails to address each of these factors, its business prospects for
achieving and sustaining profitability, and the market value of its securities
may be materially and adversely affected. Even if its implementation of this
segmentation strategy is successful, the revised structure and reporting
procedures of the new segmentation strategy may not lead to increased market
clarity or stockholder value. In addition, the execution of the segmentation
strategy, including planned reductions in the number of operating companies,
has resulted in restructuring charges being recorded by CMGI and could result
in restructuring charges being recorded in future periods.
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. For example, uBid's business
relies on order management software and information systems provided by Oracle
and other third parties, as well as on Microsoft .NET enterprise servers to
run its auction website. 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, in particular, David S. Wetherell,
CMGI's chairman and chief executive officer, David S. Andonian, CMGI's
president and chief operating officer, and George A. McMillan, CMGI's chief
financial officer and treasurer. The familiarity of these individuals with the
Internet industry makes them especially critical to CMGI's success. In
addition, CMGI's success is dependent on its ability to attract, train, retain
and motivate high quality personnel, especially for its management team. The
loss of the services of any of CMGI's executive officers or key employees may
harm its business. CMGI's success also depends on its continuing ability to
attract, train, retain and motivate other highly qualified technical and
managerial personnel. Competition for such personnel is intense.
CMGI may incur significant costs to avoid investment company status and may
suffer adverse consequences if deemed to be an investment company.
CMGI may incur significant costs to avoid investment company status and may
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. Some of CMGI's equity investments in other
businesses and its venture subsidiaries may constitute investment securities
under the Investment Company Act. A company may be deemed to be an investment
company if it owns investment securities with a value exceeding 40% of its
total assets, subject to certain exclusions. Investment companies are subject
to registration under, and compliance with, the Investment Company Act unless
a particular exclusion or safe harbor provision applies. If CMGI were to be
deemed an investment company,
27
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
CMGI would become subject to the requirements of the Investment Company Act.
As a consequence, CMGI would be prohibited from engaging in business or
issuing securities as it has in the past and might be subject to civil and
criminal penalties for noncompliance. In addition, certain of CMGI's contracts
might be voidable, and a court-appointed receiver could take control of CMGI
and liquidate its business.
Although CMGI's investment securities currently comprise less than 40% of
its total assets, fluctuations in the value of these securities or of CMGI's
other assets may cause this limit to be exceeded. Unless an exclusion or safe
harbor was available to CMGI, CMGI would have to attempt to reduce its
investment securities as a percentage of its total assets. This reduction can
be attempted in a number of ways, including the disposition of investment
securities and the acquisition of non-investment security assets. If CMGI were
required to sell investment securities, CMGI may sell them sooner than it
otherwise would. These sales may be at depressed prices and CMGI may never
realize anticipated benefits from, or may incur losses on, these investments.
CMGI may be unable to sell some investments due to contractual or legal
restrictions or the inability to locate a suitable buyer. Moreover, CMGI may
incur tax liabilities when selling assets. CMGI may also be unable to purchase
additional investment securities that may be important to its operating
strategy. If CMGI decides to acquire non-investment security assets, CMGI may
not be able to identify and acquire suitable assets and businesses or the
terms on which CMGI is able to acquire such assets may be unfavorable.
There may be conflicts of interest among CMGI, CMGI's affiliates 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 affiliates. As a result, CMGI, CMGI's officers and
directors, and CMGI's 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 or directors of
one of CMGI's affiliates that conflict with their fiduciary obligations as
officers or directors of CMGI or of another affiliate.
CMGI's strategy of selling assets of, or investments in, the companies that
it has acquired and developed presents risks.
One element of CMGI's business plan involves raising cash for working
capital for its business by selling, in public or private offerings, some of
the companies, or portions of the companies, that it has acquired and
developed or in which it has invested. Market and other conditions largely
beyond CMGI's control affect:
. the amount of proceeds from such sales.
. the timing of such sales; and
. its ability to engage in such sales;
As a result, CMGI may not be able to sell some of these assets. In
addition, even if CMGI is able to sell, CMGI may not be able to sell at
favorable prices or on favorable terms. If CMGI is unable to sell these assets
at favorable prices and terms, its business will be harmed.
CMGI's strategy of expanding its business through acquisitions of other
businesses and technologies presents special risks.
CMGI intends to continue to expand through the acquisition of businesses,
technologies, products and services from other businesses. Acquisitions
involve a number of special problems, including:
. difficulty integrating acquired technologies, operations, and personnel
with the existing businesses;
28
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
. diversion of management attention in connection with both negotiating
the acquisitions and integrating the assets;
. strain on managerial and operational resources as management tries to
oversee larger operations;
. exposure to unforeseen liabilities of acquired companies;
. potential issuance of securities in connection with an acquisition with
rights that are superior to the rights of holders of CMGI's currently
outstanding securities;
. the need to incur additional debt; and
. the requirement to record potentially significant additional future
operating costs for the amortization of goodwill and other intangible
assets.
CMGI may not be able to successfully address these problems. Moreover,
CMGI's future operating results will depend to a significant degree on its
ability to successfully manage growth and integrate acquisitions. In addition,
many of CMGI's investments are in early-stage companies with limited operating
histories and limited or no revenues. CMGI may not be able to successfully
develop these young companies.
CMGI faces competition from other acquirors of and investors in Internet-
related ventures which may prevent CMGI from realizing strategic
opportunities.
CMGI acquires or invests in existing companies that it believes are
complementary to its network and further its vision of the Internet. In
pursuing these opportunities, CMGI faces competition from other capital
providers and operators of Internet-related companies, including publicly
traded Internet companies, venture capital companies and large corporations.
Some of these competitors have greater financial resources than CMGI does. This
competition may limit CMGI's opportunity to acquire interests in companies that
could advance its vision of the Internet and increase its value.
CMGI's growth strategy and restructuring efforts place strain on its
managerial, operational and financial resources.
CMGI's growth strategy and restructuring efforts have placed, and are
expected to continue to place, a significant strain on its managerial,
operational and financial resources. CMGI's continued restructuring efforts and
future growth will increase this strain on its managerial, operational and
financial resources, inhibiting its ability to achieve the rapid execution
necessary to successfully implement its business plan.
CMGI must develop and maintain positive brand name awareness.
CMGI believes that establishing and maintaining its brand names is essential
to expanding its business and attracting new customers. CMGI also believes that
the importance of brand name recognition will increase in the future because of
the growing number of Internet companies that will need to differentiate
themselves. Promotion and enhancement of CMGI's brand names will depend largely
on its ability to provide consistently high-quality products and services. If
CMGI is unable to provide high-quality products and services, the value of its
brand names will suffer and CMGI's business prospects may be adversely
affected.
CMGI's quarterly results may fluctuate widely.
CMGI's operating results have fluctuated widely on a quarterly basis during
the last several years, and it expects to experience significant fluctuation in
future quarterly operating results. Many factors, some of which
29
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
are beyond CMGI's control, have contributed to these quarterly fluctuations in
the past and may continue to do so. Such factors include:
. demand for its products and services;
. payment of costs associated with its acquisitions, sales of assets and
investments;
. timing of sales of assets;
. market acceptance of new products and services;
. charges for impairment of long-lived assets in future periods;
. potential restructuring charges in connection with CMGI's segmentation
strategy;
. specific economic conditions in the industries in which CMGI competes;
and
. general economic conditions.
The emerging nature of the commercial uses of the Internet makes predictions
concerning CMGI's future revenues difficult. CMGI believes that period-to-
period comparisons of its results of operations will not necessarily be
meaningful and should not be relied upon as indicative of its future
performance. It is also possible that in some fiscal quarters, CMGI's operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of CMGI's common stock may decline.
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 Internet-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of such
companies. Future market movements may adversely affect the market price of
CMGI's common stock. In addition, should the market price of CMGI's common
stock drop below $1.00 per share for extended periods in the future, it risks
delisting from the Nasdaq National Market, which would have an adverse effect
on CMGI's business.
In addition, a portion of CMGI's assets includes the equity securities of
both publicly traded and non-publicly traded 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 relies on NaviSite for Web site hosting.
CMGI and many of its operating companies rely on NaviSite for network
connectivity and hosting of servers. If NaviSite fails to perform such
services, CMGI's internal business operations may be interrupted, and the
ability of CMGI's operating companies to provide services to customers may also
be interrupted. Such interruptions may have an adverse impact on CMGI's
business and revenues and its operating companies.
The success of CMGI's operating companies depends greatly on increased use of
the Internet by businesses and individuals.
The success of CMGI's operating companies depends greatly on increased use
of the Internet for electronic commerce transactions, advertising, marketing,
providing services and conducting business.
30
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Commercial use of the Internet is currently at an early stage of development
and the future of the Internet is not clear. In addition, it is not clear how
effective Internet advertising is or will be, or how successful Internet-based
sales will be. The businesses of CMGI's operating companies will suffer if
commercial use of the Internet fails to grow in the future.
CMGI's operating companies are subject to intense competition.
The market for Internet products and services is highly competitive.
Moreover, the market for Internet products and services lacks significant
barriers to entry, enabling new businesses to enter this market relatively
easily. Competition in the market for Internet products and services may
intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with the products and
services of CMGI operating companies. In addition, many of the current and
potential competitors of CMGI operating companies have greater financial,
technical, operational and marketing resources than those of CMGI operating
companies. CMGI operating companies may not be able to compete successfully
against these competitors. Competitive pressures may also force prices for
Internet goods and services down and such price reductions may reduce the
revenues of CMGI operating companies.
If the United States or other governments regulate the Internet more closely,
the businesses of CMGI's operating companies may be harmed.
Because of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such
as privacy, pricing, taxation and content. The enactment of any additional
laws or regulations may impede the growth of the Internet and the Internet-
related business of CMGI operating companies and could place additional
financial burdens on their businesses.
To succeed, CMGI's operating companies must respond to the rapid changes in
technology and distribution channels related to the Internet.
The markets for the Internet products and services of CMGI 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 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 operating companies may not be
able to establish and maintain effective distribution channels.
CMGI's operating companies face security risks.
Consumer concerns about the security of transmissions of confidential
information over public telecommunications facilities is a significant barrier
to electronic commerce and communications on the Internet. Many factors may
cause compromises or breaches of the security systems CMGI operating companies
31
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
or other Internet sites use to protect proprietary information, including
advances in computer and software functionality or new discoveries in the field
of cryptography. A compromise of security on the Internet would have a negative
effect on the use of the Internet for commerce and communications and
negatively impact CMGI operating companies' businesses. Security breaches of
their activities or the activities of their customers and sponsors involving
the storage and transmission of proprietary information, such as credit card
numbers, may expose CMGI operating companies to a risk of loss or litigation
and possible liability. CMGI cannot assure that the security measures of CMGI
operating companies will prevent security breaches.
The success of the global operations of CMGI's operating companies is subject
to special risks and costs.
CMGI operating companies have begun, and intend to continue, to expand their
operations outside of the United States. This international expansion will
require significant management attention and financial resources. The ability
of CMGI operating companies to expand their offerings of CMGI's products and
services internationally will be limited by the general acceptance of the
Internet and intranets in other countries. In addition, CMGI and its operating
companies have limited experience in such international activities.
Accordingly, CMGI and its operating companies expect 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 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.
From time to time, CMGI 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 operating companies
by:
. subjecting them to significant liability for damages;
. resulting in invalidation of their proprietary rights;
. being time-consuming and expensive to defend even if such claims are not
meritorious; and
. resulting in the diversion of management time and attention.
CMGI's operating companies may have liability for information retrieved from
the Internet.
Because materials may be downloaded from the Internet and subsequently
distributed to others, CMGI operating companies may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature, content, publication and distribution of
such materials.
32
CMGI, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to equity price risks on the marketable portion of
its equity securities. The Company's available-for-sale securities at October
31, 2001 primarily consist 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 October 31, 2001, would
result in an approximate $2.7 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. --See note K to the Interim Unaudited Condensed
Consolidated Financial Statements. The Company does not enter into derivative
financial instruments for trading purposes. As a matter of policy all
derivative positions are used to reduce risk by hedging underlying economic or
market exposure. The derivatives the Company uses are straightforward
instruments with liquid markets. At October 31, 2001, the Company was primarily
exposed to the London Interbank Offered Rate (LIBOR) interest rate on its
outstanding borrowing arrangements.
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. The Company may
consider utilizing derivative instruments to mitigate the risk of foreign
currency exchange rate fluctuations in the future.
33
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
Corporation, and David S. Wetherell as defendants. In the complaint, Mr. Braun
alleges breach of contract regarding his termination from iCAST and claims that
he is 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 claims that, under quantum meruit
principles, he is entitled to lost compensation. Mr. Braun seeks damages of
approximately $50 million and requests specific performance of the acceleration
and exercise of options. On February 2, 2001, the Court heard oral argument on
defendant's Motion for Summary Judgment and took the matter under advisement.
In October 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. Mr. Braun's promissory estoppel claim and quantum
meruit claim were not disposed of on summary judgment. Trial on these claims is
currently scheduled to begin in January 2002. The Company and iCAST believe
these claims are without merit and plan to vigorously defend against these
claims.
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 believe these claims are without merit and plan to
vigorously defend against these claims. On November 29, 2001, the court
sustained the defendants' demurrers regarding, among other things, Black's
breach of contract claims against the Company and allegations made on behalf of
the "trust plaintiffs," but granted Black leave to amend the complaint.
Item 2. Changes in Securities and Use of Proceeds
On August 18, 2001, pursuant to the terms of promissory notes in the
original aggregate principal amount of $220,000,000 issued by the Company on
August 18, 1999 to Compaq in connection with the Company's acquisition of
AltaVista, the Company issued an aggregate of 5,397,196 shares of Common Stock
to Compaq in satisfaction of interest due and payable on the notes. The shares
of Common Stock were issued and sold to Compaq in reliance on Section 4(2) of
the Securities Act of 1933, as amended, as a sale by the Company not involving
a public offering. No underwriters were involved with the issuance and sale of
the shares of Common Stock.
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
On October 30, 2001, the Company filed a Current Report on Form 8-K
dated October 29, 2001 to report under Item 5 (Other Events) an
agreement with Compaq Computer Corporation and Compaq Financial
Services Corporation. No financial statements were filed with such
report.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMGI, Inc.
/s/ George A. McMillan
By: _________________________________
Date: December 17, 2001
George A. McMillan
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
35
EXHIBIT INDEX
Item Description
---- -----------
10.1 Transaction Agreement dated as of October 29, 2001 by and among the
Registrant, NaviSite, Inc., AltaVista Company, Compaq Computer
Corporation, Compaq Financial Services Corporation, Compaq Financial
Services Company and Compaq Financial Services Canada Corporation is
incorporated herein by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated October 29, 2001 (File No. 000-23262).
10.2 Purchase Agreement dated as of October 29, 2001 by and among the Company,
Compaq Computer Corporation and B2E Solutions, LLC, relating to the
purchase and sale of 34,490,140 Units of B2E Solutions, LLC is
incorporated herein by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated October 29, 2001 (File No. 000-23262).
10.3 Note Purchase Agreement dated as of October 29, 2001 by and among the
Company, NaviSite, Inc. and Compaq Financial Services Corporation is
incorporated herein by reference to Exhibit 10.3 to the Registrant's
Current Report on Form 8-K dated October 29, 2001 (File No. 000-23262).
10.4 Loan and Security Agreement, dated as of October 30, 2001, 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 and Citizens Bank of
Massachusetts, as Lenders.
36