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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Fiscal Year Ended July 31, 2002
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From
to
Commission File 000-23262
CMGI, Inc.
(Exact name of registrant as specified in its charter)
| Delaware |
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04-2921333 |
| (State or other jurisdiction |
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(I.R.S. Employer |
| of incorporation or organization) |
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Identification No.) |
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| 100 Brickstone Square |
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| Andover, Massachusetts |
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01810 |
| (Address of principal executive offices) |
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(zip code) |
(978) 684-3600
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
(Title of Class)
Common Stock, $0.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The approximate aggregate
market value of Common Stock held by non-affiliates of the Registrant was $200,264,692 as of October 18, 2002.
On
October 18, 2002, the Registrant had outstanding 392,675,868 shares of Common Stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange
Commission relative to the Company’s 2002 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED JULY 31, 2002
CMGI, INC.
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This Annual Report on Form 10-K contains 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. For this purpose, any statements contained herein that are not statements of historical fact 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. The
important factors discussed under the caption “Factors That May Affect Future Results” in Item 7 of this report, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein
and presented elsewhere by management. Such forward-looking statements represent management’s current expectations and are inherently uncertain. Investors are warned that actual results may differ from management’s expectations. CMGI does
not undertake any obligation to update forward-looking statements.
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PART I
General
CMGI, Inc. (together with its consolidated subsidiaries, “CMGI” or the “Company”) is an operating and development company comprised of established and
emerging companies, including both CMGI operating businesses and investments. CMGI companies span a range of vertical market segments including eBusiness and Fulfillment, and Enterprise Software and Services. The Company previously operated under
the name CMG Information Services, Inc. and was incorporated in Delaware in 1986. CMGI’s address is 100 Brickstone Square, Andover, Massachusetts 01810.
CMGI’s business strategy over the years has led to the development, acquisition and operation of majority-owned subsidiaries focused on Internet technologies and supply chain management services,
as well as the strategic investment in other Internet companies that have demonstrated synergies with CMGI’s core businesses. The Company’s strategy also envisions and promotes opportunities for synergistic business relationships among its
subsidiaries, investments and affiliates. The Company expects to continue to develop and refine its product and service offerings, and to continue to pursue the development or acquisition of, or the investment in, additional companies and
technologies. A description of the Company’s development through merger and acquisition activities is set forth in note 8 of the Notes to Consolidated Financial Statements included in Item 8 below and is incorporated herein by reference.
The Company’s subsidiaries have been classified in two operating segments, eBusiness and Fulfillment and
Enterprise Software and Services, and include:
eBusiness and Fulfillment
SalesLink Corporation (“SalesLink”) provides supply chain management, product and literature fulfillment services and
third party eFulfillment solutions for its clients’ marketing, manufacturing and distribution programs.
SL Supply Chain Services International Corp. (“SL Supply Chain”) provides a comprehensive suite of global supply chain management services.
uBid, Inc. (“uBid”) is an online marketplace consisting of business-to-business, business-to-consumer, and consumer-to-consumer auctions.
Enterprise Software and Services
AltaVista Company (“AltaVista”) is a global provider of search services and software.
ProvisionSoft, Inc. (“ProvisionSoft”) is a provider of proactive infrastructure resource management software.
Tallan, Inc. (“Tallan”) is a professional services firm delivering software development, enterprise system integration,
creative design and strategic technology direction for Global 2000 and brand name online firms.
Yesmail,
Inc. (“Yesmail”) is a provider of comprehensive permission-based email marketing technologies and customer relationship software.
In addition, CMGI’s venture capital affiliate, @Ventures, is comprised of venture capital funds that focus on investing in companies involved in various aspects of the Internet and Internet
technology.
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Acquisition of iLogistix Assets
On July 11, 2002, following approval by the United States Bankruptcy Court and the administrator in The Netherlands, CMGI, through its
wholly owned subsidiary SL Supply Chain, acquired substantially all of the worldwide assets and operations of Software Logistics Corporation, a California corporation doing business as iLogistix. The Company’s SalesLink subsidiary currently
manages SL Supply Chain, including its operations centers in the United States, The Netherlands, Singapore, Taiwan, and Malaysia, to provide a comprehensive suite of traditional and e-commerce supply chain management services, including procurement,
inventory management, assembly, fulfillment and distribution services to such blue chip customers as Hewlett-Packard and Microsoft.
Disposition of Engage, Inc.
On September 9, 2002, CMGI divested all of its equity
and debt ownership interests in Engage, Inc. (“Engage”). Under the terms of the Transaction Agreement, CMGI transferred to Engage approximately 148.4 million shares of common stock of Engage held by CMGI, representing approximately
76% of the issued and outstanding shares of Engage, and cancelled approximately $60 million of debt, including all convertible debt, owed to CMGI by Engage. In consideration of the equity transfer and debt cancellation, Engage, among other things,
(i) paid to CMGI $2.5 million in cash, (ii) agreed to pay to CMGI up to an additional $6.0 million, comprised of a senior secured promissory note due in September 2006 and earnout payments commencing in fiscal year 2004, and (iii) issued to CMGI a
warrant for the purchase of up to 9.9% of the issued and outstanding shares of Engage Common Stock, at an exercise price of $.048 per share.
Disposition of NaviSite, Inc.
On September 11, 2002, CMGI
sold all of its equity and debt ownership interests in NaviSite, Inc. (“NaviSite”) to ClearBlue Technologies, Inc. (“ClearBlue”). Under the terms of the Note and Stock Purchase Agreement, CMGI sold to ClearBlue (i) approximately
71.0 million shares of common stock of NaviSite held by CMGI, (ii) warrants to purchase approximately 5.0 million shares of common stock of NaviSite, and (iii) the 12% Convertible Note issued to CMGI by NaviSite, representing $10.0 million aggregate
principal amount plus all accrued interest thereon. In consideration thereof, CMGI received, among other things, 131,579 shares of common stock of ClearBlue. As a result of the transaction, the Company expects to record a net gain of between
$4.0 million and $7.0 million in the first quarter of fiscal year 2003. The gain will be classified as a net gain on disposal of discontinued operations in its consolidated statement of operations for the first quarter of fiscal 2003.
Additionally, the historical operations of NaviSite have been reflected as loss from discontinued operations in the accompanying consolidated financial statements, and NaviSite’s net current assets and net long term assets (liabilities) have
been reported as net current assets and net non-current assets (liabilities) of discontinued operations at July 31, 2002 and 2001, respectively. Certain prior period amounts in the consolidated financial statements have been reclassified in
accordance with generally accepted accounting principles to reflect the operations of NaviSite as discontinued operations.
Disposition of Equilibrium Technologies, Inc.
On October 17, 2002, CMGI sold all of its
equity ownership interests in Equilibrium Technologies, Inc. (“Equilibrium”) to a group (the “Buyer”) led by the current management of Equilibrium. Under the terms of the Transaction Agreement, CMGI sold to the Buyer 100% of the
issued and outstanding shares of Equilibrium. In consideration thereof, CMGI received, among other things, (i) a senior secured promissory note due in October 2005 in the principal amount of $1.5 million made by the Buyer, (ii) a warrant for
the purchase of 19.9% of the issued and outstanding shares of Equilibrium Common Stock, at an exercise price of $.01 per share, and (iii) a royalty-free, perpetual worldwide license to Equilibrium’s MediaRich software.
5
Products and Services
Products and services of the Company’s majority-owned subsidiaries include the following:
eBusiness and Fulfillment Segment
SalesLink
SalesLink provides supply chain management, product and literature fulfillment
services and third-party eFulfillment solutions for its clients’ marketing, manufacturing and distribution programs.
SalesLink provides supply chain management programs for contract manufacturers and OEM clients in the high technology industry. These programs are a form of outsourced manufacturing support services, in which clients retain SalesLink
to plan, buy and build-to-order sub-assemblies for computer equipment and consumer electronic products. These outsourced manufacturing services primarily assist companies in the areas of accessory kits, software, literature and promotional products
and involve active global supply chain management and coordination of CD-ROM, DVD and diskette replication, product packaging and assembly, print management, electronic order processing and software distribution direct fulfillment and inventory
management. SalesLink also offers sophisticated advanced planning services to help its clients optimize product forecasts and minimize inventory investments. SalesLink provides its supply chain management services and solutions directly and through
its management of SL Supply Chain.
On behalf of its product and literature fulfillment clients, SalesLink
receives orders for promotional collateral and products and fulfills them by assembling and shipping the items requested. Product and literature fulfillment services begin with the receipt of orders by electronic transmission directly into
SalesLink’s computers. Orders are then generated and presented to the production floor where fulfillment packages are assembled and shipped to the end-user or to a broker or distributor. SalesLink also provides product and literature inventory
control and warehousing, offering its customer support and management reports detailing orders, shipments, billings, back orders and returns.
SalesLink provides advanced end-to-end third-party eFulfillment and logistics services for merchandise through its automated distribution center in Memphis, Tennessee. SalesLink provides order
management solutions with real-time verification of data, payment processing, fraud detection, order routing and auditing and status reporting. SL IQLink™, SalesLink’s premier Web tool for organizing and distributing marketing literature, acts as a central repository for product information to ensure immediate order processing. This
powerful online resource center connects to SL FlagShip™, SalesLink’s comprehensive order
fulfillment and management tool that provides customized reporting and analyses, SKU tracking, monitoring capabilities to code, and summary and index information essential to planning future inventory requirements.
SL Supply Chain
SL Supply Chain is a leading provider of global supply chain management solutions, supporting its customer base with supply chain design and consulting, as well as outsourced operations solutions including supply base and
inventory management, manufacturing, configuration, distribution and fulfillment, e-commerce, order management and customer service. SL Supply Chain provides intelligent value chain solutions that allow its clients to outsource business processes
from raw material procurement and order entry to final delivery. These solutions include supply chain design, sourcing, production, assembly, packaging and customer interface management. Additionally, SL Supply Chain can deploy technology-based
solutions to manage the flow and use of information throughout the supply chain including systems architecture and implementation, front-end web design, web hosting, payment processing and real time order processing and inventory management. These
comprehensive solutions leverage a scalable technology platform, proven process expertise and a global network of operations centers to manage all aspects of the supply chain process.
uBid
uBid is a leading online
auction and e-commerce marketplace that offers consumers and businesses several ways to buy and sell. uBid Direct™ Internet auctions feature a rotating selection of more than 12,000 brand name
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products, including Hewlett-Packard, Toshiba, Sony and Micron. uBid Direct products are offered and sold by uBid in 16 different product categories, providing consumers and small to mid-sized
businesses with the opportunity to purchase a wide range of brand name merchandise, often at greatly reduced prices, through live-action bidding and in non-auction formats. Product categories include computer peripherals and accessories, consumer
electronics, jewelry and gifts, travel and collectibles. All products are sold as non-returnable unless they are found to be damaged, defective or not as advertised. uBid purchases and maintains inventory for a majority of its uBid Direct auction
businesses.
Users can also buy or sell products through uBid’s Consumer Exchange™, a peer-to-peer auction marketplace in which Consumer Exchange sellers list their items for sale directly on
the uBid site, and assume responsibility for all aspects of their auction listings, including product descriptions, identification of quantities, establishment of starting and maximum bid prices, payment and shipping. uBid is not involved in
processing Consumer Exchange transactions.
uBid’s business is subject to seasonal fluctuations. Its sales
volumes and inventory balances are typically higher during the holiday season between Thanksgiving and Christmas and at the end of its major suppliers’ fiscal reporting periods. Typically, uBid experiences reduced sales levels during periods of
decreased Internet usage.
Enterprise Software and Services Segment
AltaVista
AltaVista is a leading global provider of search services for Internet users and enterprise software for businesses. Through innovations to its proven search technology, AltaVista helps people find what they need as quickly and
accurately as possible. AltaVista is organized along two business lines, Internet Search Services and Enterprise Search Software.
AltaVista’s Internet Search Services business provides relevant, integrated search results from a range of sources including Web pages, multimedia files and up-to-the minute news sources. Popular features include Babel Fish, a
free language translation service and AltaVista Prisma, an assisted search tool. AltaVista provides search capabilities in 26 languages.
AltaVista’s Enterprise Search Software business offers scalable search software that is used by leading companies, including DaimlerChrysler, Proctor & Gamble and Siemens. AltaVista enterprise search technology
converts unstructured data across the enterprise into valuable, relevant and accessible information for Internet, intranet or extranet users. With global language support, AltaVista’s search software is customizable to meet the specific needs
of business, government and education customers.
ProvisionSoft
ProvisionSoft develops and markets infrastructure resource management software that enables a customer to manage more efficiently the
storage and server resources within the customer’s data center environment. ProvisionSoft’s first product, DynamicIT™, features the ability to automatically, intelligently and predictively manage these storage and server resources, thereby eliminating labor-intensive tasks typically associated with management of resources within the data
center. Simplifying overall resource administration, the DynamicIT software is designed to also significantly reduce downtime events such as those caused by unplanned manual intervention to unforeseen problems. ProvisionSoft also offers to its
customers consulting and educational services relating to its DynamicIT software. ProvisionSoft believes that most of the customers for its DynamicIT software product will be mid- to large-size enterprises operating their own data centers.
ProvisionSoft has not generated revenue through July 31, 2002.
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Tallan
Tallan is a professional services firm delivering software development, enterprise infrastructure, creative design and strategic technology direction for Global 2000 and
brand name online firms.
Tallan focuses on software development, creative and infrastructure services to plan,
design, build and implement comprehensive solutions for client business and technology needs. Tallan’s Software Development and Infrastructure groups work together with the client to design and build the required systems, platforms and networks
to enable and support the client’s business model and plan. Tallan’s Creative Services group works to bring the client brand and user experience into the online arena through the right mix of creativity, design, marketing and technology
expertise, while enabling seamless integration with the work done by the Development and Infrastructure groups.
Yesmail
Yesmail is a provider of comprehensive email marketing solutions that enable its
clients to acquire new customers through permission email campaigns and leverage the effectiveness of email as a communication channel. Yesmail’s suite of products is built to enable its clients to build relationships online. Clients can drive
an initial customer interaction by delivering special offers through the Yesmail Network™, and once
consumers have given permission to start this online dialogue, Yesmail enables ongoing communications to continue in a highly personalized and relevant way. Yesmail’s clients include ETrade, American Express, Hewlett-Packard, Countrywide Home
Loans and Nine West.
Yesmail provides a range of services enabling its clients to utilize email to drive brand
awareness, lead generation and commerce. This is done by leveraging technology and expertise to deliver targeted marketing messages to consumers who have given their permission to receive such offers via email. The Yesmail Network is a free service
offered to consumers which enables its members to receive special offers from marketers based on their self-reported interests and has over 30 million current members.
Yesmail also licenses its technology and provides a range of services enabling its clients to communicate with their customers and subscribers via email. Specifically,
Yesmail’s Customer Relationship Management (CRM) solution enables the efficient delivery of highly personalized email communications to a targeted audience. The YesConnect Platform™ enables such personalized communications with features that allow marketers to segment their customer base, deliver specific content based on
member profiles, manage large customer databases, track customer response and provide comprehensive reporting to measure effectiveness.
Venture Capital
The Company maintains interests in several venture capital
funds: CMG@Ventures I, LLC (“CMG@Ventures I”); CMG@Ventures II, LLC (“CMG@Ventures II”); CMG@Ventures III, LLC (“CMG@Ventures III”); CMG@Ventures Expansion, LLC (“CMG@Ventures Expansion”); and CMGI@Ventures
IV, LLC (“CMGI@Ventures IV”). CMGI’s venture funds (“CMGI @Ventures”) invest in emerging Internet service and technology companies, introducing innovative and promising technology companies into the CMGI network to
complement and create competitive advantage throughout the extended family of companies. The Company anticipates and promotes synergies between these strategic positions and CMGI’s core businesses, including speeding technological innovation
and access to markets.
The Company owns 100% of the capital and is entitled to approximately 77.5% of the
cumulative net profits of CMG@Ventures I. The Company owns 100% of the capital and is entitled to approximately 80% of the cumulative net profits of CMG@Ventures II.
CMGI formed the @Ventures III venture capital funds (“@Ventures III Fund”) in August 1998. The @Ventures III Fund secured capital commitments from outside
investors and CMGI, to be invested in emerging
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Internet and technology companies. The @Ventures III Fund consists of four entities, which co-invest in each investment made by the @Ventures III Fund. Approximately 78% of each investment made
by the @Ventures III Fund is made by two entities, @Ventures III, L.P. and @Ventures Foreign Fund III, L.P. CMGI does not have a direct ownership interest in either of these entities, but CMGI is entitled to approximately 2% of the cumulative net
capital gains realized by both entities (after return of certain priority amounts to the investors in such entities) as a result of its ownership of an approximately 10% interest in the general partner of each of such entities, @Ventures Partners,
III, LLC (“@Ventures Partners III”). CMG@Ventures III co-invests approximately 20% of the total amount invested in each @Ventures III Fund portfolio company investment. CMGI owns 100% of the capital and is entitled to approximately 80% of
the cumulative net capital gains realized by CMG@Ventures III. @Ventures Partners III is entitled to the remaining 20% of the net capital gains realized by CMG@Ventures III. The remaining 2% invested in each @Ventures III Fund investment is provided
by a fourth entity, @Ventures Investors, LLC, in which CMGI has no interest. During fiscal year 2000, CMGI formed additional venture capital fund entities to provide follow-on financing to @Ventures III Fund portfolio companies. These expansion
funds have a structure that is substantially identical to the @Ventures III Fund, and CMGI’s interests in such funds are comparable to its interests in the @Ventures III Fund.
CMGI owns 100% of the capital and is entitled to a percentage (ranging from approximately 80% to approximately 92.5%) of the net profits realized by CMGI@Ventures IV on
each of its investments.
An aggregate of approximately $8.2 million was invested by CMGI’s venture capital
affiliates during the fiscal year ended July 31, 2002.
Sales and Marketing
Each CMGI operating company maintains its own separate sales and marketing staff, enabling the sales personnel to develop strong customer relationships and expertise
in their respective areas. Each company has established its own direct sales force experienced in each subsidiary’s business to address the new and evolving requirements of its business arena. CMGI and its operating companies believe that an
experienced sales staff is critical to initiating and maintaining customer relationships.
The Company’s
subsidiaries attend numerous trade shows in the Internet and high technology markets, while further supplementing marketing efforts with space advertising and product and services listings in appropriate directories. In addition, user group meetings
are sponsored for customers, where new products and services are highlighted. CMGI also markets through public relations, its Web site and CMGI-sponsored events. In addition, in certain instances, CMGI and its subsidiaries have complemented these
activities by retaining advertising and public relations agencies.
Competition
The market for Internet-related products and services is rapidly evolving, highly competitive and characterized by few significant
barriers to entry. Although the Company believes that the diverse segments of the Internet market will provide opportunities for more than one provider of products and services similar to those of the Company, it is possible that a single provider
may dominate one or more market segments. The Company believes the principal competitive factors in the markets for Internet-related products and services include name recognition, performance, cost, ease of use, variety of value-added services,
functionality and features, and quality of support. Competitors include a wide variety of companies and organizations, including Internet software, content, service and technology companies, telecommunication companies, equipment/technology
suppliers and traditional retailers.
The market for supply chain management services and solutions is very
competitive. The Company expects the intensity of competition to continue to increase. A failure to maintain and enhance the Company’s competitive position will limit its ability to maintain and increase market share, which would result in
serious
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harm to the Company’s business. Increased competition may also result in price reductions, reduced gross margins and loss of market share. The Company competes in the supply chain management
market on the basis of quality, performance, service levels, global capabilities, technology, operational efficiency and price.
Some of the Company’s competitors have substantially greater financial, infrastructure, personnel and other resources than the Company. Furthermore, some of the Company’s competitors have well established, large and
experienced marketing and sales capabilities and greater name recognition, including well established relationships with the Company’s current and potential clients. As a result, the Company’s competitors may be in a stronger position
to respond quickly to new or emerging technologies and changes in client requirements. They may also develop and promote their services more effectively than the Company. Also, the Company may lose potential clients to competitors for various
reasons, including the ability or willingness of its competitors to offer lower prices and other incentives that the Company cannot match. There can be no assurance that the Company’s competitors will not develop products and services that are
superior to those of the Company or that achieve greater market acceptance than the Company’s offerings.
Research and
Development
The Company develops and markets a variety of products and services, the markets for which are
often characterized by rapid technological development. The Company believes that its future success will depend in large part on its ability to continue to enhance its existing products and services and to develop other products and services which
complement existing ones or extend into new markets. In order to respond to rapidly changing competitive and technological conditions, the Company expects to continue to incur significant research and development expenses during the initial
development phase of new products and services as well as on an on-going basis.
During fiscal years 2002, 2001
and 2000, the Company expended approximately $53.7 million, $144.9 million and $148.7 million, respectively, or approximately 8%, 12% and 17%, respectively, of net revenue, on research and development. Information regarding in-process research
and development expenses in connection with acquisitions and investments is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 below.
Other
The Company
relies upon a combination of patent, trade secret, copyright and trademark laws to protect its intellectual property. The Company owns, or holds licenses to use, numerous patents. New patents, trade secrets and other intellectual property are from
time to time developed or obtained through the Company’s research and development and acquisition activities. None of the Company’s segments is substantially dependent on any single or group of related patents, trademarks, copyrights or
licenses.
At July 31, 2002, the Company employed a total of 2,414 persons on a full-time basis. None of the
Company’s employees are represented by a labor union. The Company believes that its relations with its employees are good.
Certain segment information, including revenue and profit information, is set forth in Note 3 of the Notes to Consolidated Financial Statements included in Item 8 below and in Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Item 7 below, and is incorporated herein by reference.
Significant customers information is set forth under the heading “Diversification of Risk” in Note 2 of the Notes to Consolidated Financial Statements included in Item 8 below and is incorporated herein by reference.
For each of the last three fiscal years, the Company’s revenues from external customers were primarily
attributed to the Company’s North American operations, and substantially all of the Company’s assets were located in the United States. Approximately 10% of the total revenues of the Enterprise Software and Services segment were generated
outside the United States during fiscal year 2002.
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Because of the diversity of the Company’s products and services, as well as
the wide geographic dispersion of its facilities, the Company uses numerous sources for the wide variety of raw materials needed for its operations. The Company has not been adversely affected by inability to obtain raw materials.
The location and general character of the Company’s
principal properties by industry segment as of October 15, 2002 are as follows:
eBusiness and Fulfillment
Segment
In its eBusiness and Fulfillment segment, the Company leases approximately 1.3 million square feet of
office, storage, warehouse, production and assembly, sales and marketing, and operations space, principally in Massachusetts, Tennessee, California, Colorado, Illinois, Florida, The Netherlands, Ireland, Singapore, Malaysia, Taiwan and Mexico under
leases expiring through fiscal year 2011. Approximately 161,000 square feet is sublet to third parties.
Enterprise Software and Services
In its Enterprise Software and Services segment, the
Company leases approximately 284,000 square feet of office, administrative, storage, production and assembly, sales and marketing, engineering and development, and operations space, principally in California, Massachusetts, Illinois, Connecticut,
New York and Europe under leases expiring through fiscal year 2007. Approximately 56,000 square feet is sublet to third parties.
Other
In addition, the Company leases approximately 327,000 square feet principally in
Massachusetts and California under leases expiring through fiscal year 2011. These facilities generally consist of executive and administrative office space for the Company’s corporate and venture capital headquarters. Approximately 23,000
square feet is sublet to third parties.
ITEM 3.—LEGAL PROCEEDINGS
In December 1999, Neil Braun, a former officer of iCAST
Corporation, a wholly owned subsidiary of the Company (“iCAST”), filed a complaint in United States District Court, Southern District of New York naming the Company, iCAST and David S. Wetherell as defendants. In the complaint, Mr. Braun
alleged breach of contract regarding his termination from iCAST and claimed that he was entitled to acceleration of options to purchase CMGI common stock and iCAST common stock, upon his termination, under contract and promissory estoppel
principles. Mr. Braun also claimed that, under quantum meruit principles, he was entitled to lost compensation. Mr. Braun sought damages of approximately $50 million and requested specific performance of the acceleration and exercise of options. In
August 2001, the Court (i) granted summary judgment dismissing Mr. Wetherell as a defendant and (ii) granted summary judgment, disposing of Mr. Braun’s contract claim. In February 2002, the Court granted summary judgment disposing of Mr.
Braun’s promissory estoppel claim. Trial on the quantum meruit claim was held in March 2002 and the jury returned a verdict in favor of Mr. Braun and against the Company in the amount of $113,482.24. As to iCAST, the jury found that Mr. Braun
had not proven his claim. The Company filed a motion for directed verdict, which motion sought to set aside the jury verdict against the Company. Such motion was denied. In May 2002, Mr. Braun appealed the Court’s dismissal of his contract and
promissory estoppel claims against iCAST and the Company. Full briefing on the appeal is not yet complete and no argument date has yet been set.
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
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family trusts against the Company and AltaVista alleging certain claims arising out of the termination of Mr. Black’s employment with AltaVista. As set forth in the complaint, Mr. Black is
seeking monetary damages in excess of $70 million. The Company and AltaVista each believes that these claims are without merit and plans to vigorously defend against these claims. In March 2002, the court ordered the entire case to binding
arbitration in California. In June 2002, Mr. Black petitioned the California Court of Appeal for a writ prohibiting enforcement of the order compelling arbitration of his cause of action for wrongful termination in violation of public policy. In
July 2002, the Court of Appeal denied Mr. Black’s petition. In August 2002, Mr. Black submitted the matter before the American Arbitration Association. The arbitrator was appointed on October 7, 2002. A date for the arbitration has not yet been
set.
On January 28, 2002, Mark Nutritionals, Inc. (“MNI”) filed suit against AltaVista in the United
States District Court for the Western District of Texas, San Antonio Division. The claims against AltaVista include unfair competition and trademark infringement and dilution, under both federal law and the laws of the State of Texas. MNI is seeking
compensatory damages in the amount of $10,000,000 and punitive damages. AltaVista believes that these claims are without merit and plans to vigorously defend against these claims. AltaVista filed its answer on March 1, 2002, denying the allegations.
AltaVista is entitled to indemnification by a third party with respect to this matter.
On April 16, 2002, NCR
Corporation filed a complaint in the United States District Court for the Northern District of Illinois against uBid. The complaint alleges that uBid has infringed four patents held by NCR and seeks unspecified monetary damages and injunctive
relief. uBid believes that these claims are without merit and plans to vigorously defend against these claims. On May 28, 2002, uBid filed its answer to the complaint, denying the allegations.
On February 26, 2002, a purported class action lawsuit was filed in the Court of Chancery of the State of Delaware against the Company, Engage and the individual
members of the Board of Directors of Engage (David S. Wetherell, George A. McMillan, Christopher M. Cuddy, Edward M. Bennett and Peter J. Rice). The complaint alleges, among other things, breaches of fiduciary duties by the Company and the
individual defendants, and violations of Delaware law. The complaint requests, among other things, that the court (i) enjoin Engage from effecting a proposed reverse stock split, (ii) enjoin the issuance of shares of Engage common stock to the
Company upon conversion of promissory notes previously issued by Engage to the Company, (iii) award rescissory relief if the reverse stock split and stock issuances are consummated, and (iv) award the plaintiff compensatory damages, attorneys’
fees and expenses. On February 28, 2002, the Delaware Court of Chancery denied a request by the plaintiffs for the scheduling of a preliminary injunction hearing, and denied a request to allow expedited discovery in the lawsuit. In May 2002, the
plaintiffs filed an amended complaint. In addition to the requests stated in the original complaint, the amended complaint requests that the court (i) enjoin a proposed merger by and among the Company, a wholly owned subsidiary of the Company and
Engage (the “Merger”), and (ii) declare the Merger not to be entirely fair to the plaintiffs. On August 2, 2002, this matter was consolidated with the related matters set forth in the following two paragraphs. In light of the September 9,
2002 transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs only,
this matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter to consider any application for attorney’s fees and expenses submitted by plaintiffs or their counsel.
On May 21, 2002, a purported class action lawsuit was filed with the Court of Chancery of the State of Delaware against the Company,
Engage and the individual members of the Board of Directors of Engage (David S. Wetherell, George A. McMillan, Christopher M. Cuddy, Edward M. Bennett and Peter J. Rice). The complaint alleges, among other things, breaches of fiduciary duties. The
complaint requests, among other things, that the Court (i) enjoin, preliminarily and permanently, the Merger, (ii) rescind the Merger (in the event it is consummated) or grant the plaintiffs rescissory damages, (iii) direct that the defendants
account to plaintiffs for all damages caused to the plaintiffs and any special benefits obtained as a result of alleged unlawful conduct, and (iv) award the plaintiffs the costs and disbursements (including attorneys’ fees) relating to this
action. On August 2, 2002, this matter was consolidated with the related matters set forth in the following and preceding paragraphs.
12
In light of the September 9, 2002 transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October
18, 2002, all parties submitted to the Court a stipulated order agreeing to dismiss, with prejudice as to the named plaintiffs only, this matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter
to consider any application for attorney’s fees and expenses submitted by plaintiffs or their counsel.
On
May 21, 2002, another purported class action lawsuit was filed with the Court of Chancery of the State of Delaware against the Company, Engage and Robert W. Bartlett, Jr., Edward A. Bennett, Christopher M. Cuddy, George A. McMillan, Peter M. Rice,
David S. Wetherell and Andrew J. Zimmon (officers and directors of Engage). The complaint alleges, among other things, breaches of fiduciary duties. The complaint requests, among other things, that the Court (i) enjoin, preliminarily and
permanently, the Merger, (ii) rescind the Merger (in the event it is consummated) or grant the plaintiffs rescissory damages, (iii) direct that the defendants account to plaintiffs for all profits and any special benefits obtained as a result of
alleged unlawful conduct, and (iv) award the plaintiffs the costs and disbursements (including attorneys’ and experts’ fees) relating to this action. On August 2, 2002, this matter was consolidated with the related matters set forth
in the preceding two paragraphs. In light of the September 9, 2002 transaction in which the Company divested all of its equity and debt ownership interests in Engage, on October 18, 2002, all parties submitted to the Court a stipulated order
agreeing to dismiss, with prejudice as to the named plaintiffs only, this matter as moot. The stipulated order further provides that the Court shall retain jurisdiction over the matter to consider any application for attorney’s fees and
expenses submitted by plaintiffs or their counsel.
The Company is also a party to litigation which it considers
routine and incidental to its business. Management does not expect the results of any of these actions to have a material adverse effect on the Company’s business, results of operation or financial condition.
ITEM 4.—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was
submitted to a vote of the Company’s stockholders during the fourth quarter of 2002.
PART II
ITEM 5.—MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On November 1, 2002, the Company’s Common Stock will commence trading on the Nasdaq SmallCap Market under the symbol
“CMGI”. Prior to such date, the Common Stock has traded on the Nasdaq National Market under the same symbol. Other market information is set forth in Note 21 of the Notes to Consolidated Financial Statements included in Item 8 below and is
incorporated herein by reference.
On October 18, 2002, there were approximately 5,673 holders of record of Common
Stock of the Company.
The Company has never declared or paid cash dividends on its common stock. The Company
currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company’s Board of
Directors after taking into account various factors, including the Company’s financial condition, operating results, current and anticipated cash needs and plans for expansion.
Information regarding the Company’s equity compensation plans and the securities authorized for issuance thereunder is set forth in Item 12 below.
On June 15, 2002, pursuant to the terms of promissory notes issued by the Company on June 15, 2000 to certain of the former
members of Shortbuzz.com LLC (“Shortbuzz”) in connection with the Company’s acquisition of Shortbuzz, the Company issued an aggregate of 7,184 shares of Common Stock to the noteholders upon conversion of such notes. The shares of
Common Stock were issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended, as a security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange. No underwriters were involved with the issuance and sale of the shares of Common Stock.
13
ITEM 6.—SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth
selected consolidated financial information of the Company for the five years ended July 31, 2002. The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Company’s consolidated financial statements and notes to those statements included elsewhere or incorporated by reference in this report. The following consolidated financial data includes the
results of operations (from dates of acquisition) of the Company’s fiscal 1998 acquisitions of Accipiter, Inc., InSolutions, Inc., Servercast Communications, LLC and On-Demand Solutions, Inc., the fiscal 1999 acquisitions of Magnitude Network,
Inc., 2CAN Media, Inc., Internet Profiles Corporation, Activerse, Inc., Nascent Technologies, Inc., Netwright, LLC and Digiband, Inc., the fiscal 2000 acquisitions of AltaVista Company, AdForce, Inc., Flycast Communications Corporation, yesmail.com,
Inc., Tallan, Inc., uBid, Inc. and eighteen other companies, the fiscal 2001 acquisitions of Space Media Holdings Limited (“Space”) and MediaBridge Technologies, Inc., and the fiscal 2002 acquisition of the iLogistix assets and operations
by the Company’s wholly owned subsidiary SL Supply Chain. See note 8 to the Company’s consolidated financial statements for further information concerning these acquisitions. The following consolidated financial data also includes the
results of operations of companies that have been sold or ceased operations. In fiscal 2001, the operations of iCast, 1stUp, Adforce, Inc., and ExchangePath ceased and the Company sold a majority of its interest in Signatures SNI, Inc. (Signatures).
In fiscal 2002, the operations of NaviPath and MyWay ceased and the Company sold its interest in Activate. For all periods presented, the results of operations of NaviSite have been accounted for within discontinued operations as a result of our
decision to sell all of our equity and debt ownership interests in NaviSite on September 11, 2002. The historical results presented herein are not necessarily indicative of future results.
| |
|
Years ended July 31,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
| |
|
|
|
|
(in thousands, except per share data) |
|
| Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net revenue |
|
$ |
707,770 |
|
|
$ |
1,170,253 |
|
|
$ |
857,902 |
|
|
$ |
181,290 |
|
|
$ |
91,741 |
|
| Cost of revenue |
|
|
608,028 |
|
|
|
1,038,894 |
|
|
|
684,661 |
|
|
|
162,462 |
|
|
|
77,504 |
|
| Research and development expenses |
|
|
53,738 |
|
|
|
144,886 |
|
|
|
148,733 |
|
|
|
21,903 |
|
|
|
17,301 |
|
| In-process research and development expenses |
|
|
— |
|
|
|
1,462 |
|
|
|
65,683 |
|
|
|
6,061 |
|
|
|
10,325 |
|
| Selling, general and administrative expenses |
|
|
281,629 |
|
|
|
610,216 |
|
|
|
639,008 |
|
|
|
77,367 |
|
|
|
42,543 |
|
| Amortization of intangible assets and stock-based compensation |
|
|
256,012 |
|
|
|
1,556,909 |
|
|
|
1,401,644 |
|
|
|
14,807 |
|
|
|
3,093 |
|
| Impairment of long lived-assets |
|
|
73,114 |
|
|
|
3,363,317 |
|
|
|
34,205 |
|
|
|
— |
|
|
|
— |
|
| Restructuring |
|
|
26,209 |
|
|
|
209,208 |
|
|
|
14,770 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
|
(590,960 |
) |
|
|
(5,754,639 |
) |
|
|
(2,130,802 |
) |
|
|
(101,310 |
) |
|
|
(59,025 |
) |
| Interest income (expense), net |
|
|
36,086 |
|
|
|
4,970 |
|
|
|
(16,204 |
) |
|
|
300 |
|
|
|
(851 |
) |
| Gains on issuance of stock by subsidiaries and affiliates |
|
|
— |
|
|
|
121,794 |
|
|
|
80,387 |
|
|
|
130,729 |
|
|
|
46,285 |
|
| Other gains (losses), net |
|
|
(68,503 |
) |
|
|
(409,095 |
) |
|
|
525,265 |
|
|
|
758,312 |
|
|
|
96,562 |
|
| Other income (expense), net |
|
|
28,887 |
|
|
|
448,153 |
|
|
|
97,898 |
|
|
|
(13,938 |
) |
|
|
(12,899 |
) |
| Income tax benefit (expense) |
|
|
7,431 |
|
|
|
184,404 |
|
|
|
116,198 |
|
|
|
(335,747 |
) |
|
|
(36,181 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from continuing operations |
|
|
(587,059 |
) |
|
|
(5,404,413 |
) |
|
|
(1,327,258 |
|