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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 January 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-23262
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CMGI, INC.
(Exact name of registrant as specified in its charter)
-----------------
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Brickstone Square
Andover, Massachusetts 01810
(Address of principal executive offices) (Zip Code)
(978) 684-3600
(Registrant's telephone number, including area code)
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares outstanding of the issuer's common stock, as of March 13, 2003:
Common Stock, par value $.01 per share 393,471,707
Class Number of shares outstanding
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CMGI, INC.
FORM 10-Q
INDEX
Page
Number
------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets--January 31, 2003
and July 31, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations--Three
and six months ended January 31, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows--Six months
ended January 31, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 6. Exhibits and Reports on Form 8-K 48
SIGNATURE 49
CERTIFICATIONS 50
EXHIBIT INDEX 52
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2
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, July 31,
2003 2002
---------------- ----------------
(in thousands, except share
and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 174,712 $ 215,078
Available-for-sale securities 1,845 10,327
Trading security -- 94,271
Accounts receivable, trade, net of allowance for doubtful
accounts 60,173 38,221
Inventories 35,560 32,177
Prepaid expenses and other current assets 24,181 19,416
Current assets of discontinued operations 59,196 132,609
Deferred loss on disposal of subsidiary -- 31,869
---------------- ----------------
Total current assets 355,667 573,968
---------------- ----------------
Property and equipment, net 26,241 30,432
Investments in affiliates 32,507 57,770
Goodwill 22,123 24,341
Non-current assets of discontinued operations 16,042 189,449
Other assets 2,408 29,943
---------------- ----------------
$ 454,988 $ 905,903
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 94,271
Current installments of long-term debt 1,397 1,316
Accounts payable 40,774 24,065
Accrued restructuring 12,679 23,783
Accrued income taxes 94,813 93,515
Accrued expenses 44,016 33,482
Other current liabilities 4,413 5,440
Current liabilities of discontinued operations 53,048 94,217
---------------- ----------------
Total current liabilities 251,140 370,089
---------------- ----------------
Long-term debt, less current installments 7,643 7,884
Other long-term liabilities 14,974 14,181
Non-current liabilities of discontinued operations 1,744 61,272
Minority interest 38,319 35,847
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share. Authorized
5,000,000 shares; zero issued or outstanding as of
January 31, 2003 and July 31, 2002 -- --
Common stock, $0.01 par value per share. Authorized
1,405,000,000 shares; issued and outstanding
393,390,023 shares at January 31, 2003 and
392,679,011 shares at July 31, 2002 3,934 3,926
Additional paid-in capital 7,294,033 7,292,377
Accumulated deficit (7,157,302) (6,880,452)
---------------- ----------------
Accumulated other comprehensive income 503 779
---------------- ----------------
Total stockholders' equity 141,168 416,630
---------------- ----------------
$ 454,988 $ 905,903
================ ================
See accompanying notes to interim unaudited condensed consolidated
financial statements
3
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- --------------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(in thousands, except per share amounts)
Net revenue $ 119,774 $ 43,744 $ 232,996 $ 88,521
Operating expenses:
Cost of revenue 110,549 36,121 214,912 84,810
Research and development 1,445 2,449 3,499 5,711
Selling 2,860 2,993 6,058 7,524
General and administrative 13,273 15,924 35,631 37,292
Amortization of intangible assets and stock-based compensation 54 1,751 109 3,501
Impairment of long-lived assets 24 2,328 24 2,328
Restructuring 9,095 (361) 9,405 (9,224)
--------- -------- --------- ---------
Total operating expenses 137,300 61,205 269,638 131,942
--------- -------- --------- ---------
Operating loss (17,526) (17,461) (36,642) (43,421)
--------- -------- --------- ---------
Other income (expense):
Interest income 845 2,699 2,083 8,722
Interest (expense) recovery, net (25,725) 13,474 1,162 7,127
Other gains (losses), net 23,468 (17,886) (31,394) (25,746)
Equity in losses of affiliates, net (373) (1,144) (888) (13,393)
Minority interest 327 21 (1,980) (47)
--------- -------- --------- ---------
(1,458) (2,836) (31,017) (23,337)
Loss from continuing operations before income taxes and
extraordinary item (18,984) (20,297) (67,659) (66,758)
Income tax expense (benefit) 738 (1,794) 1,594 10,785
--------- -------- --------- ---------
Loss from continuing operations before extraordinary item (19,722) (18,503) (69,253) (77,543)
Discontinued operations, net of income taxes:
Loss from discontinued operations (163,544) (97,575) (207,597) (263,339)
Extraordinary gain on retirement of debt, net of income taxes -- 131,281 -- 131,281
--------- -------- --------- ---------
Net income (loss) (183,266) 15,203 (276,850) (209,601)
Preferred stock accretion -- (411) -- (2,301)
Gain on repurchase of Series C Convertible Preferred Stock -- 63,505 -- 63,505
--------- -------- --------- ---------
Net income (loss) available to common stockholders $(183,266) $ 78,297 $(276,850) $(148,397)
========= ======== ========= =========
Basic and diluted income (loss) per share available to common
stockholders:
Income (loss) from continuing operations before extraordinary
item $ (0.05) $ 0.12 $ (0.18) $ (0.04)
Loss from discontinued operations $ (0.42) $ (0.25) $ (0.53) $ (0.72)
Extraordinary gain on retirement of debt, net of income taxes $ -- $ 0.33 $ -- $ 0.36
--------- -------- --------- ---------
Net income (loss) available to common stockholders $ (0.47) $ 0.20 $ (0.71) $ (0.40)
========= ======== ========= =========
Shares used in computing basic income (loss) per share 393,064 383,845 392,873 367,560
--------- -------- --------- ---------
Shares used in computing diluted income (loss) per share 393,064 388,641 392,873 367,560
--------- -------- --------- ---------
See accompanying notes to interim unaudited condensed consolidated
financial statements
4
CMGI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
January 31,
----------------------------
2003 2002
------------ ------------
(in thousands)
Cash flows from operating activities of continuing operations:
Net loss $(276,850) $(209,601)
Loss from discontinued operations (207,597) (263,339)
--------- ---------
Income (loss) from continuing operations (69,253) 53,738
Adjustments to reconcile net loss to cash used for continuing operations:
Depreciation, amortization and impairment charges 6,220 14,880
Deferred income taxes - 12,380
Realization of cumulative translation adjustment 5,026 -
Non-operating losses, net 23,933 (126,052)
Equity in losses of affiliates 888 13,393
Minority interest (1,980) (47)
Changes in operating assets and liabilities, excluding effects from acquired and
divested subsidiaries:
Trade accounts receivable (22,292) 8,806
Prepaid expenses and other current assets 242 636
Inventories (3,453) 3,325
Accounts payable, accrued restructuring and expenses 19,500 (32)
Deferred revenues 462 (2,378)
Refundable and accrued income taxes, net 1,298 13,852
Other assets and liabilities 11,019 (9,818)
--------- ---------
Net cash used for operating activities of continuing operations (28,390) (17,317)
--------- ---------
Cash flows from investing activities of continuing operations:
Additions to property and equipment (6,046) (6,050)
Net proceeds from maturities of (purchases of) available-for-sale securities, net - 21,367
Proceeds from liquidation of stock investments 15,377 19,446
Cash impact of acquisitions and divestitures of subsidiaries, net (583) (1,539)
Net investments in affiliates 10,200 (4,077)
Other, net - 3,384
--------- ---------
Net cash provided by investing activities of continuing operations 18,948 32,531
--------- ---------
Cash flows from financing activities of continuing operations:
Net repayments of notes payable - (75,000)
Net repayments of long-term debt (160) (1,780)
Payment for retirement of Series C Convertible Preferred Stock - (100,301)
Net proceeds from issuance of common stock 324 793
--------- ---------
Net cash provided by (used for) financing activities of continuing operations 164 (176,288)
--------- ---------
Net cash used for discontinued operations (31,088) (136,851)
Net decrease in cash and cash equivalents (40,366) (297,925)
Cash and cash equivalents at beginning of period 215,078 619,590
--------- ---------
Cash and cash equivalents at end of period $ 174,712 $ 321,665
========= =========
See accompanying notes to interim unaudited condensed consolidated
financial statements
5
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by CMGI, Inc. (together with its consolidated subsidiaries, "CMGI" or
the "Company") in accordance with accounting principles generally accepted in
the United States of America ("US GAAP"). In the opinion of management, the
accompanying condensed consolidated financial statements contain all
adjustments, consisting only of those of a normal recurring nature, necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these condensed consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended July 31, 2002 which are contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
(the "SEC") on October 29, 2002. The results for the three and six-month periods
ended January 31, 2003 are not necessarily indicative of the results to be
expected for the full fiscal year. Certain prior year amounts in the condensed
consolidated financial statements have been reclassified in accordance with US
GAAP to conform to the current year presentation. Discontinued operations
reporting has been applied for certain of the Company's subsidiaries that have
been disposed of or are held for sale(See note F).
Marketable securities held by the Company which meet the criteria for
classification as trading securities are carried at fair value. Unrealized
holding gains and losses on securities classified as trading are recorded as a
component of "Other gains (losses), net" in the accompanying condensed
consolidated statements of operations.
B. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 applies to all business combinations that the
Company enters into after June 30, 2001, and eliminates the pooling-of-interests
method of accounting. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Under the new statements, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests in accordance with the statements. Other intangible
assets continue to be amortized over their useful lives. The Company adopted
SFAS No. 142 on August 1, 2002 (see note D).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses the accounting treatment for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The provisions of the statement apply to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, or normal operation of a
long-lived asset. The statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 on
August 1, 2002. This statement did not have a material effect on the Company's
financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No's. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later. It
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This
Statement also amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The adoption of this Statement did not have a material impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue 94-3. The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the statement include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activity. The provisions of
this Statement are required to be applied to exit or disposal activities that
are initiated after December 31, 2002. The adoption of this statement did not
have a material effect on the Company's financial position or results of
operations.
6
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material effect on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company
does not anticipate that adoption of SFAS No. 148 will have a material effect on
the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1,
2003, it also applies to VIEs in which an interest is acquired before February
1, 2003. The Company may apply the Interpretation prospectively, with a
cumulative effect adjustment as of July 1, 2003, or by restating previously
issued financial statements with a cumulative effect adjustment as of the
beginning of the first year restated. The Company is in the process of
evaluating the effects of applying Interpretation No. 46. Based on our
preliminary analysis, the Company does not anticipate that adoption of
Interpretation No. 46 will have a material effect on the Company's financial
position or results of operations.
C. OTHER GAINS (LOSSES), NET
The following table reflects the components of "Other gains (losses), net":
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------- ------------
(in thousands)
Gain on derivative and sale of hedged Yahoo!, Inc. common
stock $ -- $ -- $ -- $ 53,897
Gain (loss) on sales of marketable securities 7,417 (3,478) 7,417 (31,003)
Gain (loss) on mark-to-market adjustment for trading
security 24,687 2,885 (6,329) 2,885
Loss on sale of Equilibrium Technologies, Inc. -- -- (3,527) --
Loss on sale of Activate.Net Corporation -- -- -- (20,743)
Loss on impairment of marketable securities (187) (1,708) (387) (1,708)
Loss on divestiture of investment in Signatures SNI, Inc. -- -- (14,056) --
Loss on impairment of investments in affiliates (7,876) (15,488) (14,051) (27,016)
Other, net (573) (97) (461) (2,058)
------------ ----------- ------------- ------------
$23,468 $(17,886) $(31,394) $(25,746)
============ =========== ============= ============
During the three months ended January 31, 2003 the Company recorded a gain
of approximately $24.7 million on the mark-to-market adjustment of a trading
security (see note L). The Company also recorded impairment charges of
approximately $7.9 million for other-than-temporary declines in the carrying
value of certain investments in affiliates. These charges were primarily
associated with investments made by CMGI@Ventures IV, LLC. During the three
months ended January 31, 2003, the Company recorded a gain on the sale of
marketable securities of approximately $7.4 million from the proceeds received
in the acquisition of Vicinity by Microsoft.
During the three months ended January 31, 2002 the Company recorded
impairment charges of approximately $15.5 million for other-than-temporary
declines in the carrying value of certain investments in affiliates.
These charges were primarily associated with investments made by
CMGI@Ventures IV, LLC.
7
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the six months ended January 31, 2003, the Company recorded a loss
of approximately $6.3 million on the mark-to-market adjustment of a trading
security (see note L). The Company also recorded impairment charges of
approximately $14.1 million for other-than-temporary declines in the carrying
value of certain investments in affiliates. These charges were primarily
associated with investments made by CMGI@Ventures IV, LLC.
On November 6, 2002, the Company divested of its equity and debt interests
in Signatures SNI, Inc. ("Signatures"). In connection with this transaction the
Company recorded a pre-tax loss of approximately $14.1 million during the six
months ended January 31, 2003 (see note F).
On October 17, 2002, the Company sold its interests in its majority-owned
subsidiary Equilibrium Technologies, Inc. ("Equilibrium") to a group led by the
current management of Equilibrium and recorded a pre-tax loss of approximately
$3.5 million (see note F).
On January 2003, the Company recorded a gain on the sale of marketable
securities of approximately $7.4 million from the proceeds received in the
acquisition of Vicinity by Microsoft.
During the six months ended January 31, 2002, the Company sold marketable
securities for total proceeds of approximately $19.4 million and recorded a net
pre-tax loss of approximately $31.0 million on these sales. These sales
primarily consisted of approximately 7.1 million shares of Primedia, Inc. common
stock for proceeds of approximately $15.9 million, approximately 356,000 shares
of Marketing Services Group, Inc. common stock for total proceeds of
approximately $1.1 million and approximately 3.2 million shares of Divine, Inc.
(Divine) common stock for total proceeds of approximately $2.4 million.
On August 1, 2001, the Company settled the final tranche of its borrowing
arrangement that hedged a portion of the Company's investment in Yahoo!, Inc.
(Yahoo!) common stock. The Company delivered 581,499 shares of Yahoo! Common
stock and recognized a pre-tax gain of approximately $53.9 million.
During the six months ended January 31, 2002, the Company recorded
impairment charges of approximately $27.0 million for other-than-temporary
declines in the carrying value of certain investments in affiliates. These
charges were primarily associated with investments made by CMGI@Ventures IV,
LLC.
In September 2001, the Company completed the sale of its majority-owned
subsidiary, Activate.Net Corporation to Loudeye Technologies, Inc. and recorded
a pre-tax loss of approximately $20.7 million.
D. IMPAIRMENT OF LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE ASSETS
Through July 31, 2002, the Company recorded impairment charges as a result
of management's ongoing business reviews and impairment analysis performed under
its policy regarding impairment, utilizing the guidance in SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121). Where impairment indicators were identified,
management evaluated whether the projected undiscounted cash flows were
sufficient to cover the particular long-lived asset being reviewed. If the
undiscounted cash flows were insufficient, management then determined the amount
of the impairment charge by comparing the carrying value of long-lived assets to
their fair value. Management determined fair value of goodwill and certain other
intangible assets based on a combination of the discounted cash flow
methodology, which was based upon converting expected cash flows to present
value, and the market approach, which included analysis of market price
multiples of companies engaged in lines of business similar to the Company. The
market price multiples were selected and applied to the Company based on the
relative performance, future prospects and risk profile of the Company in
comparison to the guideline companies. Management predominantly utilized
third-party valuation reports in its determination of fair value. Management
predominantly determined fair value of other long-lived assets, such as property
and equipment, based on third-party valuation reports.
On August 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Under SFAS No. 144, the Company is
required to test certain long-lived assets or group of assets for recoverability
whenever events or changes in circumstances indicate that the Company may not be
able to recover the asset's carrying amount. SFAS No. 144 defines impairment as
the condition that exists when the carrying amount of a long-lived asset or
group exceeds its fair value. When events or changes in circumstances dictate an
impairment review of a long-lived asset or group, the Company will evaluate
recoverability by determining whether the undiscounted cash flows expected to
result from the use and eventual disposition of that asset or group cover the
carrying value at the evaluation date. If the undiscounted cash flows are not
sufficient to cover the carrying value, the Company will measure any impairment
loss as the excess of the carrying amount of the long-lived asset or group over
its fair value.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statement. Other intangible assets will
continue to be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Accordingly, the Company adopted
SFAS No. 142 on August 1, 2002. SFAS No. 142 requires the Company to evaluate
its existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Accordingly, the Company is required to reassess the useful lives and
residual
8
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
values of all identifiable intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments. In
addition, to the extent an intangible asset is then determined to have an
indefinite useful life, the Company is required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142.
Under the provisions of SFAS No. 142, the Company is required to perform
transitional goodwill impairment tests as of August 1, 2002. To accomplish this,
the Company must identify its reporting units and determine the carrying value
of each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS No. 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss resulting from the completion of the
first step of the transitional goodwill impairment testing will be recognized as
the cumulative effect of a change in accounting principle in the Company's
condensed consolidated statements of operations.
In accordance with the provisions of SFAS No. 142, the Company has
designated reporting units for purposes of assessing goodwill impairment. The
standard defines a reporting unit as the lowest level of an entity that is a
business and that can be distinguished, physically and operationally and for
internal reporting purposes, from the other activities, operations, and assets
of the entity. Based on the provisions of the standard, the Company has
determined that it has two reporting units for purposes of goodwill impairment
testing. Additionally, the Company's policy will be to perform its annual
impairment testing for all reporting units as of the fourth quarter of each
fiscal year.
Following the adoption of SFAS No. 142, the Company completed the first
step of the required transitional impairment test during the second quarter of
2003, based on the comparison of the fair value of the reporting unit with their
respective carrying values as of August 1, 2002. The Company concluded that
there was no impairment indicated as of August 1, 2002. As of August 1, 2002,
the Company ceased the amortization of goodwill.
The changes in the carrying amount of goodwill for the six months ended
January 31, 2003 are as follows:
Enterprise
eBusiness Software
and and
Fulfillment Services
Segment Segment Total
----------- ----------- ---------
(in thousands)
Balance as of July 31, 2002 $ 22,123 $ 2,218 $ 24,341
Goodwill written off related to sale
of subsidiary -- (2,218) (2,218)
----------- ----------- ---------
Balance as of January 31, 2003 $ 22,123 -- $ 22,123
=========== =========== =========
9
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of net income (loss) available to common stockholders before
goodwill amortization expense, for the three and six months ended January 31,
2003 and 2002, is as follows:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Loss from continuing operations before extraordinary item
as reported $ (19,722) $ (18,503) $ (69,253) $ (77,543)
Add back: goodwill amortization expense, net of tax -- 1,696 -- 3,392
---------- ---------- ---------- ----------
Adjusted loss from continuing operations before
extraordinary item $ (19,722) $ (16,807) $ (69,253) $ (74,151)
========== ========== ========== ==========
Net income (loss) available to common stockholders as
reported $(183,266) $ 78,297 $(276,850) $(148,397)
Add back: goodwill amortization expense, net of tax -- 1,696 -- 3,392
---------- ---------- ---------- ----------
Adjusted net income (loss) available to common stockholders $(183,266) $ 79,993 $(276,850) $(145,005)
========== ========== ========== ==========
Basic income (loss) per share from continuing operations
before extraordinary item as reported $ (0.05) $ (0.05) $ (0.18) $ (0.21)
Add back: goodwill amortization expense, net of tax -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Adjusted basic income (loss) per share from continuing
operations before extraordinary item as reported $ (0.05) $ (0.04) $ (0.18) $ (0.20)
========== ========== ========== ==========
Diluted income (loss) per share from continuing operations
before extraordinary item as reported $ (0.05) $ (0.05) $ (0.18) $ (0.21)
Add back: goodwill amortization expense, net of tax -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Adjusted diluted income (loss) per share from continuing
operations before extraordinary item as reported $ (0.05) $ (0.04) $ (0.18) $ (0.20)
========== ========== ========== ==========
Basic income (loss) per share available to
common stockholders as reported $ (0.47) $ 0.20 $ (0.71) $ (0.40)
Add back: goodwill amortization expense, net of tax -- 0.01 -- --
---------- ---------- ---------- ----------
Adjusted basic income (loss) per share available to
common stockholders $ (0.47) $ 0.21 $ (0.71) $ (0.40)
========== ========== ========== ==========
Diluted income (loss) per share available to
common stockholders as reported $ (0.47) $ 0.20 $ (0.71) $ (0.40)
Add back: goodwill amortization expense, net of tax -- 0.01 -- --
---------- ---------- ---------- ----------
Adjusted diluted income (loss) per share available to
common stockholders $ (0.47) $ 0.21 $ (0.71) $ (0.40)
========== ========== ========== ==========
E. RESTRUCTURING CHARGES
The following tables summarize the activity in the restructuring accrual from
July 31, 2002 through January 31, 2003:
Employee
Related Contractual Asset
Expenses Obligations Impairments Total
------------- ------------ -------------- ---------
(in thousands)
Accrued restructuring balance at
July 31, 2002 $ 421 $ 23,362 $ -- $ 23,783
Q1 Restructuring 164 146 -- 310
Cash payments (168) (8,131) -- (8,299)
Non-cash charges -- -- -- --
10
Employee
Related Contractual Asset
Expenses Obligations Impairments Total
------------- ------------ -------------- -------
(in thousands)
Accrued restructuring balance at
October 31, 2002 417 15,377 -- 15,794
Q2 Restructuring 96 3,830 6,256 10,182
Restructuring adjustments -- (1,087) -- (1,087)
Cash payments (513) (5,441) -- (5,954)
Non-cash charges -- -- (6,256) (6,256)
------------- ------------ -------------- ---------
Accrued restructuring balance at
January 31, 2003 $ -- $ 12,679 $ -- $ 12,679
============= ============ ============== =========
11
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company anticipates that the remaining contractual obligation
restructuring accruals will be paid by February 2007. The remaining contractual
obligations primarily relate to facilities and equipment lease obligations.
The net restructuring charges (benefits) for the three and six months ended
January 31, 2003 and 2002, respectively, would have been allocated as follows
had the Company recorded the expense and adjustments within the functional
department of the restructured activities:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------------------------------
2003 2002 2003 2002
------- --------- ----------- -------------
(in thousands)
Cost of revenue $ -- $ (2,269) $ -- $(13,503)
Research and development 30 75 48 112
Selling 14 206 90 420
General and administrative 9,051 1,627 9,267 3,747
------- --------- ----------- -------------
$ 9,095 $ (361) $ 9,405 $ (9,224)
======= ========= =========== =============
The Company's restructuring initiatives during the six months ended January
31, 2003 and 2002, respectively, involved strategic decisions to exit certain
businesses and to reposition certain on-going businesses of the Company.
Restructuring charges consisted primarily of contract terminations, severance
charges and equipment charges incurred as a result of the cessation of
operations of certain subsidiaries and actions taken at several remaining
subsidiaries and at the Company's corporate headquarters to increase operational
efficiencies, improve margins and further reduce expenses. Severance charges
included employee termination costs as a result of workforce reductions.
Employees affected by the restructurings were notified both through direct
personal contact and by written notification. The contract terminations
primarily consisted of costs to exit facility and equipment leases and to
terminate bandwidth and other vendor contracts. The asset impairment charges
primarily related to the write-off of property and equipment.
During the three months ended January 31, 2003, the Company recorded net
restructuring charges of approximately $9.1 million. Of this amount, $5.0
million related to the recognition of the cumulative translation component of
equity as a result of the substantial completion of the shutdown of the
Company's European operations. The Company also recorded $1.2 million of
restructuring charges related to the write-off of certain software related
costs. In addition, the Company recorded additional facility lease obligation
charges related to vacant office space in San Francisco, CA.
Also, during the three months ended January 31, 2003, the Company settled
certain facility lease obligations related to its European operations for
amounts less than originally anticipated and recorded a reduction of previously
recorded restructuring estimates of approximately $1.1 million.
During the three months ended October 31, 2002, the Company recorded total
restructuring charges of approximately $0.3 million. Of this amount, $0.15
million related to severance costs associated with a workforce reduction at the
Company's majority owned subsidiary ProvisionSoft. Additionally, the Company
recorded a restructuring charge of $0.16 million related to facility and
equipment lease obligations that the Company assumed in connection with its sale
of Equilibrium.
During the three months ended January 31, 2002, the Company recorded a net
restructuring benefit of approximately ($0.3) million primarily at its corporate
headquarters and MyWay. The restructuring charge incurred at the Company's
headquarters, of approximately $2.9 million, related to severance costs from the
termination of approximately 70 employees as well as the costs for the future
rental obligations associated with office space located in San Francisco, CA.
MyWay incurred restructuring expenses of $0.4 million related to the termination
of certain customer and vendor contracts in connection with the cessation of its
operations.
12
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also during the three months ended January 31, 2002, the Company settled
certain vendor and customer contractual obligations for amounts less than
originally anticipated and recorded a reduction of previously recorded
restructuring estimates. These restructuring adjustments related to settlements
negotiated by NaviPath and MyWay with their respective customers and vendors for
amounts less than originally estimated.
During the three months ended October 31, 2001 the Company recorded a net
restructuring benefit of approximately ($8.9) million. Of this amount, MyWay
incurred approximately $5.9 million in restructuring charges primarily related
to the write-off of property and equipment, as well as the termination of
customer and vendor contracts. NaviPath incurred restructuring charges of
approximately $4.1 million that primarily related to severance costs, legal, and
other professional fees incurred in connection with the cessation of its
operations. The Company also recorded approximately $2.2 million in
restructuring charges related to the write-off of property and equipment, and
costs to exit facility leases in Europe.
Also, during the three months ended October 31, 2001, the Company settled
certain vendor and customer contractual obligations for amounts less than
originally estimated. As a result, the Company recorded a restructuring
adjustment of approximately $21.1 million to the accrued restructuring balance
at July 31, 2001, primarily related to payments by NaviPath to terminate
purchase commitments and service contracts for amounts less than originally
estimated.
F. DISCONTINUED OPERATIONS AND DIVESTITURES
On August 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Under the provisions of SFAS No.
144, certain disposal activities that previously did not qualify for
discontinued operations accounting will now be required to be reported as
discontinued operations. SFAS No. 144 requires that a disposal of a component of
an entity comprising operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes from the rest
of the entity, shall be reported as discontinued operations if (a) the
operations of the component have been or will be eliminated from the ongoing
operations of the entity as a result of the disposition activity, and (b) the
entity will not have any significant continuing involvement in the operations of
the component after the disposal transaction.
During the quarter ended January 31, 2003, the Company determined to divest
of uBid either through the sale of its equity interests, or substantially all of
uBid's assets and liabilities. It is expected that the Company will sign a
definitive agreement in the near future.
On March 7, 2003, the Company sold all of its equity ownership interests in
Tallan, Inc. to a group (the "Tallan Buyer") led by management of Tallan. Under
the terms of the Transaction Agreement, the Company sold to the Tallan Buyer
100% of the issued and outstanding shares of Tallan. In consideration thereof,
the Company received, among other things, (i) approximately $7.1 million in
cash, (ii) a senior secured interest free promissory note due in March 2008 in
the principal amount of $3.0 million made by the Tallan Buyer, and (iii) a
warrant for the purchase of 9.0% of the issued and outstanding shares of Tallan
common stock, as of the earlier of the date of first exercise or merger or sale
of Tallan (on a fully diluted basis, giving effect to the exercise or conversion
of the Tallan) at an exercise price of $.01 per share. In addition, Tallan
agreed to pay to the Company up to an additional $5.0 million in earnout
payments commencing in fiscal 2004 based on Tallan's acheivement of certain
revenue thresholds.
On February 28, 2003, the Company sold all of its equity ownership interest
in Yesmail, Inc. for approximately $5.0 million in cash, subject to certain
adjustments and customary escrow arrangements.
On February 18, 2003, Overture Services, Inc. ("Overture"), and AltaVista
Company, a majority-owned operating company of CMGI ("AltaVista"), signed a
definitive agreement under which Overture will acquire AltaVista's business for
approximately $140 million in cash and stock. Under the terms of the agreement,
Overture will pay AltaVista in Overture common stock valued at approximately $80
million (provided that Overture will not be required to issue more than
4,274,670
13
shares or less than 3,001,364 shares), plus $60 million in cash, and will assume
certain of AltaVista's liabilities. The transaction, which is subject to
customary approvals and certain other conditions, is expected to close in April
2003.
The Company met the criteria specified in SFAS No. 144 in order to classify
each of the above listed subsidiaries (disposal groups) as held for sale at
January 31, 2003. With respect to each of these subsidiaries at January 31,
2003, management of the Company and the Board of Directors committed to a plan
to sell such entity, such entity was available for immediate sale, an active
program was initiated to locate a buyer, the Company believed that the sale of
such entity was probable and would be completed within one year. Additionally,
the Company was actively marketing each entity for sale at prices that were
reasonable in relation to its current fair value, and the actions required to
complete each plan indicated that it was unlikely that any of the plans would
change significantly. Therefore, for all periods presented, uBid, which was
previously included in the eBusiness and Fulfillment segment, and Tallan,
Yesmail and AltaVista, which were previously included in the Enterprise Software
and Services segment, have been classified as held-for-sale at January 31, 2003,
and have been reported as discontinued operations in the condensed consolidated
financial statements for all periods presented. The Company also plans to divest
of its interests in ProvisionSoft. However, the held for sale criteria outlined
above were not met by January 31, 2003.
On September 9, 2002, the Company sold all of its equity and debt ownership
interests in Engage. Under the terms of the Transaction Agreement, CMGI
transferred to Engage approximately 148.4 million shares of common stock of
Engage held by CMGI, representing approximately 76% of the issued and
outstanding shares of Engage, and cancelled approximately $60 million of debt,
including all convertible debt, owed to CMGI by Engage. In consideration of the
equity transfer and debt cancellation, Engage, among other things, (i) paid to
CMGI $2.5 million in cash, (ii) agreed to pay to CMGI up to an additional $6.0
million, comprised of a senior secured promissory note due in September 2006 and
earnout payments commencing in fiscal year 2004, and (iii) issued to CMGI a
warrant for the purchase of up to 9.9% of the issued and outstanding shares of
Engage common stock, as of the earlier of the date of first exercise or a merger
or sale of Engage (on a fully diluted basis, giving effect to the exercise or
conversion of all then outstanding convertible securities of Engage other than
stock options issued to employees and directors of Engage), at an exercise price
of $.048 per share. As a result of the divestiture, Engage, which was previously
included within the Enterprise Software and Services segment, has been accounted
for as a discontinued operation in accordance with the provisions of SFAS No.
144. Accordingly, Engage's operating results have been segregated from
continuing operations and have been reported as discontinued operations in the
accompanying condensed consolidated balance sheets and statements of operations
and cash flows, and related notes to the condensed consolidated financial
statements for all periods presented. The Company has recorded a loss on the
disposal of Engage of approximately $16.6 million (which included a $2.8 million
loss from discontinued operations and a $13.8 million loss on the sale).
On June 12, 2002 (the measurement date), CMGI's board of directors
authorized the divestiture of the Company's equity and debt ownership interests
in its subsidiary NaviSite. On September 11, 2002, the Company completed the
sale of all its equity and debt ownership interests in its subsidiary, NaviSite
to ClearBlue Technologies, Inc. ("ClearBlue"). In consideration thereof, the
Company received, among other things, 131,579 shares of common stock of
ClearBlue. On the measurement date, NaviSite comprised more than 90% of both the
total assets and operating losses of the Managed Application Services segment
and NaviSite's product offering represented both a major line of business and a
distinct class of customer. As a result, during the fourth quarter of the
Company's fiscal year ended July 31, 2002, the Company accounted for its
divestiture of NaviSite as discontinued operations in accordance with the
provisions of APB No. 30, "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". At July 31, 2002, the Company
expected to record a net gain in the first quarter of fiscal year 2003 on the
sale of its debt and equity ownership interests in NaviSite. The estimated gain
on the sale of NaviSite included the results of operations from the measurement
date through the date of disposal. The results of operations of NaviSite from
the measurement date through July 31, 2002 were deferred and reflected as
deferred loss on disposal of subsidiary on the condensed consolidated balance
sheet at July 31, 2002. NaviSite's operating results have been segregated from
continuing operations and have been reported as discontinued operations in the
accompanying condensed consolidated balance sheets and statements of operations
and cash flows, and related notes to the condensed consolidated financial
statements for all periods presented. During the six months ended January 31,
2003, the Company recorded a gain of approximately $2.3 million on the disposal
of NaviSite. In December 2002, the Company received 213,437 shares of NaviSite
Common Stock upon distribution from ClearBlue.
Summarized financial information for the discontinued operations of
Yesmail, AltaVista, Tallan, uBid, Engage and NaviSite are as follows:
Three Months Ended Six Months Ended
January 31, January 31,
----------------------------------------------------------
2003 2002 2003 2002
----------- ------------ ---------- -------------
(in thousands)
Results of operations:
Net revenue $ 61,321 $ 161,268 $ 143,525 $ 323,936
Total expenses 224,865 258,843 336,782 587,275
--------- --------- --------- ---------
Net loss (163,544) (97,575) (193,257) (263,339)
Gain on sale of NaviSite -- -- 2,291 --
Loss on sale of Engage -- -- (16,631) --
--------- --------- --------- ---------
Net loss from discontinued operations $(163,544) $ (97,575) $(207,597) $(263,339)
========= ========= ========= =========
14
January 31, 2003 July 31, 2002
---------------- -------------
(in thousands)
Financial position:
Current assets $ 59,196 $132,609
Property and equipment, net 14,650 34,351
Other assets 1,392 155,098
Total liabilities (54,792) (155,489)
-------- --------
Net assets of discontinued operations $ 20,446 $166,569
======== ========
On October 17, 2002, the Company sold all of its equity ownership interests
in Equilibrium to a group (the "Buyer") led by the management of Equilibrium.
Under the terms of the agreement, the Company sold to the Buyer 100% of the
issued and outstanding shares of Equilibrium. In consideration thereof, the
Company received, among other things, (i) a senior secured promissory note due
in October 2005 in the principal amount of $1.5 million, (ii) a warrant for the
purchase of 19.9% of the issued and outstanding shares of Equilibrium common
stock, as of the earlier of the date of first exercise or a merger or sale of
Equilibrium (on a fully diluted basis, giving effect to the exercise or
conversion of all then outstanding convertible securities of Equilibrium), at an
exercise price of $.01 per share, and (iii) a royalty-free, perpetual worldwide
license to use Equilibrium's MediaRich software. As a result of the sale, the
Company recorded a pre-tax loss of approximately $3.5 million. As a result of
the terms of the warrant received, the disposition of Equilibrium does not
qualify for discontinued operations reporting in accordance with SFAS No. 144.
On November 6, 2002, the Company entered into a Recapitalization Agreement
with Signatures SNI, Inc. ("Signatures") in which Signatures paid the Company a
total of $8.0 million to: (i) redeem all of the capital stock held by the
Company; (ii) retire a portion of the outstanding principal balance on the
promissory note held by the Company; and (iii) retire all of the outstanding
accrued interest relating to the promissory note. In addition, the Company
contributed the remaining promissory note principal balance to the capital of
Signatures and cancelled the outstanding warrants. As a result of this
transaction, during the six months ended January 31, 2003, the Company recorded
a pre-tax loss of approximately $14.1 million.
G. SEGMENT INFORMATION
Based on the information provided to the Company's chief operating
decision-maker for purposes of making decisions about allocating resources and
assessing performance, the Company's operations have been classified in two
operating segments offering distinctive products and services that are marketed
through different channels: Enterprise Software and Services and eBusiness and
Fulfillment.
In addition to its two current operating segments, the Company continues to
report a Portals segment (that consists of the operations of MyWay and iCAST)
and a Managed Application Services segment (that consists of the operations of
NaviPath, ExchangePath, 1stUp, and Activate), as these entities do not meet the
aggregation criteria under SFAS No. 131 with respect to the Company's current
reporting segments. The historical results of these companies will continue to
be reported in the Portals and
15
Managed Application Services segments, respectively, as will any residual
results from operations that exist through the cessation of operations of these
entities, each of which are in varying stages of being wound down.
Management evaluates segment performance based on segment net revenue,
operating loss and "pro forma operating income (loss)", which is defined as the
operating income (loss) excluding net charges related to in-process research and
development, depreciation, long-lived asset impairment, restructuring and
amortization of intangible assets and stock-based compensation.
"Other" includes certain corporate infrastructure expenses, which are not
identifiable to the operations of the Company's operating business segments.
Summarized financial information of the Company's continuing operations by
business segment is as follows:
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ -------------------------------
2003 2002 2003 2002
----------- ----------- ------------ ------------
(in thousands)
Net revenue:
Enterprise Software and Services $ - $ 393 $ 227 $ 704
eBusiness and Fulfillment 119,501 39,478 232,360 75,678
Managed Application Services 273 361 409 5,814
Portals (formerly Search and Portals) - 3,512 - 6,325
--------- --------- --------- ---------
$ 119,774 $ 43,744 $ 232,996 $ 88,521
========= ========= ========= =========
Operating income (loss):
Enterprise Software and Services $ (2,522) $ (4,400) $ (6,703) $ (9,295)
eBusiness and Fulfillment 1,761 (714) 2,043 (950)
Managed Application Services 264 1,300 400 2,109
Portals (formerly Search and Portals) 869 1,500 869 (6,296)
Other (17,898) (15,147) (33,251) (28,989)
--------- --------- --------- ---------
$ (17,526) $ (17,461) $ (36,642) $ (43,421)
========= ========= ========= =========
Pro forma operating income (loss):
Enterprise Software and Services $ (2,530) $ (4,172) $ (6,449) $ (8,229)
eBusiness and Fulfillment 3,149 1,077 4,890 2,331
Managed Application Services 288 500 424 (13,112)
Portals (formerly Search and Portals) 963 913 963 (293)
Other (6,991) (8,595) (20,845) (18,462)
--------- --------- --------- ---------
$ (5,121) $ (10,277) $ (21,017) $ (37,765)
========= ========= ========= =========
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ -------------------------------
2003 2002 2003 2002
----------- ----------- ------------ ------------
(in thousands)
GAAP operating loss $ (17,526) $ (17,461) $ (36,642) $ (43,421)
Adjustments:
Depreciation 3,232 3,466 6,087 9,051
Impairment of long-lived assets 24 2,328 24 2,328
Restructuring (adjustments), net 9,095 (361) 9,405 (9,224)
Amortization of intangible assets and
stock-based compensation 54 1,751 109 3,501
--------- --------- --------- ---------
Pro forma operating loss $ (5,121) $ (10,277) $ (21,017) $ (37,765)
========= ========= ========= =========
16
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents is included in the calculation of diluted earnings per share only
when the effect of the inclusion would be dilutive. Approximately 2.9 million
weighted average common stock equivalents were excluded from the denominator in
the diluted loss per share calculation for the three months ended January 31,
2003, as their inclusion would be antidilutive. Approximately 2.9 million and
4.6 million weighted average common stock equivalents were excluded from the
denominator in the diluted loss per share calculation for the six months ended
January 31, 2003 and 2002, respectively, as their inclusion would be
antidilutive.
Approximately 9.8 million and 9.6 million shares representing the weighted
average effect of assumed conversion of Series C Convertible Preferred Stock
were excluded from the denominator in the diluted loss per share calculation for
the three and six months ended January 31, 2002, respectively. These shares were
repurchased in November 2001 (see note L).
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss) the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial for the three and six months ended
January 31, 2003 and 2002, respectively.
I. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of income taxes, are as
follows:
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) $(183,266) $ 15,203 $(276,850) $(209,601)
Net unrealized holding gain (loss) arising during
the period (1,852) 6,113 3,991 (27,987)
Reclassification adjustment for net realized
(gains) losses included in net income (loss) (4,333) 3,489 (4,133) 13,044
--------- --------- --------- ---------
(6,185) 9,602 (142) (14,943)
--------- --------- --------- ---------
Net unrealized foreign currency translation
adjustment arising during the period (5,090) - (5,174) -
Reclassification adjustment for foreign currency
translation adjustment included in net income (loss) 5,040 - 5,040 -
--------- --------- --------- ---------
(50) - (134) -
--------- --------- --------- ---------
Comprehensive income (loss) $(189,501) $ 24,805 $(277,126) $(224,544)
========= ========= ========= =========
The components of accumulated other comprehensive income (loss) as of January
31, 2003 and July 31, 2002 are as follows:
January 31, January 31,
2003 2002
---------- ----------
Net unrealized holding gains $ 637 $ 779
Cumulative foreign currency translation adjustment (134) -
---------- ----------
$ 503 $ 779
========== ==========
J. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION
Six Months Ended
January 31,
---------------------------
2003 2002
---------- ----------
(in thousands)
Cash paid during the period for:
Interest $ 155 $ 755
------- -------
Income taxes $ 130 $ 772
------- -------
Cash received during the period for:
Federal income tax refund $ -- $13,975
------- -------
During the six months ended January 31, 2003 significant non-cash financing
activities included the following:
In December 2002, the Company fulfilled its obligation to deliver
approximately 448.3 million shares of PCCW stock to the Holders (See note L).
This obligation had been classified as notes payable on the Company's condensed
consolidated balance sheet at July 31, 2002.
17
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the six months ended January 31, 2002, significant non-cash
investing activities included the following transactions:
In August 2001, the Company settled the final tranche of the borrowing
arrangement that hedged a portion of the Company's investment in the common
stock of Yahoo! through the delivery of 581,499 shares of Yahoo! common stock.
In August 2001, the Company issued approximately 5.4 million shares of its
common stock as payment for the first quarter fiscal 2002 interest on the Compaq
Computer Corporation (Compaq), now Hewlett-Packard Company (HP), note payable.
In October 2001, the Company's affiliate, CMG@Ventures I, LLC, distributed
approximately 1.7 million shares of Terra Networks, S.A. to certain of its
profit members. In November 2001, the company's affiliates, CMG@Ventures I, LLC
and CMG@Ventures II, LLC, distributed the following shares to certain of their
respective profit members: approximately 1.2 million shares of Terra Networks
stock, approximately 574,000 shares of Yahoo! common stock, approximately
257,000 shares of Vicinity Corporation common stock, approximately 178,000
shares of Kana Software, Inc. common stock, approximately 106,000 shares of
NexPrise common stock, approximately 80,000 shares of Hollywood Entertainment
common stock, approximately 66,000 shares of Critical Path, Inc. common stock,
approximately 12,000 shares of PTEK Holdings, Inc. common stock and
approximately 3,000 shares of MarchFirst, Inc. common stock. Certain portions of
these distributions were made to David Wetherell, CMGI's Chairman and former
Chief Executive Officer, in his capacity as a profit member of CMG@Ventures I,
LLC and CMG@Ventures II, LLC. These distributions resulted in a reduction in
"Other assets" and "Minority interest" in the accompanying condensed
consolidated balance sheets.
In November 2001, the Company retired its $220.0 million in aggregate face
amount of notes payable due to HP (See Note M).
Also in November 2001, the Company repurchased all of the outstanding
shares of its Series C Convertible Preferred Stock (see Note L).
K. INVENTORIES
Inventories at January 31, 2003 and July 31, 2002 consisted of the
following:
January 31, 2003 July 31, 2002
---------------- -------------
(in thousands)
Raw Materials $24,660 $24,276
Work-in-process 70 104
Finished Goods 10,830 7,797
------- -------
$35,560 $32,177
======= =======
L. RETIREMENT OF SERIES C CONVERTIBLE PREFERRED STOCK
On June 29, 1999, CMGI completed a $375 million private placement of
375,000 shares of newly issued Series C Redeemable, Convertible Preferred Stock
(Series C Preferred Stock). Each share of Series C Preferred Stock had a stated
value of $1,000 per share. The Company paid a semi-annual dividend of 2% per
annum, in arrears, on June 30 and December 30 of each year at the Company's
option, in cash or through an adjustment to the liquidation preference of the
Series C Preferred Stock. The Series C Preferred Stock was redeemable at the
option of the holders upon the occurrence of certain events.
In November 2001, the Company repurchased all of the outstanding shares of
its Series C Convertible Preferred Stock pursuant to privately negotiated stock
exchange agreements with the holders of the Series C Preferred Stock (the
"Holders"). Under these agreements, the Company repurchased all of the
outstanding shares of its Series C Preferred Stock for aggregate consideration
consisting of approximately $100.3 million in cash, approximately 34.7 million
shares of the Company's common stock, and an obligation to deliver, no later
than December 2, 2002, approximately 448.3 million shares of PCCW stock.
In addition, due to the delayed delivery obligation with respect to the
PCCW shares, the Company agreed to make cash payments to the Holders, on the
dates and in the aggregate amounts as follows: approximately $3.7 million on
February 19, 2002, approximately $3.5 million on May 17, 2002, approximately
$3.8 million on August 19, 2002, approximately $3.7 million on November 19, 2002
and approximately $0.5 million on December 2, 2002. The obligation to make
payments would cease upon delivery of the PCCW shares and any payment due for
the period during which the PCCW shares are delivered to the Holders would be
reduced on a pro rata basis.
18
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying value of the consideration exchanged approximated fair market
value at the date of the transaction. As a result, in November 2001, the Company
reclassified its investment in PCCW shares from "Other assets" to "Trading
security"in accordance with SFAS No. 115, and recorded the liability related to
the obligation to deliver the PCCW stock as a current note payable, both of
which were carried at market value. Changes in the fair value of the PCCW stock
and the note payable were recorded in the condensed consolidated statements of
operations as Other gains (losses), net and as adjustments to interest expense,
respectively. The fair market value adjustment of the note payable for the six
months ended January 31, 2003 was $6.3 million, and resulted in a $6.3 million
decrease to interest expense, which was offset by a loss of $6.3 million on the
fair value adjustment of the trading security which was included in Other gains
(losses), net.
On November 19, 2002 and December 2, 2002, respectively, the Company made
its final two cash interest payments to the Holders. In addition, on December 2,
2002, the Company fulfilled its obligation to deliver approximately 448.3
million shares of PCCW stock to the Holders. No gain or loss was recognized upon
settlement.
M. Agreements with Hewlett-Packard Company
In November 2001, Hewlett-Packard, a significant stockholder of the Company
(HP), agreed to deem the Company's $220.0 million in aggregate face amount of
notes payable, plus the accrued interest thereon, paid in full in exchange for
$75.0 million in cash, approximately 4.5 million shares of CMGI common stock and
CMGI's 49% ownership interest in its affiliate, B2E Solutions, LLC, of which HP
had previously owned the remaining 51%. As a result, the Company recorded an
extraordinary gain of approximately $133.1 million related to the extinguishment
of the Company's $220.0 million in face amounts notes payable to HP. The gain
was calculated as the difference between the carrying value of the notes payable
plus accrued interest thereon, less the carrying value of the consideration
exchanged. The carrying value of the consideration approximated fair market
value at the date of the transaction.
19
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
N. CONTINGENCIES
In December 1999, Neil Braun, a former officer of iCAST Corporation, a
wholly owned subsidiary of the Company ("iCAST"), filed a complaint in United
States District Court, Southern District of New York naming the Company, iCAST
and David S. Wetherell as defendants. In the complaint, Mr. Braun alleged breach
of contract regarding his termination from iCAST and claimed that he was
entitled to acceleration of options to purchase CMGI common stock and iCAST
common stock, upon his termination, under contract and promissory estoppel
principles. Mr. Braun also claimed that, under quantum meruit principles, he was
entitled to lost compensation. Mr. Braun sought damages of approximately $50
million and requested specific performance of the acceleration and exercise of
options. In August 2001, the Court (i) granted summary judgment dismissing Mr.
Wetherell as a defendant and (ii) granted summary judgment, disposing of Mr.
Braun's contract claim. In February 2002, the Court granted summary judgment
disposing of Mr. Braun's promissory estoppel claim. Trial on the quantum meruit
claim was held in March 2002 and the jury returned a verdict in favor of Mr.
Braun and against the Company in the amount of $113,482.24. As to iCAST, the
jury found that Mr. Braun had not proven his claim. The Company filed a motion
for directed verdict, which motion sought to set aside the jury verdict against
the Company. Such motion was denied. In May 2002, Mr. Braun appealed the Court's
dismissal of his contract and promissory estoppel claims against iCAST and the
Company. On February 11, 2003, the United States Court of Appeals for the Second
Circuit heard arguments on the appeal and took the case under advisement. No
decision on the appeal has been received.
In August 2001, Jeffrey Black, a former employee of AltaVista, filed a
complaint in Superior Court of the State of California (Santa Clara County) in
his individual capacity as well as in his capacity as a trustee of two family
trusts against the Company and AltaVista alleging certain claims arising out of
the termination of Mr. Black's employment with AltaVista. As set forth in the
complaint, Mr. Black is seeking monetary damages in excess of $70 million. In
March 2002, the court ordered the entire case to binding arbitration in
California. In June 2002, Mr. Black petitioned the California Court of Appeal
for a writ prohibiting enforcement of the order compelling arbitration of his
cause of action for wrongful termination in violation of public policy. In July
2002, the Court of Appeal denied Mr. Black's petition. In August 2002, Mr. Black
submitted the matter to the American Arbitration Association. An arbitrator was
appointed in January 2003 and an arbitration hearing is scheduled for August
2003. The Company and AltaVista each believes that these claims are without
merit and plans to vigorously defend against these claims.
On January 28, 2002, Mark Nutritionals, Inc. ("MNI") filed suit against
AltaVista in the United States District Court for the Western District of Texas,
San Antonio Division. The claims against AltaVista include unfair competition
and trademark infringement and dilution, under both federal law and the laws of
the State of Texas. MNI is seeking compensatory damages in the amount of $10.0
million and punitive damages. AltaVista believes that these claims are without
merit and plans to vigorously defend against these claims. AltaVista filed its
answer on March 1, 2002, denying the allegations. MNI has filed for Chapter 11
bankruptcy protection. AltaVista is entitled to indemnification by a third party
with respect to this matter.
On April 16, 2002, NCR Corporation filed a complaint in the United States
District Court for the Northern District of Illinois against uBid. The complaint
alleges that uBid has infringed four patents held by NCR and seeks unspecified
monetary damages and injunctive relief. On May 28, 2002, uBid filed its answer
to the complaint, denying the allegations and asserting counterclaims against
NCR. On December 5, 2002, NCR amended the complaint to add four additional
patents. On December 20, 2002, uBid filed its answer to the amended complaint,
denying the allegations and asserting counterclaims against NCR. On January 30,
2003, the parties agreed to settle this matter on mutually agreeable terms. The
Stipulation of Dismissal was filed on February 11, 2003 and was entered by the
Court on March 4, 2003.
The Company and its subsidiaries are from time-to-time subject to other
legal proceedings and claims which arise in the ordinary course of its business.
In the opinion of management, the amount of ultimate liability with respect to
these actions will not materially affect the financial position or results of
operations of the Company.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended, that involve
risks and uncertainties. All statements other than statements of historical
information provided herein may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. Factors that could cause actual results to differ materially from
those reflected in the forward-looking statements include, but are not limited
to, those discussed in this section under the heading "Factors That May Affect
Future Results" and elsewhere in this report and the risks discussed in the
Company's other filings with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Basis of Presentation
The Company reports two current operating segments: (i) eBusiness and
Fulfillment, and (ii) Enterprise Software and Services. As of January 31, 2003,
ProvisionSoft was the only remaining subsidiary with continuing operations in
the Enterprise Software and Services segment. The Company has announced its
plans to divest of its interests in ProvisionSoft in the near future. Upon
completion of the disposition of its interests in ProvisionSoft, the Company
expects to experience declines in research and development expenses, selling
expenses, and general and administrative expenses within the Enterprise Software
and Services segment. The Other segment represents certain corporate cash and
cash equivalents, available-for-sale and trading securities, certain other
assets and liabilities, and marketing and administrative expenses and the
Company's venture capital affiliates.
In addition to its two current operating segments, the Company continues to
report a Portals segment (that consists of the operations of MyWay and iCAST)
and a Managed Application Services segment (that consists of the operations of
NaviPath, ExchangePath, 1stUp, and Activate), as these entities do not meet the
aggregation criteria under SFAS No. 131 with respect to the Company's current
reporting segments.The historical results of these companies will continue to be
reported in the Portals and Managed Application Services segments, respectively,
as will any residual results from operations that exist through the cessation of
operations.
On September 9, 2002, the Company sold all of its equity and debt ownership
interests in Engage. On September 11, 2002, the Company sold all of its equity
and debt ownership interests in NaviSite, pursuant to a plan approved on June
12, 2002. On February 18, 2003, Overture and AltaVista signed a definitive
agreement under which Overture will acquire AltaVista's business for
approximately $140 million in cash and stock, and will assume certain of
AltaVista's liabilities. Under the terms of the agreement, Overture will pay
AltaVista in Overture common stock valued at approximately $80 million (provided
that Overture will not be required to issue more than 4,274,670 shares or less
than 3,001,364 shares), plus $60 million in cash, and will assume certain of
AltaVista's liabilities. The transaction, which is subject to customary
approvals and certain other conditions, is expected to close in April 2003. On
February 28, 2003, the Company sold all of its equity ownership interests in
Yesmail, Inc. On March 7, 2003, the Company sold all of its equity ownership
interests in Tallan, Inc.
21
During the quarter ended January 31, 2003, the Company determined to divest
of uBid either through the sale of equity interests or substantially all of
uBid's assets and liabilities. It is expected that the Company will sign a
definitive agreement in the near future.
As a result, for all periods presented, Engage, AltaVista, Yesmail and
Tallan, which were previously included within the Enterprise Software and
Services segment, uBid, which was previously included within the eBusiness and
Fulfillment segment, and NaviSite, which was previously included within the
Managed Application Services segment, have been accounted for as discontinued
operations. Accordingly, the assets, liabilities and operating results of these
companies have been segregated from continuing operations and reported as
discontinued operations in the accompanying condensed consolidated balance sheet
and statements of operations and cash flows, and related notes to the condensed
consolidated financial statements for all periods presented.
Certain amounts for prior periods in the accompanying condensed
consolidated financial statements, and in the discussion below, have been
reclassified to conform to current period presentations.
In accordance with accounting principles generally accepted in the United
States of America, all significant intercompany transactions and balances have
been eliminated in consolidation. Accordingly, segment results reported by the
Company exclude the effect of transactions between the Company's subsidiaries.
22
Results of Operations
Three months ended January 31, 2003 compared to the three months ended
January 31, 2002
Net Revenue:
Three Months Three Months As a % of
Ended As a % of Ended Total
January 31, Total Net January 31, Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ ---------- -------- --------
(in thousands)
Enterprise Software and Services $ -- -- $ 393 1% $ (393) (100)%
eBusiness and Fulfillment 119,501 100% 39,478 90% 80,023 203%
Managed Application Services 273 -- 361 1% (88) (24)%
Portals -- -- 3,512 8% (3,512) (100)%
-------- -------- --------
Total $119,774 100% $ 43,744 100% $ 76,030 174%
======== ======== ========
The increase in net revenue for the three months ended January 31, 2003, as
compared to the same period in the prior year, was the result of a 203% increase
in net revenue within the eBusiness and Fulfillment segment, partially offset by
decreased net revenues in the Enterprise Software and Services, Managed
Application Services and Portals segments as a result of the divestiture and/or
cessation of business operations within these segments.
The increase in net revenue within the eBusiness and Fulfillment segment
was due to the net revenue contributions of SL Supply Chain Services
International Corp. (SL Supply Chain) through which the Company acquired
substantially all of the worldwide assets and operations of Software Logistics
Corporation d/b/a iLogistix during the fourth quarter of fiscal year 2002. The
increase in revenue resulting from the acquisition of iLogistix was partially
offset by a decline in net revenue at SalesLink. Net revenue at SalesLink
declined as compared to the same period in prior year, primarily due to volume
declines in supply chain management services. These declines are largely the
result of the continued difficult economic climate for many of the major OEMs
that comprise a large part of the revenue base for SalesLink. Sales to one
customer comprised approximately 73% of eBusiness and Fulfillment segment
revenue for the three months ended January 31, 2003.
The decrease in net revenue within the Enterprise Software and Services
segment was the result of the sale during the first quarter of fiscal 2003 of
Equilibrium. The decrease in net revenue within the Managed Application Services
segment was primarily due to the cessation of operations of NaviPath. The
decrease in net revenue within the Portals segment was primarily due to the
cessation of operations of MyWay during fiscal year 2002.
Cost of Revenue:
Three Months Three Months As a % of
Ended As a % of Ended Total
January 31, Total Net January 31, Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ --------- -------- --------
(in thousands)
Enterprise Software and Services $ -- -- $ (120) (31)% $ 120 100%
eBusiness and Fulfillment 110,549 93% 34,522 87% 76,027 220%
Managed Application Services -- -- 62 17% (62) (100)%
Portal -- -- 1,657 47% (1,657) (100)%
-------- -------- --------
Total $110,549 92% $ 36,121 83% $ 74,428 206%
======== ======== ========
Cost of revenue consists primarily of expenses related to the cost of
products purchased for sale or distribution as well as salaries and benefit
expenses, consulting and contract labor costs, fulfillment and shipping costs,
and applicable facilities costs. The increase in cost of revenue for the three
months ended January 31, 2003, as compared to the same period in the prior year,
was attributable to the cost of revenue of the SL Supply Chain business, which
the Company acquired during the fourth quarter of fiscal year 2002. The increase
in cost of revenue from the acquisition of the SL Supply Chain business was
partially offset by a reduced cost of revenue at SalesLink, due to volume
declines in supply chain management services, and decreased cost of revenue as a
result the Company's restructuring efforts, which included the sale or cessation
of operations of several companies.
The Company's cost of revenue as a percentage of net revenue increased to
approximately 92% for the three months ended January 31, 2003 from approximately
83% in the same period in the prior fiscal year. The increase in cost of revenue
for the three months ended January 31, 2003, compared to the same period in
fiscal 2002, is the result of both a 6% decrease in gross margins in the
eBusiness and Fulfillment segment as well as the cessation of operations within
the higher-margin Managed Application Services and Portals segments.
23
Cost of revenue as a percentage of net revenue within the eBusiness and
Fulfillment segment increased to approximately 93% for the three months ended
January 31, 2003 from approximately 87% in the same period of the prior fiscal
year, as a result of lower gross margins at SalesLink as well as the impact of
the SL Supply Chain business, which has lower margins than the SalesLink
business. During the three months ended January 31, 2003, SalesLink settled a
royalty dispute for an amount less than originally estimated, which partially
offset the increase in cost of revenue within the eBusiness and Fulfillment
segment by approximately $1.0 million. The gross margins at SalesLink decreased
primarily due to lower sales levels and reduced pricing of its services within
the supply chain management and literature distribution businesses,
respectively, and increased costs related to amortization associated with a new
Enterprise Resource Planning (ERP) system.
The decrease in cost of revenue as a percentage of net revenue within the
Managed Application Services segment was due to the cessation of operations of
NaviPath during fiscal year 2002. The decrease in cost of revenue as a
percentage of net revenue within the Portals segment was due to the cessation of
operations of MyWay during fiscal year 2002.
Research and Development Expenses:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Total Net January 31, Total Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ ---------- -------- --------
(in thousands)
Enterprise Software and Services $ 1,423 -- $ 1,901 484% $ (478) (25)%
Managed Application Services 22 8% -- -- 22 --
Portals -- -- 548 16% (548) (100)%
------- ------- -------
Total $ 1,445 1% $ 2,449 6% $(1,004) (41)%
======= ======= =======
Research and development expenses consist primarily of personnel and
related costs to design, develop, enhance, test and deploy the Company's
products and services either prior to the development efforts reaching
technological feasibility or once the product had reached the maintenance phase
of its life cycle. Research and development expenses are primarily related to
the operations of the Company's ProvisionSoft subsidiary. Research and
development expenses during the three months ended January 31, 2003 decreased
compared to the same period in the prior fiscal year primarily due to the sale
of the Company's ownership interests in Equilibrium during the first quarter of
fiscal year 2003 and the cessation of operations at MyWay.
The decrease in research and development expenses within the Enterprise
Software and Services segment during the three months ended January 31, 2003, as
compared to the same period in the prior fiscal year, was primarily the result
of the sale of Equilibrium during the first quarter of fiscal 2003. The decrease
was partially offset by increased research and development expenses at
ProvisionSoft due to increased personnel and related costs to design, develop
and test ProvisionSoft's new software product. The decrease in research and
development expense within the Portals segment was due to the cessation of
operations of MyWay.
Selling Expenses:
Three Months Three Months
Ended As a % of Ended As a % of
January 31, Total Net January 31, Total Net
2003 Revenue 2002 Revenue $ Change % Change
------------ --------- ------------ --------- -------- --------
(in thousands)
Enterprise Software and Services $667 -- $1,711 435% $(1,044) (61)%
eBusiness and Fulfillment 1,019 1% 592 1% 427 72%
Managed Application Services -- -- -- -- -- --
Portals -- -- 252 7% (252) (100)%
Other 1,174 -- 438 -- 736 168%
------ ------ -------
Total $2,860 2% $2,993 7% $ (133) (4)%
====== ====== =======
Selling expenses consist primarily of advertising and other general
marketing related expenses, compensation and employee-related expenses, sales
commissions, facilities costs, and travel costs. Selling expenses decreased
during the three months ended January 31, 2003, as compared to the same period
in the prior fiscal year, by approximately 4%. The decrease was primarily due to
headcount reductions, lower sales commissions as a result of lower net revenue,
reductions in marketing campaigns, the cessation of operations at MyWay in
fiscal 2002 and the sale of the Company's equity ownership interests in
Equilibrium during the first quarter of fiscal 2003.
The decrease within the Enterprise Software and Services segment was
primarily the result of the sale of the Company's equity ownership interests in
Equilibrium. Selling expenses within the Enterprise Software and Services
segment are primarily related to the operations of ProvisionSoft.
24
The increase in selling expenses within the eBusiness and Fulfillment segment
was primarily attributable to the Company's acquisition of the SL Supply Chain
business during the fourth quarter of fiscal year 2002. The acquisition resulted
in increased headcount and personnel-related costs within the eBusiness and
Fulfillment segment. The decrease in selling expense within the Portals segment
was the result of the cessation of operations of MyWay.
Selling expense within the Other segment was primarily related to the
Company's amended sponsorship arrangement with the New England Patriots, under
which the Company receives certain limited marketing rights in exchange for a
series of payments of $1.6 million per year beginning in January of 2003 and
ending in July of 2015. During