CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CMGI, Inc. (together with
its consolidated subsidiaries, CMGI or the Company), through its subsidiary, ModusLink Corporation (ModusLink), provides end-to-end global supply chain management solutions that help businesses market, sell and
distribute their products and services. ModusLink services technology-based clients in the computing, software, consumer electronics, storage and communications markets. ModusLink had fiscal 2007 revenue of approximately $1.1 billion, 34 facilities
in 12 countries with a significant presence in Asia and Europe. In addition, CMGIs venture capital business, @Ventures, invests in a variety of technology ventures. On April 2, 2007, ModusLink acquired full ownership of the joint venture
through which it operated in Japan. ModusLink previously had a 40% interest in this entity. The Company previously operated under the name CMG Information Services, Inc. and was incorporated in Delaware in 1986. CMGIs address is 1100 Winter
Street, Suite 4600, Waltham, Massachusetts 02451.
CMGIs business strategy in recent years has led to the development, acquisition
and operation of majority-owned subsidiaries focused on supply chain management services, as well as the investment in emerging, innovative and promising technology companies.
(2)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The
accompanying consolidated financial statements reflect the application of certain significant accounting policies described below.
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the results of its
wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company accounts for investments in businesses in which it owns between 20% and 50% of its voting
interest using the equity method, if the Company has the ability to exercise significant influence over the investee company. All other investments for which the Company does not have the ability to exercise significant influence or for which there
is not a readily determinable market value, are accounted for under the cost method of accounting. Certain amounts for prior periods have been reclassified to conform to current year presentations.
Use of Estimates
The preparation of
the Companys consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis the Company evaluates its estimates including
those related to revenue recognition, inventories, investments, intangible assets, income taxes, restructuring, valuation of long-lived assets, contingencies and litigation. Accounting estimates are based on historical experience and various
assumptions that are considered reasonable under the circumstances. However, because these estimates inherently involve judgments and uncertainties, actual results could differ materially from those estimated.
Revenue Recognition
The Company
derives its revenue primarily from the sale of products, supply chain management services and other services. Revenue is recognized as product is shipped and related services are performed in accordance with all applicable revenue recognition
criteria.
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed or services
have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured in accordance with the Securities and Exchange Commissions (SEC) Staff Accounting Bulletin No. 104
(SAB No. 104). The Company also follows the guidance of the Financial Accounting Standards Boards (FASB) Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent. The Companys application of EITF 99-19 includes evaluation of the terms of each major client contract relative to a number of criteria that management considers in making its determination with respect to gross
versus net reporting of revenue for transactions with its clients. Managements criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk. The
Company records all shipping and handling fees billed to clients as revenue, and related costs as cost of sales, when incurred, in accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs.
43
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company also follows the guidance of EITF Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured
and allocated to the separate units of accounting. For those contracts which contain multiple deliverables, management must first determine whether each service, or deliverable, meets the separation criteria of EITF 00-21. In general, a deliverable
(or a group of deliverables) meets the separation criteria if the deliverable has standalone value to the client and if there is objective and reliable evidence of the fair value of the remaining deliverables in the arrangement. Each deliverable
that meets the separation criteria is considered a separate unit of accounting. Management allocates the total arrangement consideration to each separate unit of accounting based on the relative fair value of each separate unit of
accounting. The amount of arrangement consideration that is allocated to a unit of accounting that has already been delivered is limited to the amount that is not contingent upon the delivery of another separate unit of accounting. After the
arrangement consideration has been allocated to each separate unit of accounting, management applies the appropriate revenue recognition method for each separate unit of accounting as described previously based on the nature of the arrangement. All
deliverables that do not meet the separation criteria of EITF 00-21 are combined into one unit of accounting and the appropriate revenue recognition method is applied.
Foreign Currency Translation
All assets and liabilities of the Companys foreign subsidiaries,
whose functional currency is the local currency, are translated to U.S. dollars at the rates in effect at the balance sheet date. All amounts in the accompanying statement of operations are translated using the average exchange rates in effect
during the year. Resulting translation adjustments are reflected in the accumulated other comprehensive income (loss) component of stockholders equity. Foreign currency transaction gains and losses are included in Other gains and
(losses), net.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents.
Investments with maturities greater than 90 days to twelve months at the time of purchase are considered short-term investments.
Fair
Value of Financial Instruments
The carrying value for cash and cash equivalents, accounts and notes receivable, accounts payable,
non-current liabilities and the revolving line of credit approximates fair value because of the short maturity of these instruments. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future
cash flows based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.
Investments
Marketable securities held by the Company, which meet the criteria for classification as available-for-sale are carried at fair value.
Unrealized holding gains and losses on securities classified as available-for-sale are carried net of income taxes, when applicable, as a component of accumulated other comprehensive income (loss) in the accompanying consolidated statements of
stockholders equity.
The Company maintains interests in several privately held companies primarily through its various venture
capital funds. The Companys venture capital business, @Ventures, invests in early-stage technology companies. These investments are generally made in connection with a round of financing with other third-party investors. Investments in which
the Companys interest is less than 20% and which are not classified as available-for-sale securities are carried at the lower of cost or net realizable value unless it is determined that the Company exercises significant influence over the
investee company, in which case the equity method of accounting is used. For those investments in which the Companys voting interest is between 20% and 50%, the equity method of accounting is generally used. Under this method, the investment
balance, originally recorded at cost, is adjusted to recognize the Companys share of net earnings or losses of the investee company as they occur, limited to the extent of the Companys investment in, advances to and commitments for the
investee. The Companys share of net earnings or losses of the investee are reflected in Equity in income (losses) of affiliates, net in the Companys accompanying consolidated statements of operations.
The Company assesses the need to record impairment losses on its investments and records such losses when the impairment of an investment is determined
to be other than temporary in nature. The process of assessing whether a particular equity
44
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
investments net realizable value is less than its carrying cost requires a significant amount of judgment. This valuation process is based primarily on
information that the Company requests from these privately held companies who are not subject to the same disclosure and audit requirements as the reports required of U.S. public companies. As such, the reliability and accuracy of the data may vary.
Based on the Companys evaluation, it recorded impairment charges related to its investments in privately held companies accounted for under the equity method of accounting of approximately $1.0 million, $0.6 million, and $0.4 million for the
fiscal years ended 2007, 2006, and 2005, respectively. These impairment losses are reflected in Equity in income (losses) of affiliates, net in the Companys accompanying consolidated statements of operations.
At the time an equity method investee sells its stock to unrelated parties at a price in excess of its book value, the Companys net investment in
that affiliate increases. If at that time, the affiliate is not a newly formed, non-operating entity, or a research and development company, start-up or development stage company, and the affiliate appears to have the ability to continue in
existence, the Company records the increase as a gain in its accompanying consolidated statement of operations.
Inventory
Inventories are stated at the lower of cost or market. Cost is primarily determined by the first-in, first-out (FIFO)
method.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Raw materials
|
|
$
|
42,388
|
|
$
|
48,539
|
Work-in-process
|
|
|
934
|
|
|
1,248
|
Finished goods
|
|
|
17,623
|
|
|
28,100
|
|
|
|
|
|
|
|
|
|
$
|
60,945
|
|
$
|
77,887
|
|
|
|
|
|
|
|
Long-Lived Assets, Goodwill and Other Intangible Assets
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 144, the Company
tests 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 assets 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. The Company evaluates 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 measures an impairment loss as the excess of the carrying amount of the long-lived asset
or group over its fair value. Management uses third party valuation reports to assist in its determination of fair value.
The Company is
required to test goodwill for impairment annually or if a triggering event occurs in accordance with the provisions of SFAS No. 142 Goodwill and Other Intangible Assets. The Companys policy is to perform its annual impairment
testing for all reporting units, determined to be the Americas, Europe and Asia operating segments, in the fourth quarter of each fiscal year. The Companys valuation methodology for assessing impairment requires management to make judgments
and assumptions based on historical experience and to rely heavily on projections of future operating performance. Management uses third party valuation experts to assist in its determination of the fair value of reporting units subject to
impairment testing. The Company operates in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If our assumptions used in estimating our valuations of the
Companys reporting units for purposes of impairment testing differ materially from actual future results, the Company may record impairment charges in the future and our financial results may be materially adversely affected. The Company
completed it annual impairment review of goodwill as of July 31, 2007 and has concluded that goodwill was not impaired.
Restructuring Expenses
The Company follows the provisions of 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. 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. In accordance with this guidance, management must execute an exit plan that will result in
45
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the incurrence of costs that have no future economic benefit. The Company records liabilities that primarily include estimated severance and other costs
related to employee benefits and certain estimated costs to exit equipment and facility lease obligations and other service contracts. These contractual obligations principally represent future obligations under non-cancelable real estate leases.
Restructuring estimates relating to real estate leases involve consideration of a number of factors including: potential sublet rental rates, estimated vacancy period for the property, brokerage commissions and certain other costs. Estimates
relating to potential sublet rates and expected vacancy periods are most likely to have a material impact on the Companys results of operations in the event that actual amounts differ significantly from estimates. These estimates involve
judgment and uncertainties, and the settlement of these liabilities could differ materially from recorded amounts.
Property and
Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization is provided on the straight-line basis over
the estimated useful lives of the respective assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the lease term. The Company capitalizes certain computer software
development costs when incurred in connection with developing or obtaining computer software for internal use. The estimated useful lives are as follows:
|
|
|
Buildings
|
|
32 years
|
Machinery & equipment
|
|
3 to 5 years
|
Furniture & fixtures
|
|
5 to 7 years
|
Automobiles
|
|
5 years
|
Leasehold improvements
|
|
5 to 7 years
|
Software
|
|
3 to 5 years
|
Maintenance and repairs are charged to operating expenses as incurred. Major renewals and
betterments are added to property and equipment accounts at cost.
Income Taxes
Income taxes are accounted for under the provisions of SFAS No. 109, Accounting for Income Taxes, using the asset and liability method
whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. SFAS No. 109 also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that
some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology is subjective and requires significant estimates and judgments in the determination of the recoverability of deferred tax assets and in
the calculation of certain tax liabilities. At July 31, 2007 and 2006, respectively, a valuation allowance has been recorded against the gross deferred tax asset in the U.S. and certain of its foreign subsidiaries since management believes that
after considering all the available objective evidence, both positive and negative, historical and prospective, with greater weight given to historical evidence, it is more likely than not that these assets will not be realized. In each reporting
period, we evaluate the adequacy of our valuation allowance on our deferred tax assets. In the future, if the Company is able to demonstrate a consistent trend of pre-tax income, then at that time management may reduce its valuation allowance,
accordingly.
In addition, the calculation of the Companys tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in several tax jurisdictions. The Company is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and
the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves for probable exposures. Based on our evaluation of current tax positions, the Company
believes it has appropriately accrued for exposures.
Earnings (Loss) Per Share
The Company calculates earnings per share in accordance with SFAS No. 128, Earnings per Share. Basic earnings per share are computed
based on the weighted average number of common shares outstanding during the period. The dilutive effects of common stock equivalents are included in the calculation of diluted earnings per share only when the effect of their inclusion would be
dilutive. Approximately 3.8 million, 3.3 million and 8.3 million weighted average common stock equivalents were
46
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
included in the denominator in the calculation of dilutive earnings per share for the years ended July 31, 2007, 2006 and 2005, respectively.
Approximately 5.6 million, 7.3 million and 4.1 million common stock equivalent shares and approximately 1.1 million, 0.8 million and 0.4 million nonvested shares were excluded from the denominator in the diluted
earnings per share calculation for the years ended July 31, 2007, 2006 and 2005, respectively, as their inclusion would have been antidilutive.
Stock-Based Compensation Plans
On August 1, 2005, the first day of the Companys 2006
fiscal year, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors
including employee stock options and employee stock purchases based on estimated fair values. In March 2005, the SEC issued SAB No. 107 relating to SFAS No. 123(R). The Company has applied the provisions of SAB No. 107 in its adoption
of SFAS No. 123(R).
SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of
grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys consolidated statement of operations. SFAS
No. 123(R) supersedes the Companys previous accounting under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. As permitted by SFAS No. 123, the Company measured options, granted prior to
August 1, 2005, as compensation cost in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no accounting recognition
was given to stock options granted at fair market value until they were exercised. Upon exercise, net proceeds, including tax benefits realized, were credited to equity.
The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of August 1, 2005. In accordance with the modified
prospective transition method, the Companys consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately
expected to vest during the period, reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
In the Companys pro forma information required under SFAS No. 123 for the periods prior to August 1, 2005, the Company established estimates for forfeitures. Stock-based compensation expense recognized in the Companys
consolidated statements of operations for the fiscal years ended July 31, 2007 and 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of July 31, 2005 based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for the stock-based payment awards granted subsequent to July 31, 2005 was based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R).
Upon adoption of SFAS No. 123(R), the Company also changed its method of valuation for
stock-based awards granted after August 1, 2005 to a binomial-lattice option-pricing model (binomial-lattice model) from the Black-Scholes option-pricing model (Black-Scholes model) which was previously used for the
Companys pro forma information required under SFAS No. 123. The Company believes that the binomial-lattice model is a more accurate model for valuing employee stock options since it better reflects the impact of stock price changes on
option exercise behavior. The Company uses third party analyses to assist in developing the assumptions used in its binomial-lattice model and the resulting fair value used to record compensation expense. The Companys determination of fair
value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Companys stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but
are not limited to the Companys expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of
the stock-based award.
Major Clients and Concentration of Credit Risk
Sales to two clients, Hewlett-Packard and Advanced Micro Devices, accounted for approximately 31% and 11%, respectively, of the Companys
consolidated net revenue for the fiscal year ended July 31, 2007. Sales to two clients, Hewlett-Packard and Kodak, accounted for approximately 30% and 11%, respectively, of the Companys consolidated net revenue for the fiscal year ended
July 31, 2006. Sales to one client, Hewlett-Packard, accounted for approximately 36% of the Companys consolidated net revenue for the fiscal year ended July 31, 2005. During fiscal 2007 and 2006 five clients accounted for
approximately 62% and 60% of the Companys consolidated net revenue, respectively. Accounts receivable from these clients amounted to approximately
47
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
42% and 45% of our total trade accounts receivable balance at July 31, 2007 and 2006, respectively. To reduce risk, the Company performs ongoing credit
evaluations of its clients financial condition. The Company generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts based on its assessment of the collectibility of accounts
receivable.
Financial instruments, which potentially subject the Company to concentrations of credit risk are cash, cash equivalents,
available-for-sale securities, short-term investments, accounts receivable, accounts payable, the revolving line of credit and long-term debt, including capital lease obligations. The Companys cash equivalent and short-term investment
portfolio is diversified and consists primarily of short-term investment grade securities placed with high credit quality financial institutions.
Derivative Instruments and Hedging Activities
The Company enters into forward foreign currency exchange rate contracts to
manage exposures to certain foreign currencies. The fair value of the Companys foreign currency exchange rate contracts is estimated based on the foreign currency exchange rates as of July 31, 2007. The Companys policy is not to
allow the use of derivatives for trading or speculative purposes. At July 31, 2007, the notional value of the Companys foreign currency exchange contracts was to sell 7.6 million U.S. dollars and to buy 3.0 million Euro and
0.7 million British Pounds.
The Company believes that its forward foreign currency exchange rate contracts economically function as
effective hedges of the underlying exposures; however, the forward foreign currency exchange rate contracts do not meet the specific criteria for hedge accounting defined in SFAS No. 133, thus requiring the Company to record all changes in the
fair value of these contracts in earnings in the period of the change. Unrealized gains or losses are included in Other gains (losses), net in the Companys accompanying consolidated statements of operations and amounts were not
material for the three years presented.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an
amendment of SFAS No. 115, which permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company beginning in fiscal 2009. The Company is
currently evaluating SFAS No. 159 and the impact, if any, that it may have on its results of operations or financial position.
In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132 (R). SFAS No. 158 requires an
employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in
the year in which the changes occur through comprehensive income. SFAS No. 158 also requires the measurement of defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of financial position
(with limited exceptions). The Company adopted SFAS No.158, as required, as of July 31, 2007 and the effect of adoption was not material. (See Note 16)
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning in fiscal 2009. The Company is currently evaluating the impact, if any, that SFAS No. 157 may have on its results of operations or
financial position.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.
SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the companys balance sheet and statement of operations financial statements and the related financial statement
disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values
of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the
nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Companys adoption of SAB No. 108 as of July 31, 2007 did not have an impact on the Companys results of
operations or financial position.
48
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years
beginning after December 15, 2006. Accordingly, the Company will adopt FIN 48 on August 1, 2007, as required. The cumulative effect of adopting FIN 48, if any, will be recorded as an adjustment to the Companys opening balance of
retained earnings (or other appropriate components of equity or net assets in the statement of financial position). The Company is in the process of assessing the impact of this interpretation.
(3)
|
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
|
The Company classifies all highly liquid investments with original maturities of 90 days or less at the time of purchase as a cash equivalent. Investments with maturities greater than 90 days to twelve months at the time of purchase are
considered short-term investments.
As of July 31, 2007 and 2006, the Company had short-term investments in Auction Rate Securities
(ARS) of approximately $111.8 million and $94.5 million, respectively. ARS generally have long-term stated maturities of 20 to 30 years. However, these securities have certain economic characteristics of short-term investments due to a
rate-setting mechanism and the ability to liquidate them through a Dutch auction process that occurs on pre-determined intervals of less than 90 days. These ARS are classified as short-term investments on the accompanying consolidated balance sheets
due to managements ability and intent regarding these securities and are accounted for as available-for-sale, in accordance with SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. As of
July 31, 2007 and 2006, respectively, there were no unrealized gains or losses associated with these investments as cost approximates fair value.
(4)
|
STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
|
Cash used for operating activities reflect cash payments for interest and income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Cash paid for interest
|
|
$
|
2,346
|
|
$
|
2,950
|
|
$
|
1,496
|
Cash paid for income taxes
|
|
$
|
4,621
|
|
$
|
1,575
|
|
$
|
1,935
|
Significant non-cash investing activities during fiscal 2007 and 2006 included the issuance of
approximately 1.3 million and 0.6 million shares of nonvested CMGI common stock, respectively, valued at approximately $2.4 million and $0.9 million, respectively, to certain executives of the Company.
During fiscal 2005, significant non-cash activities primarily included the issuance of approximately 68.6 million shares of CMGI common stock and
assumed or substituted options to purchase approximately 12.6 million shares of CMGI common stock in connection with the acquisition of Modus. The Company also issued approximately 2.5 million shares of nonvested CMGI common stock (valued
at approximately $3.6 million) to certain executives and employees of Modus in connection with the acquisition, which shares vested in August 2005. In addition, approximately 2.9 million nonvested shares of the Companys common stock,
valued at approximately $6.8 million, were issued to certain executives and employees of the Company.
Based on the information
provided to the Companys chief operating decision-maker (CODM) for purposes of making decisions about allocating resources and assessing performance, the Company reports three operating segments, Americas, Asia, and Europe. In
addition to its three operating segments, the Company reports an Other category. The Other category represents corporate expenses consisting primarily of costs associated with certain corporate administrative functions such as legal and finance
which are not fully allocated to the Companys subsidiary companies, administration costs related to the Companys venture capital affiliates and any residual results of operations from previously divested operations. The Other
categorys balance sheet information includes cash and cash equivalents, available-for-sale securities, investments and other assets, which are not identifiable to the operations of the Companys operating business segments.
49
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Management evaluates segment performance based on segment net revenue, operating income (loss) and
Non-GAAP operating income (loss), which is defined as the operating income (loss) excluding net charges related to depreciation, long-lived asset impairment, amortization of intangible assets, stock-based compensation and restructuring.
The Company believes that its Non-GAAP measure of operating income (loss) provides investors with a useful supplemental measure of the Companys operating performance by excluding the impact of non-cash charges and restructuring activities.
Each of the excluded items (depreciation, long-lived asset impairment, amortization of intangible assets and stock-based compensation and restructuring) were excluded because they may be considered to be of a non-operational or non-cash nature.
Historically, the Company has recorded significant impairment and restructuring charges and therefore management uses Non-GAAP operating income (loss) to assist in evaluating the performance of the Companys core operations. Non-GAAP operating
income (loss) does not have any standardized definition and therefore is unlikely to be comparable to similar measures presented by other reporting companies. These Non-GAAP results should not be evaluated in isolation of, or as a substitute for,
the Companys financial results prepared in accordance with U.S. GAAP.
Our international operations subject us to exposure to foreign
currency exchange rate fluctuations. Revenues and related expenses generated from our international segments are generally denominated in the functional currencies of the local countries. Primary currencies include Euros, Singapore Dollars, British
Pounds, Czech Koruna, Hungarian Forints, Chinese Renminbi, Taiwan Dollars and Japanese Yen. The income statements of our international operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent
the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenues and operating expenses for our Asia and Europe segments. Similarly, our revenues and operating
expenses will decrease for our Asia and Europe segments when the U.S. dollar strengthens against foreign currencies.
50
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Summarized financial information of the Companys continuing operations by operating segment and
the Other category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
395,084
|
|
|
$
|
479,093
|
|
|
$
|
433,147
|
|
Asia
|
|
|
288,936
|
|
|
|
245,624
|
|
|
|
212,595
|
|
Europe
|
|
|
459,006
|
|
|
|
424,169
|
|
|
|
407,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
1,143,026
|
|
|
|
1,148,886
|
|
|
|
1,053,423
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,143,026
|
|
|
$
|
1,148,886
|
|
|
$
|
1,053,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
11,455
|
|
|
$
|
18,049
|
|
|
$
|
51
|
|
Asia
|
|
|
29,808
|
|
|
|
19,018
|
|
|
|
23,173
|
|
Europe
|
|
|
(10,126
|
)
|
|
|
(19,996
|
)
|
|
|
1,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
31,137
|
|
|
|
17,071
|
|
|
|
24,744
|
|
Other
|
|
|
(16,372
|
)
|
|
|
(16,486
|
)
|
|
|
(16,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,765
|
|
|
$
|
585
|
|
|
$
|
7,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
22,249
|
|
|
$
|
25,882
|
|
|
$
|
11,526
|
|
Asia
|
|
|
38,234
|
|
|
|
26,179
|
|
|
|
30,418
|
|
Europe
|
|
|
(2,572
|
)
|
|
|
(7,161
|
)
|
|
|
7,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
57,911
|
|
|
|
44,900
|
|
|
|
49,467
|
|
Other
|
|
|
(13,470
|
)
|
|
|
(12,532
|
)
|
|
|
(15,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,441
|
|
|
$
|
32,368
|
|
|
$
|
33,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
44,441
|
|
|
$
|
32,368
|
|
|
$
|
33,676
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(15,028
|
)
|
|
|
(11,021
|
)
|
|
|
(9,723
|
)
|
Amortization of intangible assets
|
|
|
(4,821
|
)
|
|
|
(4,824
|
)
|
|
|
(5,226
|
)
|
Stock-based compensation
|
|
|
(5,184
|
)
|
|
|
(6,417
|
)
|
|
|
(5,700
|
)
|
Restructuring, net
|
|
|
(4,643
|
)
|
|
|
(9,521
|
)
|
|
|
(5,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating income
|
|
$
|
14,765
|
|
|
$
|
585
|
|
|
$
|
7,769
|
|
Other income
|
|
|
41,505
|
|
|
|
31,874
|
|
|
|
2,980
|
|
Income tax expense (benefit)
|
|
|
7,135
|
|
|
|
3,780
|
|
|
|
(19,933
|
)
|
Income (loss) from discontinued operations
|
|
|
276
|
|
|
|
(13,734
|
)
|
|
|
(4,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49,411
|
|
|
$
|
14,945
|
|
|
$
|
26,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Total assets of continuing operations:
|
|
|
|
|
|
|
Americas
|
|
$
|
234,405
|
|
$
|
239,387
|
Asia
|
|
|
231,806
|
|
|
204,164
|
Europe
|
|
|
188,947
|
|
|
177,049
|
|
|
|
|
|
|
|
Sub-total
|
|
|
655,158
|
|
|
620,600
|
Other
|
|
|
163,879
|
|
|
140,641
|
|
|
|
|
|
|
|
|
|
$
|
819,037
|
|
$
|
761,241
|
|
|
|
|
|
|
|
51
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of July 31, 2007 approximately 43%, 38% and 19% of the Companys long-lived assets were
located in the United States, Asia and Europe, respectively. As of July 31, 2006 approximately 47%, 36% and 17% of the Companys long-lived assets were located in the United States, Asia and Europe, respectively.
(6)
|
DISCONTINUED OPERATIONS AND DIVESTITURES
|
For the
year ended July 31, 2007, the Company recorded income from discontinued operations of approximately $0.3 million primarily related to adjustments to previously recorded estimates for facility lease obligations based on changes to the underlying
assumptions regarding the estimated length of time of the subleased space and the expected rent recovery rate related to the vacant space.
For the year ended July 31, 2006, the Company recorded a loss from discontinued operations of approximately $13.7 million primarily related to the discontinued operations and sale of the Companys marketing distribution services
business, SalesLink. This business unit had previously been included within the Companys Americas reporting segment. The $13.7 million loss from discontinued operations is comprised of net operating charges of $9.6 million and a $1.5 million
loss on sale of SalesLinks marketing distribution services business. The Company also recorded a $2.6 million impairment charge to a previously recorded loss on sale of Tallan for an other than temporary decline in the carrying value of a note
receivable and warrant. The net operating charges include revenues of $13.3 million, expenses of $14.6 million, a charge of $5.6 million for unutilized facility and equipment leases and a non-cash charge of $2.7 million for the write down of
goodwill.
For the year ended July 31, 2005, the Company recorded a loss from discontinued operations of approximately $4.2 million.
The $2.1 million of operating loss from discontinued operations is composed of revenues of $16.3 million and total operating expenses of $18.4 million as a result of the sale of the Companys marketing distribution services business unit,
SalesLink, in fiscal 2006. The remaining $2.0 million is attributable to the settlement of litigation brought against the Company by the Official Committee of Unsecured Creditors of Engage, Inc.
Summarized financial information for the discontinued operations of the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
|
|
$
|
13,267
|
|
|
$
|
16,253
|
|
Total expenses
|
|
|
276
|
|
|
(22,861
|
)
|
|
|
(18,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
|
276
|
|
|
(9,594
|
)
|
|
|
(2,110
|
)
|
Adjustment to loss on sale of Engage
|
|
|
|
|
|
|
|
|
|
(2,047
|
)
|
Adjustment to loss on sale of Tallan
|
|
|
|
|
|
(2,585
|
)
|
|
|
|
|
Loss on sale of SalesLink
|
|
|
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
276
|
|
$
|
(13,734
|
)
|
|
$
|
(4,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Financial position:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
91
|
|
|
$
|
1,962
|
|
Current liabilities
|
|
|
(2,782
|
)
|
|
|
(4,775
|
)
|
Non-current liabilities
|
|
|
(1,698
|
)
|
|
|
(4,106
|
)
|
|
|
|
|
|
|
|
|
|
Net liabilities of discontinued operations
|
|
$
|
(4,389
|
)
|
|
$
|
(6,919
|
)
|
|
|
|
|
|
|
|
|
|
52
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(7)
|
PROPERTY AND EQUIPMENT
|
Property and equipment at
cost, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Buildings
|
|
$
|
19,419
|
|
|
$
|
18,290
|
|
Machinery and equipment
|
|
|
29,772
|
|
|
|
22,360
|
|
Leasehold improvements
|
|
|
10,458
|
|
|
|
6,731
|
|
Software
|
|
|
25,335
|
|
|
|
10,247
|
|
Other
|
|
|
9,347
|
|
|
|
14,195
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,331
|
|
|
$
|
71,823
|
|
Less: Accumulated depreciation and amortization
|
|
|
(39,224
|
)
|
|
|
(25,803
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment, at cost
|
|
$
|
55,107
|
|
|
$
|
46,020
|
|
|
|
|
|
|
|
|
|
|
Assets under capital leases which are included in the amounts above are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Buildings
|
|
$
|
3,929
|
|
|
$
|
3,659
|
|
Machinery and equipment
|
|
|
304
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
(3,568
|
)
|
|
|
(3,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
665
|
|
|
$
|
653
|
|
|
|
|
|
|
|
|
|
|
The Company recorded depreciation expense of approximately $15.0 million, $11.0 million and $9.7
million for the fiscal years ended July 31, 2007, 2006 and 2005, respectively. Depreciation expense within the Americas, Europe and Asia regions was approximately $4.2 million, $5.3 million and $5.5 million, respectively for fiscal 2007,
$3.3 million, $3.6 million and $4.1 million, respectively, for fiscal 2006 and $3.5 million, $3.1 million and $3.1 million, respectively, for fiscal 2005. Amortization of assets recorded under capital leases is included in the depreciation
expense amounts.
(8)
|
GOODWILL AND INTANGIBLE ASSETS
|
The purchase price
of the assets acquired and the liabilities assumed in a business combination is subject to an allocation period in accordance with SFAS 141, Business Combinations. In connection with the Modus acquisition, the allocation period for all
adjustments other than those related to tax loss carryforwards and contingencies expired during the quarter ended October 31, 2005, while the allocation period for tax adjustments will still remain open in accordance with SFAS 109,
Accounting for Income Taxes. During the fiscal year ended July 31, 2007, total purchase accounting adjustments recorded were approximately $3.0 million. An adjustment of $1.1 million was recorded related to a tax contingency arising
from a tax audit by the local tax authorities in Asia for a period prior to the acquisition of Modus, which was offset by adjustments related to the utilization of pre-acquisition net operating losses in the Americas, Europe and Asia regions of
approximately $3.7 million, $0.5 million and $0.6 million, respectively. Additionally, approximately $0.8 million of goodwill was recognized in Asia as a result of ModusLink acquiring full ownership of the joint venture through which it
operated in Japan. ModusLink previously had a 40% interest in the entity.
The carrying amount of goodwill is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Europe
|
|
|
Asia
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance as of July 31, 2006
|
|
$
|
78,625
|
|
|
$
|
30,743
|
|
|
$
|
71,871
|
|
$
|
181,239
|
|
Purchase price adjustments from acquisition of Modus
|
|
|
(3,719
|
)
|
|
|
(478
|
)
|
|
|
449
|
|
|
(3,748
|
)
|
Goodwill from acquisition of Japan-based joint venture
|
|
|
|
|
|
|
|
|
|
|
785
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2007
|
|
$
|
74,906
|
|
|
$
|
30,265
|
|
|
$
|
73,105
|
|
$
|
178,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The components of intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2007
|
|
July 31, 2006
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
amortization
|
|
Net Book
Value
|
|
Weighted
average
amortization
period
|
|
Gross
Carrying
Amount
|
|
Accumulated
amortization
|
|
Net Book
Value
|
|
Weighted
average
amortization
period
|
Client Relationships
|
|
$
|
20,500
|
|
$
|
8,781
|
|
$
|
11,719
|
|
7 years
|
|
$
|
20,500
|
|
$
|
5,848
|
|
$
|
14,652
|
|
7 years
|
Developed Technology
|
|
|
3,500
|
|
|
3,500
|
|
|
|
|
3 years
|
|
|
3,500
|
|
|
2,336
|
|
|
1,164
|
|
3 years
|
Trade Names
|
|
|
2,190
|
|
|
2,190
|
|
|
|
|
3 years
|
|
|
2,190
|
|
|
1,466
|
|
|
724
|
|
3 years
|
Non-competes
|
|
|
400
|
|
|
400
|
|
|
|
|
1 year
|
|
|
400
|
|
|
400
|
|
|
|
|
1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,590
|
|
$
|
14,871
|
|
$
|
11,719
|
|
|
|
$
|
26,590
|
|
$
|
10,050
|
|
$
|
16,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets for the years ended July 31, 2007, 2006 and 2005
totaled approximately $4.8 million, $4.8 million and $5.2 million, respectively. The amortization of intangible assets for the fiscal year ended July 31, 2007, 2006 and 2005 would have been primarily allocated to selling expenses had
the Company recorded the expenses within the functional operating expense categories.
The estimated future aggregate amortization expense
for intangible assets as of July 31, 2007, is as follows:
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
(in thousands)
|
2008
|
|
$
|
2,929
|
2009
|
|
$
|
2,929
|
2010
|
|
$
|
2,929
|
2011
|
|
$
|
2,932
|
The Companys restructuring
initiatives during the fiscal years ended July 31, 2007, 2006 and 2005 involved strategic decisions to exit certain businesses and to reposition certain on-going businesses of the Company. Restructuring charges consisted primarily of contract
terminations, employee severance charges as a result of workforce reductions and facility and equipment charges. The Company records charges related to operating leases with no future economic benefit to the Company as a result of the abandonment of
unutilized facilities.
54
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following tables summarize the activity in the restructuring accrual for the fiscal years ended
July 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Related
Expenses
|
|
|
Contractual
Obligations
|
|
|
Asset
Impairments
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Accrued restructuring balance at July 31, 2004
|
|
$
|
296
|
|
|
$
|
14,845
|
|
|
$
|
|
|
|
$
|
15,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability assumed in conjunction with the Modus acquisition
|
|
|
954
|
|
|
|
1,927
|
|
|
|
|
|
|
|
2,881
|
|
Restructuring accrualModus acquisition
|
|
|
4,433
|
|
|
|
9,131
|
|
|
|
|
|
|
|
13,564
|
|
Restructuring charges
|
|
|
2,495
|
|
|
|
3,261
|
|
|
|
158
|
|
|
|
5,914
|
|
Restructuring adjustments
|
|
|
(16
|
)
|
|
|
(92
|
)
|
|
|
(548
|
)
|
|
|
(656
|
)
|
Cash paid
|
|
|
(6,753
|
)
|
|
|
(11,318
|
)
|
|
|
548
|
|
|
|
(17,523
|
)
|
Non-cash adjustments
|
|
|
|
|
|
|
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2005
|
|
$
|
1,409
|
|
|
$
|
17,754
|
|
|
$
|
|
|
|
$
|
19,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrualModus acquisition
|
|
|
3,504
|
|
|
|
773
|
|
|
|
|
|
|
|
4,277
|
|
Restructuring charges
|
|
|
5,602
|
|
|
|
3,622
|
|
|
|
329
|
|
|
|
9,553
|
|
Restructuring adjustments
|
|
|
(347
|
)
|
|
|
315
|
|
|
|
|
|
|
|
(32
|
)
|
Cash paid
|
|
|
(8,647
|
)
|
|
|
(11,786
|
)
|
|
|
|
|
|
|
(20,433
|
)
|
Non-cash adjustments
|
|
|
|
|
|
|
|
|
|
|
(329
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2006
|
|
$
|
1,521
|
|
|
$
|
10,678
|
|
|
$
|
|
|
|
$
|
12,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
1,386
|
|
|
|
3,078
|
|
|
|
236
|
|
|
|
4,700
|
|
Restructuring adjustments
|
|
|
|
|
|
|
101
|
|
|
|
(158
|
)
|
|
|
(57
|
)
|
Cash paid
|
|
|
(1,886
|
)
|
|
|
(4,540
|
)
|
|
|
83
|
|
|
|
(6,343
|
)
|
Non-cash adjustments
|
|
|
140
|
|
|
|
|
|
|
|
(161
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2007
|
|
$
|
1,161
|
|
|
$
|
9,317
|
|
|
$
|
|
|
|
$
|
10,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
It is expected that the payments of employee-related charges will be substantially completed by
November 30, 2009. The remaining contractual obligations primarily relate to facility lease obligations for vacant space resulting from the current and previous restructuring activities of the Company. The Company anticipates that contractual
obligations will be substantially fulfilled by May 2012.
The net restructuring charges for the fiscal years ended July 31, 2007, 2006
and 2005 would have been allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
Cost of revenue
|
|
$
|
1,081
|
|
$
|
4,930
|
|
$
|
3,315
|
Selling
|
|
|
400
|
|
|
686
|
|
|
182
|
General and administrative
|
|
|
3,162
|
|
|
3,905
|
|
|
1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,643
|
|
$
|
9,521
|
|
$
|
5,258
|
|
|
|
|
|
|
|
|
|
|
During the fiscal year ended July 31, 2007, the Company recorded net restructuring charges of
approximately $4.6 million. These charges consisted of approximately $1.4 million relating to a workforce reduction of approximately 91 employees primarily related to the consolidation of facilities in the Netherlands in the Europe region and the
elimination of redundant positions related to the Companys hub and spoke initiative from the Americas region as well as the closure or reorganization of certain Utah facilities in the Americas region. Additionally, the Company recorded
approximately $3.2 million relating to early termination charges and unutilized lease facilities for which the Company expects to realize no future economic benefit primarily due to the restructuring activities of the Netherlands facilities in the
Europe region as well as the restructuring activities from the Americas region.
55
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During the fiscal year ended July 31, 2006, the Company recorded net restructuring charges of
approximately $9.5 million. These charges consisted of approximately $5.3 million relating to a workforce reduction of 146 employees, primarily due to the elimination of redundant positions in Europe related to the Companys hub and spoke
initiative, and in the Americas related to the reorganization of certain operational and sales activities. In addition, the Company recorded approximately $3.9 million of restructuring charges related to certain contractual obligations and real
estate leases in connection with the consolidation of two facilities in the Netherlands and the closure of facilities in Ireland and Scotland as part of the Companys efforts to continue to drive lower costs and operating efficiencies, as well
as approximately $0.3 million relating to the impairment of certain assets no longer in service.
In addition, during the fiscal year ended
July 31, 2006, the Company recorded a purchase accounting adjustment to goodwill of approximately $4.3 million for restructuring activities related to the acquisition of Modus. These restructuring activities occurred primarily in the Americas
and Europe regions in the amounts of $0.4 million and $3.9 million, respectively. The restructuring in the Americas region was employee severance related in connection with the elimination of redundant positions. The restructuring in Europe
primarily related to the closure of the plant in Scotland and consists of approximately $3.1 million of severance for 130 employees and $0.8 million relating to unoccupied facilities for which the Company expects to realize no future economic
benefits.
During the fiscal year ended July 31, 2005, the Company recorded net restructuring charges of approximately $5.3 million.
These charges consist of approximately $2.5 million related to a workforce reduction of 135 employees, approximately $3.2 million relating to unutilized facilities for which the Company expects to realize no future economic benefit and
approximately $0.1 million relating to the impairment of certain assets no longer in service. The Company also recorded an adjustment of approximately $0.5 million as the result of a gain on the sale of previously impaired assets.
In conjunction with the acquisition of Modus, the Company assumed approximately $2.9 million of Modus restructuring liabilities. In addition, during the
fiscal year ended July 31, 2005, the Company accrued approximately $13.6 million of restructuring charges in connection with the Companys Modus acquisition. These assumed and accrued charges totaled $6.4 million, $9.6 million and
$0.5 million in the Americas, Europe and Asia regions, respectively, and primarily relate to the elimination of excess plant capacity and redundant infrastructure in those regions.
The following tables summarize the restructuring accrual by operating segment and the Other category for the fiscal years ended July 31, 2007, 2006,
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Asia
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
Total
|
|
|
|
(in thousands)
|
|
Accrued restructuring balance at July 31, 2004
|
|
$
|
11,859
|
|
|
$
|
(563
|
)
|
|
$
|
(1,232
|
)
|
|
$
|
5,077
|
|
|
$
|
15,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability assumed in conjunction with the Modus acquisition
|
|
|
531
|
|
|
|
|
|
|
|
2,350
|
|
|
|
|
|
|
|
2,881
|
|
Restructuring accrual Modus acquisition
|
|
|
5,843
|
|
|
|
482
|
|
|
|
7,239
|
|
|
|
|
|
|
|
13,564
|
|
Restructuring charges
|
|
|
2,874
|
|
|
|
948
|
|
|
|
2,010
|
|
|
|
82
|
|
|
|
5,914
|
|
Restructuring adjustments
|
|
|
(69
|
)
|
|
|
(11
|
)
|
|
|
(613
|
)
|
|
|
37
|
|
|
|
(656
|
)
|
Cash paid
|
|
|
(10,421
|
)
|
|
|
(606
|
)
|
|
|
(4,338
|
)
|
|
|
(2,158
|
)
|
|
|
(17,523
|
)
|
Non-cash adjustments
|
|
|
11
|
|
|
|
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2005
|
|
$
|
10,628
|
|
|
$
|
250
|
|
|
$
|
5,247
|
|
|
$
|
3,038
|
|
|
$
|
19,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual-Modus acquisition
|
|
|
370
|
|
|
|
|
|
|
|
3,907
|
|
|
|
|
|
|
|
4,277
|
|
Restructuring charges
|
|
|
1,218
|
|
|
|
388
|
|
|
|
7,839
|
|
|
|
108
|
|
|
|
9,553
|
|
Restructuring adjustments
|
|
|
(48
|
)
|
|
|
(124
|
)
|
|
|
199
|
|
|
|
(59
|
)
|
|
|
(32
|
)
|
Cash paid
|
|
|
(6,305
|
)
|
|
|
(252
|
)
|
|
|
(11,036
|
)
|
|
|
(2,840
|
)
|
|
|
(20,433
|
)
|
Non-cash adjustments
|
|
|
|
|
|
|
(210
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2006
|
|
$
|
5,863
|
|
|
$
|
52
|
|
|
$
|
6,037
|
|
|
$
|
247
|
|
|
$
|
12,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
3,161
|
|
|
|
313
|
|
|
|
1,223
|
|
|
|
3
|
|
|
|
4,700
|
|
Restructuring adjustments
|
|
|
73
|
|
|
|
(179
|
)
|
|
|
46
|
|
|
|
3
|
|
|
|
(57
|
)
|
Cash paid
|
|
|
(4,191
|
)
|
|
|
(264
|
)
|
|
|
(1,879
|
)
|
|
|
(9
|
)
|
|
|
(6,343
|
)
|
Non-cash adjustments
|
|
|
(237
|
)
|
|
|
275
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at July 31, 2007
|
|
$
|
4,669
|
|
|
$
|
197
|
|
|
$
|
5,368
|
|
|
$
|
244
|
|
|
$
|
10,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(10)
|
@VENTURES INVESTMENTS
|
Through our venture capital
business, @Ventures, we maintain interests in several venture capital funds; CMG@Ventures III, LLC (CMG@Ventures III); CMG@Ventures Expansion, LLC (CMG@Ventures Expansion); CMGI@Ventures IV, LLC (CMGI@Ventures
IV); and @Ventures V, LLC (@Ventures V). These venture capital funds invest in emerging, innovative and promising technology companies. In addition, we previously maintained interests in CMG@Ventures I, LLC (CMG@Ventures
I), which was dissolved on July 31, 2006, and CMG@Ventures II, LLC (CMG@Ventures II), which was dissolved on July 31, 2007.
CMG@Ventures II was formed during fiscal year 1997. The Company owned 100% of the capital and was entitled to approximately 80% of cumulative net profits of CMG@Ventures II. The remaining interest in these investments
was attributed to profit members. CMG@Ventures II did not invest in any companies during fiscal years 2007, 2006 and 2005. During fiscal year 2006, CMG@Ventures II received distributions of approximately $21.2 million. During fiscal year 2007,
CMG@Ventures II received distributions of approximately $2.5 million.
In fiscal year 1999, CMGI formed the @Ventures III venture capital
fund (@Ventures III Fund). The @Ventures III Fund secured capital commitments from outside investors and CMGI to be invested in emerging Internet service 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 in which CMGI does not have a direct ownership interest, but CMGI is entitled to approximately
0.1% of the capital of each entity 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). The Company committed to contribute
up to $56.0 million to its limited liability company subsidiary, CMG@Ventures III, equal to approximately 20% of total amounts committed to the @Ventures III Fund, of which approximately $53.8 million has been funded as of July 31, 2007. The
Company does not expect to be required to invest the remainder of the committed amount. 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 cumulative net capital gains realized by CMG@Ventures III. The remaining 2% invested in each @Ventures III Fund investment is provided by a fourth entity in which CMGI has no interest. CMG@Ventures III did not
invest in any companies during fiscal years 2007, 2006 and 2005.
During fiscal year 2000, CMGI formed an expansion fund to the @Ventures
III Fund to provide follow-on financing to existing @Venture III Fund investee companies pursuant to which CMGI committed to contribute up to $20.1 million of which $16.8 million has been funded as of July 31, 2007. The Company does not
expect to be required to invest the remainder of the committed amount. The @Ventures Expansion Fund has a structure that is substantially identical to the @Ventures III Fund, and CMGIs interests in this fund are comparable to its interests in
the @Ventures III Fund. CMG@Ventures Expansion did not invest in any companies during fiscal year 2005. During fiscal year 2006, CMG@Ventures Expansion invested approximately $0.1 million in one company and received no distributions. CMG@Ventures
Expansion did not invest in any companies during fiscal year 2007, however did receive distributions of approximately $1.6 million.
Also
during fiscal year 2000, CMGI announced the formation of three new venture capital funds: CMGI@Ventures IV, LLC (CMGI@Ventures IV), CMGI @Ventures B2B, LLC (the B2B Fund) and CMGI @Ventures Technology Fund, LLC (the
Tech Fund). CMGI owns 100% of the capital and is entitled to a percentage (ranging from approximately 80% to approximately 92.5%) of the net capital gains realized by CMGI@Ventures IV, the B2B Fund and the Tech Fund. During fiscal year
2001, the B2B Fund and Tech Fund were merged with and into CMGI@Ventures IV, creating a single evergreen fund. During fiscal year 2005, CMGI@Ventures IV invested approximately $0.7 million in one company and received distributions of approximately
$6.4 million. During fiscal year 2006, CMGI @Ventures IV invested approximately $0.3 million in one company and received distributions of approximately $15.2 million. During fiscal year 2007, CMGI @Ventures IV invested approximately $0.3
million in one company and received distributions of approximately $30.8 million.
During fiscal year 2004, CMGI formed a new venture
capital fund: @Ventures V, LLC. CMGI owns 100% of the capital and is entitled to from approximately 91% to 92% of the net profits realized by @Ventures V, LLC. During fiscal year 2005, @Ventures V, LLC invested approximately $4.1 million in two
companies. During fiscal year 2006, @Ventures V, LLC invested approximately $6.4 million in one new company and two existing portfolio companies. During fiscal year 2007, @Ventures V, LLC invested approximately $10.9 million in two new companies and
two existing portfolio companies. No distributions were received by @Ventures V in fiscal years 2007, 2006 or 2005.
As of July 31,
2007, the Company, through @Ventures, held investments in 13 portfolio companies, although investments in four of these companies are nominal and not viewed as material. From time to time, the Company may make new and follow-on
57
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
venture capital investments and may from time to time receive distributions from investee companies. As of July 31, 2007, the Company was not obligated
to fund any new or follow-on investments.
As of the fiscal years ended July 31, 2007 and 2006, the Company did not have an equity
method investment in which the Companys proportionate share exceeded 10% of the Companys consolidated assets or income from continuing operations. For the year ended July 31, 2005 summarized financial information for one equity
method investment in which the Companys proportionate share of the investee company exceeded 10% of the Companys consolidated assets or income/(loss) from continuing operations, in accordance with the provisions of Rules 4-08(g) of
Regulation S-X, was as follows:
|
|
|
|
|
|
|
Year Ended
July 31, 2005
|
|
(Unaudited)
|
|
(in thousands)
|
|
Revenue
|
|
$
|
4,041
|
|
Gross profit
|
|
$
|
3,861
|
|
Loss from continuing operations
|
|
$
|
(8,761
|
)
|
Net loss
|
|
$
|
(8,761
|
)
|
|
|
|
|
July 31, 2005
|
|
(Unaudited)
|
|
(in thousands)
|
|
Current assets
|
|
$
|
10,839
|
|
Non-current assets
|
|
$
|
1,866
|
|
Current liabilities
|
|
$
|
3,726
|
|
Non-current liabilities
|
|
$
|
952
|
|
Redeemable preferred stock
|
|
$
|
52,259
|
|
The following schedule reflects
the components of Other gains, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Gain (loss) on sales of marketable securities
|
|
$
|
30
|
|
|
$
|
(83
|
)
|
|
$
|
|
|
Gain on sale of investments
|
|
|
34,971
|
|
|
|
27,798
|
|
|
|
5,157
|
|
Foreign currency exchange losses
|
|
|
(2,837
|
)
|
|
|
(2,294
|
)
|
|
|
(3,139
|
)
|
Gain on sale of building
|
|
|
|
|
|
|
2,749
|
|
|
|
|
|
Other, net
|
|
|
(290
|
)
|
|
|
348
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,874
|
|
|
$
|
28,518
|
|
|
$
|
2,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fiscal year ended July 31, 2007, the Company recorded gains from sales of
investments of approximately $1.6 million and $28.7 million, respectively, resulting from acquisitions of @Ventures portfolio companies, Mitchell International, Inc. and Avamar Technologies, Inc., by third parties. Under the terms of the
agreement, Avamar was acquired in a cash transaction valued at approximately $165.0 million. The Company may also receive up to an additional $3.3 million of consideration currently held in escrow, subject to the satisfaction of certain
indemnification provisions of the transaction. These potential proceeds from escrow have not been included in the recorded gain. Additionally, gains of approximately $2.5 million, $0.6 million, $1.3 million and $0.3 million, respectively, were
recorded to adjust previously recorded gains on the acquisitions of WebCT, Inc., Realm Business Solutions, Inc., Molecular, Inc. and Alibris, Inc. due to satisfaction of conditions leading to the release of funds held in escrow. WebCT, Inc., Realm
Business Solutions, Inc., Molecular, Inc. and Alibris, Inc. were @Ventures portfolio companies that were acquired by third parties in previous reporting periods. During fiscal year 2007, the Company incurred foreign currency exchange losses of
approximately $2.8 million related primarily to unhedged foreign currency exposures in Asia.
During the fiscal year ended July 31,
2006, the Company sold its remaining 0.1 million shares of NaviSite, Inc. for a loss of approximately $0.1 million. Also, during the fiscal year ended July 31, 2006, the Company recorded gains from sales of investments of approximately
$19.4 million, $3.3 million and $4.6 million, respectively, resulting from acquisitions by third parties of @Ventures portfolio companies, WebCT Inc., Realm Business Solutions, Inc. and Alibris, Inc. Additionally gains of approximately $0.5 million
were recorded to adjust a previously recorded gain on the acquisition of Molecular Inc., an @Ventures
58
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
portfolio company, due to satisfaction of conditions leading to the release of funds held in escrow. As of July 31, 2006, the Company was entitled to
receive up to $7.9 million of additional total proceeds from the above portfolio companies, depending on the satisfaction of certain earn-out targets, termination of the indemnification periods, and the release of the shareholder escrow. During
fiscal year 2006, the Company incurred foreign currency exchange losses of approximately $2.3 million related primarily to unhedged foreign currency exposures in Asia. The Company also recognized a gain of approximately $2.7 million on the sale of a
building in Ireland.
During the fiscal year ended July 31, 2005, the Company recorded a $4.5 million gain as a result of the
acquisition by a third party of Molecular, Inc., an @ Ventures portfolio company. As a result of the transaction, the Company received proceeds of $6.1 million. At the time of the sale, the Company was entitled to receive up to $3.6 million of
additional proceeds, depending on the satisfaction of certain earn-out targets over the two years subsequent to the transaction, termination of the indemnification period, and the release of the shareholder escrow. The Company also realized a gain
of $0.6 million associated with the acquisition by a third party of Classmates Online, Inc., an @Ventures portfolio company, in December 2004. Additionally, the Company incurred foreign currency exchange losses of approximately $3.1 million related
primarily to unhedged foreign currency exposures in Asia.
(12)
|
BORROWING ARRANGEMENTS
|
During fiscal 2006,
ModusLink entered into a new revolving credit agreement (the New Loan Agreement) with a bank syndicate. The New Loan Agreement is a three-year $60.0 million revolving credit facility, with a scheduled maturity of October 31, 2008.
Advances under the New Loan Agreement may be in the form of loans or letters of credit. Outstanding borrowings under the former Loan Agreement have been assumed by the New Loan Agreement. Approximately $24.8 million of borrowings were outstanding
under the facility, and approximately $0.1 million had been reserved in support of outstanding letters of credit at July 31, 2007. Interest on the revolving credit facility is based on Prime or LIBOR plus an applicable margin (ranging from
1.25% 1.75%). The effective interest rate was 6.57% and 6.75% at July 31, 2007 and 2006, respectively. The New Loan Agreement is secured by all assets of ModusLink and includes certain restrictive financial covenants, all of
which ModusLink was in compliance with at July 31, 2007. These covenants include balance sheet leverage, liquidity and profitability measures and restrictions that limit the ability of ModusLink, among other things, to merge, acquire or sell
assets without prior approval from the lenders. CMGI is not a guarantor under the New Loan Agreement.
(13)
|
COMMITMENTS AND CONTINGENCIES
|
The Company leases
facilities and certain other machinery and equipment under various non-cancelable operating leases and executory contracts expiring through December 2019. Certain non-cancelable leases are classified as capital leases and the leased assets are
included in property, plant and equipment, at cost. Such leasing arrangements involve buildings and machinery and equipment as noted in Note 12. Future minimum payments, including restructuring related obligations as of July 31, 2007, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Stadium
Obligation
|
|
Capital
Lease
Obligations
|
|
Total
|
|
|
(in thousands)
|
For the fiscal years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
25,302
|
|
$
|
2,400
|
|
$
|
459
|
|
$
|
28,161
|
2009
|
|
|
19,843
|
|
|
1,600
|
|
|
295
|
|
|
21,738
|
2010
|
|
|
15,937
|
|
|
1,600
|
|
|
34
|
|
|
17,571
|
2011
|
|
|
8,682
|
|
|
1,600
|
|
|
|
|
|
10,282
|
2012
|
|
|
3,481
|
|
|
1,600
|
|
|
|
|
|
5,081
|
Thereafter
|
|
|
3,942
|
|
|
4,800
|
|
|
|
|
|
8,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,187
|
|
$
|
13,600
|
|
$
|
788
|
|
$
|
91,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments have been reduced by future minimum sublease rentals of
approximately $4.8 million. Capital lease obligations are net of interest of approximately $0.1 million.
Total rent and equipment lease
expense charged to continuing operations was approximately $25.8 million, $21.3 million and $21.1 million for the fiscal years ended July 31, 2007, 2006 and 2005, respectively.
59
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In August 2000, the Company announced it had acquired the exclusive naming and sponsorship rights to
the New England Patriots new stadium, for a period of fifteen years. In August 2002, the Company finalized an agreement with the owner of the stadium to amend the sponsorship agreement. Under the terms of the amended agreement, the
Company relinquished the stadium naming rights and remains obligated for a series of annual payments of $1.6 million per year through 2015. The Company applied a discount rate to the future payment stream to reflect the present value of its
obligation on the accompanying consolidated balance sheet.
The Company applies the disclosure provisions of FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34, to its
agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS No. 5 by requiring that guarantors disclose certain types of guarantees, even if the likelihood of requiring the
guarantors performance is remote. The following is a description of arrangements in which the Company is a guarantor.
From time to
time, the Company provides guarantees of payment to vendors doing business with certain of the Companys subsidiaries or former subsidiaries. These guarantees require that in the event that the subsidiary cannot satisfy its obligations with
certain of its vendors, the Company will be required to settle the obligation. Additionally, from time to time, the Company agrees to provide indemnification to its clients in the ordinary course of business. Typically, the Company agrees to
indemnify its clients for losses caused by the Company. As of July 31, 2007, the Company had no recorded liabilities with respect to these arrangements.
In 1999, a subsidiary of the Company entered into a facility lease with a term ending in November 2006. The Company issued a guaranty in connection with this lease. The Company divested its interest in the subsidiary
in 2002. During the quarter ended October 31, 2006, the Company became aware that this lease had been amended to extend the lease term through November 2016 with cumulative base rent of approximately $16.0 million. The Company disputes that it
has any ongoing liability under this guaranty.
The Company is also a party to litigation from time to time, which it considers routine and
incidental to its business. Management does not expect the results of any of such routine and incidental matters to have a material adverse effect on the Companys business, results of operation or financial condition.
(14)
|
STOCK AWARD PLANS AND STOCK-BASED COMPENSATION
|
Stock Option
Plans
The Company currently awards stock options under four plans: the 2004 Stock Incentive Plan (the 2004 Plan), the 2002
Non-Officer Employee Stock Incentive Plan (the 2002 Plan), the 2000 Stock Incentive Plan (the 2000 Plan) and the 2005 Non-Employee Director Plan (the 2005 Plan). Options granted under the 2004 Plan, 2002 Plan and
the 2000 Plan are generally exercisable as to 25% of the shares underlying the options beginning one year after the date of grant, with the option being exercisable as to the remaining shares in equal monthly installments over the next three years.
Stock options granted under these plans have contractual terms of seven years. The Company may also grant awards other than stock options under the 2004 Plan, 2002 Plan and 2000 Plan.
In December 2005, at the Companys Annual Meeting of Stockholders, the stockholders of the Company approved the 2005 Plan, pursuant to which the
Company grants non-qualified stock options to certain members of the Board of Directors. The 2005 Plan replaced the Companys Amended and Restated 1999 Stock Option Plan for Non-Employee Directors (1999 Plan). No additional options
will be granted under the 1999 Plan; however, all then outstanding options under the 1999 Plan shall remain in effect in accordance with their respective terms. Pursuant to the 1999 Plan, 2,000,000 shares of the Companys common stock were
initially reserved for issuance. Up to 2,000,000 shares of common stock may be issued pursuant to awards granted under the 2005 Plan (subject to adjustment in the event of stock splits and other similar events). The 2005 Plan provides that each
eligible director will automatically be granted an option to acquire 200,000 shares of Common Stock (the Initial Option) upon election to the Board. Each director who ceases to be an Affiliated Director (as defined in the 2005 Plan) and
is not otherwise an employee of the Company or any of its subsidiaries or affiliates will be granted, on the date such director ceases to be an Affiliated Director but remains as a member of the Board of Directors, an Initial Option to acquire
200,000 shares of Common Stock under the plan. Each Initial Option will vest and become exercisable on a monthly basis as to 1/36th of the number of shares of Common Stock originally subject to the option on each monthly anniversary of the date of
grant, provided that the optionee serves as a director on
60
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
such monthly anniversary date. On the date of each annual meeting of stockholders of the Company, each eligible director who is both serving as director
immediately prior to and immediately following such annual meeting, and who has served on the Board for at least six months, will automatically be granted an option to purchase 24,000 shares of Common Stock (an Annual Option). Each
Annual Option will vest and become exercisable on a monthly basis as to 1/36th of the number of shares originally subject to the option on each monthly anniversary of the date of grant, provided that the optionee serves as a director on such monthly
anniversary date. Stock options granted under the 2005 Plan have contractual terms of 10 years.
In December 2004, at the Companys
Annual Meeting of Stockholders, the stockholders of the Company approved the 2004 Plan pursuant to which the Company may grant stock options, stock appreciation rights, restricted stock awards and other equity-based awards for the purchase of up to
an aggregate of 15,000,000 shares of common stock of the Company (subject to adjustment in the event of stock splits and other similar events). The maximum number of shares with respect to which stock options may be granted to any one participant
under the 2004 Plan may not exceed 6,000,000 shares per calendar year. The maximum number of shares with respect to those awards other than stock options and stock appreciation rights may be granted under the 2004 Plan is 5,000,000 shares.
In March 2002, the Board of Directors adopted the 2002 Plan, pursuant to which 4,150,000 shares of common stock were reserved for issuance
(subject to adjustment in the event of stock splits and other similar events). In May 2002, the Board of Directors approved an amendment to the 2002 Plan in which the total shares available under the plan were increased to 19,150,000. Under the 2002
Plan, non-statutory stock options or restricted stock awards may be granted to the Companys or its subsidiaries employees, other than those who are also officers or directors, as defined. The Board of Directors administers this plan,
approves the individuals to whom options will be granted, and determines the number of shares and exercise price of each option.
In
October 2000, the Board of Directors adopted the 2000 Plan, pursuant to which 15,500,000 shares of common stock were reserved for issuance (subject to adjustment in the event of stock splits and other similar events). The Stockholders of the
Company approved the 2000 plan in December 2000. Under the 2000 Plan, non-qualified stock options, incentive stock options or restricted stock awards may be granted to the Companys or its subsidiaries employees, consultants, advisors or
directors, as defined. The Board of Directors administers this plan, approves the individuals to whom options will be granted, and determines the number of shares and exercise price of each option.
Employee Stock Purchase Plan
On October 4,
1994, the Board of Directors of the Company adopted the 1995 Employee Stock Purchase Plan, as amended (the Plan). During fiscal year 2002, the Plan was amended to increase the aggregate number of shares that may be issued from the Plan
to 3,000,000 shares. Approximately 640,000 shares are available for future issuance as of July 31, 2007. Under the Plan, employees who elect to participate in the Plan instruct the Company to withhold a specified amount through payroll
deductions during each quarterly period. On the last business day of each applicable quarterly payment period, the amount withheld is used to purchase the Companys common stock at an exercise price equal to 85% of the lower of the market price
on the first or last business day of the quarterly period. During the fiscal years ended July 31, 2007, 2006, and 2005 the Company issued approximately 126,000, 206,000 and 220,000 shares, respectively, under the Plan.
Stock Option Valuation and Expense Information under SFAS No. 123(R)
On August 1, 2005, the Company adopted SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to the Companys employees and
directors including employee stock options and employee stock purchases based on estimated fair values. The following table summarizes stock-based compensation expense related to employee stock options, employee stock purchases and nonvested shares
under SFAS No. 123(R) for the fiscal years ended July 31, 2007 and 2006, respectively which was allocated as follows:
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Cost of goods sold
|
|
$
|
474
|
|
$
|
544
|
Selling
|
|
|
575
|
|
|
666
|
General and administrative
|
|
|
4,135
|
|
|
5,207
|
|
|
|
|
|
|
|
|
|
$
|
5,184
|
|
$
|
6,417
|
|
|
|
|
|
|
|
61
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Prior to fiscal year 2005, the Company used the Black-Scholes option pricing model to estimate the
grant date fair value of stock option awards. For grants subsequent to the adoption of SFAS No. 123(R), the Company estimates the fair value of stock option awards on the date of grant using a binomial-lattice model. The Company believes that
the binomial-lattice model is a more accurate model for valuing employee stock options since it better reflects the impact of stock price changes on option exercise behavior. The weighted-average grant date fair value of employee stock options
granted during the fiscal years ended July 31, 2007 and 2006 was $0.63 and $0.96, respectively, using the binomial-lattice model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
Expected volatility
|
|
50.68
|
%
|
|
79.45
|
%
|
Risk-free interest rate
|
|
4.61
|
%
|
|
4.37
|
%
|
Expected term (in years)
|
|
4.12
|
|
|
4.25
|
|
Expected dividend yield
|
|
0.00
|
%
|
|
0.00
|
%
|
The volatility assumption for fiscal 2007 is based on the weighted average of the most recent
volatility measures since the acquisition of Modus on August 2, 2004. The volatility assumption for fiscal 2006 was based on the weighted average for the most recent one year and long term volatility measures of the Companys stock as well
as certain of the Companys peers. Prior to August 1, 2005, the Company had used its historical stock price volatility in accordance with SFAS No. 123 for purposes of its proforma information.
The weighted average risk-free interest rate assumption is based upon the interpolation of various U.S. Treasury rates, as of the month of the grants.
The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding
and is based on historical option activity. The determination of the expected term of employee stock options assumes that employees exercise behavior is comparable to historical option activity. The binomial-lattice model estimates the
probability of exercise as a function of time based on the entire history of exercises and cancellations on all past option grants made by the Company. The expected term generated by these probabilities reflects actual and anticipated exercise
behavior of options granted historically.
As stock-based compensation expense recognized in the accompanying consolidated statement of
operations for the fiscal years ended July 31, 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based partially on historical experience. In the Companys proforma information required under SFAS No. 123 for the
periods prior to August 1, 2005, the Company established estimates for forfeitures.
Stock Options
The status of the plans for the fiscal year ended July 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
Weighted-
Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Term
(Years)
|
|
Aggregate Intrinsic
Value
|
|
|
(in thousands, except exercise price and years)
|
Stock options outstanding, July 31, 2006
|
|
17,010
|
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
4,719
|
|
|
|
1.50
|
|
|
|
|
|
Exercised
|
|
(979
|
)
|
|
|
0.95
|
|
|
|
|
|
Forfeited or expired
|
|
(1,431
|
)
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding, July 31, 2007
|
|
19,319
|
|
|
$
|
1.63
|
|
4.50
|
|
$
|
4,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable, July 31, 2007
|
|
10,283
|
|
|
$
|
1.74
|
|
3.48
|
|
$
|
2,808
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2007, unrecognized stock-based compensation related to stock options was
approximately $6.7 million. This cost is expected to be expensed over a weighted average period of 1.9 years. The aggregate intrinsic value of options exercised during the fiscal years ended July 31, 2007 and 2006 was approximately $1.1 million
and $1.0 million, respectively.
62
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Nonvested Stock
Nonvested stock are shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. In connection with the adoption of SFAS No. 123(R) on
August 1, 2005, the Company reclassified approximately $6.2 million of recorded deferred compensation related to unamortized nonvested stock to additional paid-in capital. Nonvested stock is expensed ratably over the term of the restriction
period, ranging from one to five years. Nonvested stock compensation expense for the fiscal year ended July 31, 2007 and 2006 was approximately $1.6 million and $1.2 million, respectively.
A summary of the status of our nonvested stock for the fiscal year ended July 31, 2007, is as follows:
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
Weighted average
grant date
fair value
|
|
|
(in thousands)
|
Nonvested stock outstanding, July 31, 2006
|
|
2,560
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
Granted
|
|
1,325
|
|
|
|
1.72
|
Vested
|
|
(717
|
)
|
|
|
1.45
|
Forfeited
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock outstanding, July 31, 2007
|
|
3,168
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
The fair value of nonvested shares is determined based on the market price of the Companys
common stock on the grant date. The total grant date fair value of nonvested stock that vested during the fiscal years ended July 31, 2007 and 2006 was approximately $1.1 million and $4.8 million, respectively. As of July 31, 2007, there
was approximately $5.5 million of total unrecognized compensation cost related to nonvested stock to be recognized over a weighted-average period of 2.2 years.
Pro Forma Information under SFAS No. 123
Pro forma information regarding the effect on net income and income per share
if the Company had applied the fair value recognition provisions of SFAS No. 123 for the fiscal year ended July 31, 2005 is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
July 31, 2005
|
|
Net income
|
|
$
|
26,525
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
|
|
|
(23,581
|
)
|
Add: Total stock-based employee compensation expense included in reported net income
|
|
|
5,700
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
8,644
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basicas reported
|
|
$
|
0.06
|
|
|
|
|
|
|
Basicpro forma
|
|
$
|
0.02
|
|
|
|
|
|
|
Dilutedas reported
|
|
$
|
0.06
|
|
|
|
|
|
|
Dilutedpro forma
|
|
$
|
0.02
|
|
|
|
|
|
|
The fair value of each stock option award was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
Year Ended
July 31, 2005
|
|
Risk-free interest rate
|
|
|
3.50
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
71.20
|
%
|
Expected term (years)
|
|
|
4.20
|
|
Weighted average fair value of options granted during the period
|
|
$
|
0.96
|
|
63
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
18,986
|
|
$
|
29,334
|
|
$
|
(13,592
|
)
|
Foreign
|
|
|
37,284
|
|
|
3,125
|
|
|
24,341
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing operations before income taxes
|
|
$
|
56,270
|
|
$
|
32,459
|
|
$
|
10,749
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax expense (benefit) have been recorded in the Companys financial
statements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Income tax expense (benefit) from continuing operations
|
|
$
|
7,135
|
|
|
$
|
3,780
|
|
|
$
|
(19,933
|
)
|
Discontinued operations
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
Goodwill, for initial recognition of acquired tax benefits that previously were included in valuation allowance
|
|
|
(3,748
|
)
|
|
|
(716
|
)
|
|
|
|
|
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes charged directly to stockholders
equity
|
|
|
|
|
|
|
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
3,387
|
|
|
$
|
2,944
|
|
|
$
|
(19,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefit) from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
460
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
(1,441
|
)
|
|
|
(22,972
|
)
|
Foreign
|
|
|
5,300
|
|
|
|
3,937
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,300
|
|
|
$
|
2,956
|
|
|
$
|
(20,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,719
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(1,884
|
)
|
|
|
824
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,835
|
|
|
$
|
824
|
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
7,135
|
|
|
$
|
3,780
|
|
|
$
|
(19,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred income tax assets and liabilities have been classified on the accompanying consolidated
balance sheets in accordance with the nature of the item giving rise to the temporary differences. The components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2007
|
|
|
July 31, 2006
|
|
|
|
Current
|
|
|
Non-current
|
|
|
Total
|
|
|
Current
|
|
|
Non-current
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals, reserves and stock based compensation not currently deductible
|
|
$
|
2,878
|
|
|
$
|
13,231
|
|
|
$
|
16,109
|
|
|
$
|
8,697
|
|
|
$
|
12,505
|
|
|
$
|
21,202
|
|
Tax basis in excess of financial basis of investments in affiliates
|
|
|
|
|
|
|
37,550
|
|
|
|
37,550
|
|
|
|
|
|
|
|
54,939
|
|
|
|
54,939
|
|
Net operating loss and capital loss carryforwards
|
|
|
|
|
|
|
1,399,572
|
|
|
|
1,399,572
|
|
|
|
|
|
|
|
1,465,968
|
|
|
|
1,465,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
2,878
|
|
|
|
1,450,353
|
|
|
|
1,453,231
|
|
|
|
8,697
|
|
|
|
1,533,412
|
|
|
|
1,542,109
|
|
Less: valuation allowance
|
|
|
(1,532
|
)
|
|
|
(1,421,211
|
)
|
|
|
(1,422,743
|
)
|
|
|
(8,697
|
)
|
|
|
(1,518,315
|
)
|
|
|
(1,527,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,346
|
|
|
|
29,142
|
|
|
|
30,488
|
|
|
|
|
|
|
|
15,097
|
|
|
|
15,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial basis in excess of tax basis for intangible and fixed assets
|
|
|
|
|
|
|
(5,988
|
)
|
|
|
(5,988
|
)
|
|
|
|
|
|
|
(7,286
|
)
|
|
|
(7,286
|
)
|
Undistributed accumulated earnings of foreign subsidiaries
|
|
|
|
|
|
|
(23,459
|
)
|
|
|
(23,459
|
)
|
|
|
|
|
|
|
(10,219
|
)
|
|
|
(10,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
|
|
|
|
(29,447
|
)
|
|
|
(29,447
|
)
|
|
|
|
|
|
|
(17,505
|
)
|
|
|
(17,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
1,346
|
|
|
$
|
(305
|
)
|
|
$
|
1,041
|
|
|
$
|
|
|
|
$
|
(2,408
|
)
|
|
$
|
(2,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as
of July 31, 2007 will be allocated as follows (in thousands):
|
|
|
|
|
Income tax benefit recognized in the consolidated statement of operations
|
|
$
|
(1,398,530
|
)
|
Additional paid in capital
|
|
|
(15,649
|
)
|
Goodwill and other non-current intangible assets
|
|
|
(8,564
|
)
|
|
|
|
|
|
|
|
$
|
(1,422,743
|
)
|
|
|
|
|
|
The net change in the total valuation allowance for the year ended July 31, 2007 was a
decrease of approximately $104 million. This decrease is primarily due to the expiration of state net operating losses and the expiration of federal and state capital loss carryforwards. A valuation allowance has been recorded against the gross
deferred tax asset in the U.S and certain foreign subsidiaries since management believes that after considering all the available objective evidence, both positive and negative, historical and prospective, it is more likely than not that certain
assets will not be realized.
ModusLink has obtained five-year tax holidays for certain of its solution centers in China. These tax
holidays were obtained by Modus prior to its acquisition by the Company and remain in effect throughout various dates ending December 2008. These tax holidays are structured such that tax rates are 0% for the first two profitable years and 7.5% for
the three year period thereafter. During calendar year 2007, the Chinese government introduced legislation for domestic and foreign companies that will eliminate certain tax holidays effective January 1, 2008. The legislation allows for a
transition period for companies with existing holidays whereby the tax rate will increase gradually over a five year period up to a maximum rate of 25%. ModusLinks current tax holidays are expected to expire during calendar year 2008. The
Company has recorded its deferred tax assets and liabilities based upon the tax rates expected to be in effect upon recognition.
The
Company has net operating loss carryforwards for federal and state tax purposes of approximately $2.0 billion and $2.1 billion, respectively, at July 31, 2007. The federal net operating losses will expire from 2016 through 2025 and the
state net operating losses will expire from 2007 through 2016. The Company has a foreign net operating loss carryforward of approximately $68.8 million. In addition, the Company has capital loss carryforwards for federal and state tax purposes of
approximately $1.5 billion. The federal and state capital losses begin to expire in calendar year 2007. The utilization of net operating losses and
65
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
capital losses may be limited in the future if the Company experiences an ownership change as defined by Internal Revenue Code Section 382. An ownership
change occurs when the ownership percentage of 5% or greater stockholders changes by more than 50% over a three-year period.
The
Companys ModusLink subsidiary has undistributed earnings from its foreign subsidiaries of approximately $74.6 million at July 31, 2007, of which approximately $14.7 million is considered to be permanently reinvested due to certain
restrictions under local laws as well as the Companys plans to reinvest such earnings for future expansion in certain foreign jurisdictions. The amount of taxes attributable to the permanently reinvested undistributed earnings is not
practically determinable. The Company has recorded a deferred tax liability of $23.5 million on the remaining $59.9 million of undistributed earnings that are not considered to be permanently reinvested.
Income tax expense attributable to income from continuing operations differs from the computed expense computed by applying the U.S. federal income tax
rate of 35 percent to pre-tax income (loss) from continuing operations as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Computed expected income tax expense
|
|
$
|
19,695
|
|
|
$
|
11,361
|
|
|
$
|
3,762
|
|
Increase (decrease) in income tax benefit resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of estimated tax liabilities
|
|
|
|
|
|
|
(1,951
|
)
|
|
|
(24,713
|
)
|
Losses utilized
|
|
|
(16,007
|
)
|
|
|
(11,882
|
)
|
|
|
(5,662
|
)
|
State income taxes, net of federal benefit
|
|
|
|
|
|
|
332
|
|
|
|
1,132
|
|
Foreign dividends
|
|
|
12,160
|
|
|
|
7,678
|
|
|
|
11,346
|
|
Foreign Tax Rate Differential
|
|
|
(9,069
|
)
|
|
|
(3,631
|
)
|
|
|
(7,320
|
)
|
AMT Liability
|
|
|
|
|
|
|
460
|
|
|
|
|
|
Other
|
|
|
356
|
|
|
|
1,413
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense (benefit)
|
|
$
|
7,135
|
|
|
$
|
3,780
|
|
|
$
|
(19,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of the Companys tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in several tax jurisdictions. The Company is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of
deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves for probable exposures. Based on our evaluation of current tax positions, the
Company believes it has appropriately accrued for exposures. During fiscal 2006 and 2005 the Company recorded an income tax benefit of $2.0 million and $24.7 million, respectively, as a result of a reduction in the Companys estimate of
certain tax liabilities that had been included in accrued income taxes in the Companys accompanying consolidated balance sheet.
(16)
|
DEFINED BENEFIT PENSION PLANS
|
In connection with
the Modus acquisition in fiscal 2005, the Company assumed two separately defined pension plans covering certain of its employees in its Netherlands facility and a defined pension plan pertaining to certain of its employees in its Taiwan facility.
Pension costs are actuarially determined.
On July 31, 2007 the Company adopted the recognition and disclosure provisions of SFAS 158
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 required the Company to recognize the funded status (i.e. the
difference between the fair value of the plan assets and the projected benefit obligations) of its benefits plans in the July 31, 2007 balance sheet with a corresponding adjustment to accumulated other comprehensive income. The initial impact
of the standard due to unrecognized net actuarial gains and losses is recognized as a component of accumulated comprehensive income. The adoption of SFAS 158 resulted in a net adjustment to accumulated other comprehensive income of approximately
$0.4 million.
66
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The change in benefit obligation and plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
11,475
|
|
|
$
|
7,619
|
|
Service cost
|
|
|
1,061
|
|
|
|
921
|
|
Interest cost
|
|
|
535
|
|
|
|
320
|
|
Actuarial (gain)
|
|
|
(1,940
|
)
|
|
|
(1,750
|
)
|
Employee contributions
|
|
|
396
|
|
|
|
387
|
|
Benefits and administrative expenses paid
|
|
|
(1,000
|
)
|
|
|
(121
|
)
|
Currency translation
|
|
|
711
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
11,238
|
|
|
|
7,772
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
7,291
|
|
|
|
4,580
|
|
Actual return on plan assets
|
|
|
138
|
|
|
|
252
|
|
Employee contributions
|
|
|
396
|
|
|
|
387
|
|
Employer contributions
|
|
|
917
|
|
|
|
448
|
|
Benefits and administrative expenses paid
|
|
|
(987
|
)
|
|
|
(121
|
)
|
Currency translation
|
|
|
495
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
8,250
|
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
|
(2,988
|
)
|
|
|
(1,987
|
)
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in statement of financial position as a non-current liability
|
|
$
|
(2,988
|
)
|
|
$
|
(1,662
|
)
|
|
|
|
|
|
|
|
|
|
The amount not yet recognized as a component of net periodic cost and included in accumulated
other comprehensive income for the fiscal year ended July 31, 2007 is $0.4 million, net of income taxes.
The accumulated benefit
obligation was approximately $7.9 million and $6.0 million at July 31, 2007 and 2006, respectively.
Information for pension plans
with an accumulated benefit obligation in excess of plan assets was as follows:
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Projected benefit obligation
|
|
$
|
3,798
|
|
$
|
7,772
|
Accumulated benefit obligation
|
|
$
|
1,989
|
|
$
|
5,972
|
Fair value of plan assets
|
|
$
|
1,109
|
|
$
|
5,785
|
Information for pension plans with a projected benefit obligation in excess of plan assets was as
follows:
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Projected benefit obligation
|
|
$
|
11,238
|
|
$
|
7,772
|
Fair value of plan assets
|
|
$
|
8,250
|
|
$
|
5,785
|
67
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The incremental effect of applying SFAS No. 158 on individual line items in the accompanying
consolidated statement of financial position at July 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-SFAS 158
|
|
Incremental
effect of adopting
SFAS 158
|
|
|
Post-
SFAS 158
|
|
|
(in thousands)
|
Other long-term liabilities
|
|
$
|
12,160
|
|
$
|
(403
|
)
|
|
$
|
11,757
|
Accumulated other comprehensive income
|
|
$
|
7,368
|
|
$
|
403
|
|
|
$
|
7,771
|
Total stockholders equity
|
|
$
|
554,666
|
|
$
|
403
|
|
|
$
|
555,069
|
Components of net periodic pension costs was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
|
|
Service cost
|
|
$
|
1,061
|
|
|
$
|
921
|
|
|
$
|
499
|
|
Interest costs
|
|
|
535
|
|
|
|
320
|
|
|
|
232
|
|
Expected return on plan assets
|
|
|
(363
|
)
|
|
|
(179
|
)
|
|
|
(167
|
)
|
Amortization of net actuarial loss
|
|
|
40
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension costs
|
|
$
|
1,273
|
|
|
$
|
1,172
|
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount included in accumulated other comprehensive income expected to be recognized as a
component of net periodic pension costs in fiscal 2008 is approximately $9 thousand related to amortization of a net actuarial gain.
Assumptions:
Weighted-average assumptions used to determine benefit obligations was as follows:
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
5.25
|
%
|
|
4.75
|
%
|
Rate of compensation increase
|
|
2.00
|
%
|
|
2.00
|
%
|
Weighted-average assumptions used to determine net periodic pension cost was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Discount rate
|
|
4.75
|
%
|
|
4.75
|
%
|
|
4.00
|
%
|
Expected long-term rate of return on plan assets
|
|
4.25
|
%
|
|
4.25
|
%
|
|
3.50
|
%
|
Rate of compensation increase
|
|
2.00
|
%
|
|
2.00
|
%
|
|
2.00
|
%
|
68
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Benefit payments:
The following table summarizes expected benefit payments from the plans through fiscal 2017. Actual benefit payments may differ from expected benefit payments. The minimum required contributions to the plan are
expected to be approximately $1.6 million in fiscal 2008.
|
|
|
|
|
|
Pension Benefit
Payments
|
|
|
(in thousands)
|
For the fiscal years ended July 31:
|
|
|
|
2008
|
|
$
|
73
|
2009
|
|
$
|
71
|
2010
|
|
$
|
82
|
2011
|
|
$
|
96
|
2012
|
|
$
|
112
|
Next 5 years
|
|
$
|
1,482
|
To develop the expected long-term rate of return on assets assumption consideration is given to
the current level of expected returns on risk free investments, the historical level of risk premium associated with the other asset classes in which the portfolio is invested and the expectations for the future returns of each asset class. The
expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
The defined benefit plans have 100% of its assets invested in bank-managed portfolios of debt securities and other assets. Conservation of capital with
some conservative growth potential is the strategy for the plans.
(17)
|
COMPREHENSIVE INCOME
|
The components of accumulated
other comprehensive income, net of income taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Net unrealized holding gains (losses)
|
|
$
|
733
|
|
$
|
2,328
|
|
$
|
(33
|
)
|
Cumulative foreign currency translation adjustment
|
|
|
6,635
|
|
|
3,961
|
|
|
2,362
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
(338
|
)
|
Impact of adoption of SFAS No. 158
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
7,771
|
|
$
|
6,289
|
|
$
|
1,991
|
|
|
|
|
|
|
|
|
|
|
|
|
(18)
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
The allowance for
doubtful accounts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Balance at beginning of year
|
|
$
|
1,123
|
|
|
$
|
2,107
|
|
|
$
|
573
|
|
Acquisitions(a)
|
|
|
|
|
|
|
|
|
|
|
1,479
|
|
Additions
|
|
|
61
|
|
|
|
162
|
|
|
|
382
|
|
Deductions
|
|
|
(112
|
)
|
|
|
(1,146
|
)
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,072
|
|
|
$
|
1,123
|
|
|
$
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amount of $1.5 million in fiscal 2005 relates to the acquisition of Modus in August 2004.
|
69
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In September 2007, the
Companys Board of Directors authorized the Company to proceed with a 1 for 10 reverse stock split, which had been approved by the Companys stockholders at the Annual Meeting of Stockholders on December 6, 2006. CMGIs common
stock will begin trading at the split-adjusted level on November 1, 2007. For 20-trading days following the split, CMGIs common stock will trade under the trading symbol CMGID. After the 20-trading day period, CMGIs
common stock will resume trading under the symbol CMGI.
The number of shares of the Companys common stock issued and
outstanding will be reduced from approximately 489 million shares as of September 25, 2007, to approximately 48.9 million shares post-split. No fractional shares will be issued in connection with the reverse stock split. CMGI
shareholders who would be entitled to fractional shares will receive cash payments in lieu of receiving fractional shares.
The
Companys historical earnings per share on a proforma basis, assuming the reverse split had occurred on August 1, 2004, would be as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
1.01
|
|
$
|
0.59
|
|
|
$
|
0.65
|
|
Income (loss) from discontinued operations
|
|
|
0.01
|
|
|
(0.28
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available to common stockholders
|
|
$
|
1.02
|
|
$
|
0.31
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
1.01
|
|
$
|
0.59
|
|
|
$
|
0.63
|
|
Income (loss) from discontinued operations
|
|
|
0.00
|
|
|
(0.28
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available to common stockholders
|
|
$
|
1.01
|
|
$
|
0.31
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2007, the Companys Board of Directors also authorized the repurchase of up to
$50.0 million of the Companys common stock from time to time on the open market or in privately negotiated transactions over the next 18 months. The timing and amount of any shares repurchased will be determined by the Companys
management based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider
trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with the Companys stock plans and for other corporate purposes. The repurchase program will be
funded using the Companys working capital.
70
CMGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(20)
|
SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
|
The following table sets forth selected quarterly financial information for the fiscal years ended July 31, 2007 and 2006. The operating results for any given quarter are not necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Quarter Ended
|
|
|
Fiscal 2006 Quarter Ended
|
|
|
|
Oct. 31
|
|
|
Jan. 31
|
|
|
Apr. 30
|
|
|
Jul. 31
|
|
|
Oct. 31
|
|
|
Jan. 31
|
|
|
Apr. 30
|
|
|
Jul. 31
|
|
|
|
(in thousands except share data)
|
|
Net revenue
|
|
$
|
283,636
|
|
|
$
|
324,752
|
|
|
$
|
282,078
|
|
|
$
|
252,560
|
|
|
$
|
303,409
|
|
|
$
|
318,849
|
|
|
$
|
264,748
|
|
|
$
|
261,880
|
|
Cost of revenue
|
|
|
253,593
|
|
|
|
284,219
|
|
|
|
252,111
|
|
|
|
222,038
|
|
|
|
272,437
|
|
|
|
288,445
|
|
|
|
235,886
|
|
|
|
233,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,043
|
|
|
|
40,533
|
|
|
|
29,967
|
|
|
|
30,522
|
|
|
|
30,972
|
|
|
|
30,404
|
|
|
|
28,862
|
|
|
|
27,993
|
|
Total expenses
|
|
|
24,990
|
|
|
|
29,264
|
|
|
|
29,090
|
|
|
|
32,956
|
|
|
|
28,688
|
|
|
|
32,101
|
|
|
|
30,606
|
|
|
|
26,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
5,053
|
|
|
|
11,269
|
|
|
|
877
|
|
|
|
(2,434
|
)
|
|
|
2,284
|
|
|
|
(1,697
|
)
|
|
|
(1,744
|
)
|
|
|
1,742
|
|
Total other income (loss), net
|
|
|
3,246
|
|
|
|
30,443
|
|
|
|
7,832
|
|
|
|
(16
|
)
|
|
|
3,454
|
|
|
|
(452
|
)
|
|
|
22,949
|
|
|
|
5,923
|
|
Income tax expense (benefit)
|
|
|
(1,440
|
)
|
|
|
5,727
|
|
|
|
(909
|
)
|
|
|
3,757
|
|
|
|
943
|
|
|
|
758
|
|
|
|
(738
|
)
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
9,739
|
|
|
|
35,985
|
|
|
|
9,618
|
|
|
|
(6,207
|
)
|
|
|
4,795
|
|
|
|
(2,907
|
)
|
|
|
21,943
|
|
|
|
4,848
|
|
Discontinued operations, net of income taxes
|
|
|
588
|
|
|
|
(112
|
)
|
|
|
(203
|
)
|
|
|
3
|
|
|
|
(2,663
|
)
|
|
|
(3,408
|
)
|
|
|
(269
|
)
|
|
|
(7,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,327
|
|
|
$
|
35,873
|
|
|
$
|
9,415
|
|
|
$
|
(6,204
|
)
|
|
$
|
2,132
|
|
|
$
|
(6,315
|
)
|
|
$
|
21,674
|
|
|
$
|
(2,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
Income (loss) from discontinued operations
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71