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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended July 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the Transition Period From________________ to ________________
Commission File 0-22846
CMG Information Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-2921333
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
100 Brickstone Square 01810
Andover, Massachusetts
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 684-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class) (Name of each exchange on which registered)
Common Stock, $0.01 par value NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $ 87,162,405 as of October 22, 1996.
On October 22, 1996, the Registrant had outstanding 9,174,990 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders are incorporated by reference
into Parts I, II and IV of this Report. Portions of the definitive proxy
statement (the "Definitive Proxy Statement") to be filed with the Securities and
Exchange Commission relative to the Company's 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1996
CMG INFORMATION SERVICES, INC.
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PART I
Item Page
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1. Business
General.................................................................................... 2
Direct Marketing Industry.................................................................. 3
The Internet and World Wide Web............................................................ 3
Interactive Marketing Industry............................................................. 4
Products and Services...................................................................... 4
Business Strategy.......................................................................... 11
Sales and Marketing........................................................................ 12
Competition................................................................................ 12
Research and Development................................................................... 13
Intellectual Property and Proprietary Rights............................................... 13
Employees.................................................................................. 13
Segment Information........................................................................ 13
Significant Customers...................................................................... 14
2. Properties.................................................................................... 14
3. Legal Proceedings............................................................................. 14
4. Submission of Matters to Vote of Security Holders............................................. 14
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 14
6. Selected Consolidated Financial Data.......................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................... 15
8. Financial Statements and Supplementary Data................................................... 15
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................... 15
PART III
10. Directors and Executive Officers of the Registrant............................................ 15
11. Executive Compensation........................................................................ 15
12. Security Ownership of Certain Beneficial Owners and Management................................ 15
13. Certain Relationships and Related Transactions................................................ 15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 16
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This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties, including without limitation those discussed
in "Risk Factors that may Affect Further Results" section of Item 7 of this
report. Such forward-looking statements speak only as of the date on which they
are made, and the Company cautions readers not to place under reliance on such
statements.
PART I
ITEM 1. - BUSINESS
General
CMG Information Services, Inc. and its subsidiaries ("CMG" or the "Company")
is a direct marketing service provider that invests in, develops and integrates
advanced, Internet, interactive, and database management technologies. CMG
offers its clients a wide variety of direct marketing opportunities to choose
from, including: highly segmented and accurate mailing lists, database
management, design and development capabilities, consultative list management
and brokerage services, literature fulfillment, sales lead/inquiry management,
business-to-business telemarketing services and Internet and interactive media
direct marketing software technologies. The Company is advancing products and
services that will both create and profit from direct marketing opportunities on
the Internet.
Direct marketing is the use of mail order, telemarketing, electronic
interactive media and other methods of direct contact of targeted customers and
prospects to promote products and services. Direct marketing, unlike other forms
of advertising which are disseminated to a broad audience through print and
broadcast media, enables businesses to reallocate marketing and advertising
dollars to more effective forms of advertising sent directly to a defined set of
consumers. This defined set is identified through analysis and segmentation of
large amounts of data on past customers and future prospects. From this
information, specific targeted marketing strategies and personalized
communications can be generated which focus on those customers and prospects
who, according to their buying habits and customer profile, are most likely to
respond.
CMG's emergence into the direct marketing products and services arena is being
driven by the distinctive yet synergistic competencies of its operating
businesses.
CMG's List Division provides educational and business-to-business publishers
with comprehensive, highly segmented, and accurate lists for direct marketing to
millions of customers nationwide. Our services help publishers develop and
implement effective direct marketing programs using both conventional and on-
line media. CMG believes that its databases of university faculty and
information-buyers make it a leading supplier of mailing lists and related
services to educational and professional publishers. The Company's twenty years
of experience supplying lists to the direct marketing industry, together with
its expertise in the use of computer technology to develop, segment, enhance,
maintain and market customer and prospect list databases, permit the Company to
offer its publisher clients a full range of list services.
CMG Direct Interactive (CMGDI or Direct Interactive) is at the forefront of
leveraging its expertise in direct marketing, database design/development and
project management to invest in the creation of new database management products
and a suite of product and service offerings that will enable sophisticated
direct interactive marketing environments. These new products will enable Direct
Interactive to take advantage of the demand for data management services created
from the Internet and interactive media, while continuing to grow and invest in
its computer list services, including list order fulfillment, merge/purge and
other direct mail cost saving services.
SalesLink provides literature fulfillment, sales lead/inquiry management,
business-to-business telemarketing, and print-on-demand, primarily to the mutual
fund, high-tech and bio-tech industries.
CMG @Ventures' focus is on strategic investment and development
opportunities. Its mission is to assist the commercialization of electronic
content, products and services via the Internet and interactive media. Drawing
upon significant investment resources, strong technical talent, and a management
team steeped in the Internet, electronic publishing and managing consortia,
@Ventures has successfully made ten strategic investments.
@Ventures has invested in five consolidated subsidiaries: 58% owned Lycos,
Inc. (Lycos), 61% owned GeoCities, 100% owned NetCarta Corporation (NetCarta),
92% owned Black Sun Interactive, Inc. (Black Sun), and 54% owned Freemark
Communications, Inc. (Freemark). At July 31, 1996 @Ventures had invested in
minority ownership positions in three affiliates: 45% owned Vicinity
Corporation (Vicinity), 46% owned TeleT Communications (TeleT) and 37% owned
Ikonic, Inc. (Ikonic). Subsequent to July 31, 1996 @Ventures sold its
investment in TeleT for a gain, receiving cash and Premiere Technologies common
stock and invested in two additional minority ownership positions: 46%
ownership in Parable, LLC (Parable) and 27% ownership in Silknet. The Company
is entitled to 77.5% of the net capital gains of @Ventures and 22.5% are
attributable to @Ventures partners. In fiscal 1997, the Company's share will be
increased to 80%. All of CMG @Ventures investments are early stage companies
and there can be no assurance that their products or services will be
commercially successful.
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CMG's three wholly owned start-up Internet companys, ADSmart Corporation
(ADSmart), InfoMation Publishing Corporation (InfoMation) and Planet Direct
Corporation (Planet Direct) are being developed to further benefit from direct
marketing opportunities on the Internet by providing advertising services,
personal electronic newspapers and comprehensive Internet service content
offerings.
Direct Marketing Industry
The use of direct marketing by businesses to target and communicate with
potential customers has increased due in part to the relative cost efficiency of
direct marketing as compared to other advertising methods, as well as the rapid
development of affordable computer technology. Prior to and during much of the
1970's, the costs associated with selling products and services either through
mass marketing or through personal sales calls were relatively low, while the
costs of database development were prohibitive for all but the largest
businesses. In the 1980's, the costs of developing and implementing computer
technologies to analyze and target potential customers declined while the costs
of traditional marketing increased significantly. In addition, concerns have
been raised about the efficacy of traditional forms of marketing. Direct
marketing remains one of the few advertising media allowing an accurate measure
of results through a review of response rates thereby increasing the
effectiveness of the selling effort.
The increasing popularity of direct marketing has created a substantial need
for comprehensive, current and accurate information to identify high probability
purchasers from the millions of consumers in North America. This information, if
properly packaged in a database with the appropriate software, can be used in
all aspects of direct marketing: market sizing, distribution channel selection
and balancing, sales lead generation, territorial resource allocation and
customer prioritization and qualification. In the absence of this information,
the selling process results in higher expense per sales contact and lost revenue
from unidentified customers. These factors have created increasing demand for
lower cost information regarding the identity, location and purchasing history
of potential customers. For many businesses, this information can be crucial to
their marketing success.
Direct marketers of information products, including book and magazine
publishers, financial institutions, seminar coordinators and professional
associations, generate significant demand for affordable, current, highly-
segmented mailing list databases, and mailing list database services. In
addition, these information product vendors have sought new ways to obtain value
from their customer databases by more effectively analyzing and/or selling their
customer and prospect lists.
The Internet and World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information and conduct business. While the Internet was historically
used by a limited number of academic institutions, defense contractors and
government agencies primarily for remote access to host computers and for
sending and receiving electronic mail, commercial organizations and individuals
are increasingly dominating the use of the Internet. Recent technological
advances, including increases in microprocessor speed and the development of
easy-to-use graphical user interfaces, combined with cultural and business
changes, have led to the Internet being integrated into the operations and
strategies of commercial organizations and the activities of individuals.
Much of the recent growth in Internet use by businesses and individuals has
been driven by the emergence of a network of servers and information available
on the Internet called the World Wide Web. The Web is a network medium that is
rich in content, activities and format. The Web medium includes a wide range of
content such as magazines, news feeds, radio broadcasts, and corporate, product,
educational, research, and political information, as well as activities,
including customer service, electronic commerce, reservations, banking, games
and discussion groups. International Data Corporation estimates that the number
of individuals with access to the Internet is projected to reach 199 million
users in 1999, of which 125 million users are estimated to be accessing the Web.
The Company believes that recent trends in the establishment of Internet access
services such as AT&T's WorldNet will facilitate access to the Internet and
result in an increase in the number of users of the Internet. An increase in
the number of users of the Internet could result in higher traffic to the
Company's sites.
The Web can be accessed using software that allows non-technical users to
exploit the capabilities of the Internet easily. Electronic documents or "Web
pages" which may contain textual, audio and video information, are published on
Web sites in a common format. Each Web site could contain hundreds of Web
pages. Users can view these Web pages by using widely available software called
"Web browsers" such as the Netscape Navigator or the Microsoft Internet
Explorer. Users specify which electronic documents they wish to view with their
Web browser by entering each document's unique electronic Web address, or
Universal Resource Locator ("URL"). Alternatively, users can navigate the Web
by making use of the hypertext link capability of Web documents. Hypertext
links are active areas on a Web page which can be located anywhere else on the
Web. This feature enables
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users to move from one page to of content and activity to another related or
"linked" page, without having to know the underlying address or URL of either
document.
The rapid deployment of the Web has introduced fundamental and structural
changes in the way information can be produced, distributed and consumed,
lowering the cost of publishing information and extending its potential reach.
Companies from many industries are publishing product and the company
information or advertising materials and collecting customer feedback and
demographic information interactively. The structure of Web documents allows an
organization to publish significant quantities of product information while
simultaneously allowing each user to view selectively only those elements of the
information which are of particular interest. This feature makes possible the
dynamic tailoring of information delivery to each user's interests in a cost
effective and timely fashion. The Web, by facilitating the publishing and
exchange of information, is dramatically increasing the amount of information to
users.
Interactive Marketing Industry
Direct Marketing is undergoing rapid, fundamental change, as customers needs
evolve and technology advances. Marketing channels and media outlets are
expanding in number and diversifying in scope, and powerful database
technologies are able to target both broad markets and individual customers with
ever-greater precision.
The emergence of the Internet into homes and offices has provided direct
marketers with a powerful new distribution mechanism - interactive media.
Interactive marketing is a subset of direct marketing. It differentiates itself
from traditional direct marketing channels in that the consumer has flexibility
and control over what is being presented, when they view the products or
services and which types of products or services they are viewing.
In contrast to conventional media, the Internet offers capabilities to target
advertising to specific audiences, to measure the popularity of content, to make
timely changes in response, to reach worldwide audiences cost-effectively and to
create innovative and interactive advertisements. By collecting customer
feedback and demographic information, advertisers can direct highly customized
marketing campaigns at defined targets. In addition, the Internet enables
advertisers to transact with prospective customers much more rapidly than with
conventional media.
The Company believes that advertisers will seek to advertise on Web sites that
offer a high volume of traffic and feature flexible advertisement programs
capable of reaching targeted audiences. Likewise, the Company believes that as
advertisers increasingly embrace the Internet as an advertising vehicle, their
participation will subsidize in part the creation and expansion of the
information and resources available on the Web which in turn is expected to
stimulate further traffic flow. However, the Internet as an advertising medium
is still evolving and, consequently, advertisers seek demonstration of its
effectiveness as a media purchase. Due to the limited information and
experience on Web advertising and a general unfamiliarity with the concept of
interactive advertising, advertisers require assistance with the design and
placement of advertisements on the Internet.
Interactive marketing provides direct marketers with the ability to create
electronic databases of customer information. Using this information will
enable direct marketers to develop more effective advertising, make better
decisions about distribution methods and media selection and target customers
more effectively. The dialogue created between the marketer and the consumer
through interactive marketing creates advertising accountability, enabling
marketers to track advertisement interaction, anticipate consumer needs and make
changes immediately. It is expected that across scores of industries, the
relationship between marketers and consumers will soon be direct, and one-to-
one. When that day arrives, marketers will benefit from this newfound ability
to establish deep, intimate relationships with their customers.
Products and Services
CMG Lists
The Company's principal products are mailing lists derived from the Company's
databases and sold primarily to publishers. The Company has three primary
mailing list databases, the College List, the Information Buyers List and the
ElHi List. The databases are highly segmented, permitting the Company to use its
application software to extract specifically defined lists of potential
customers who are most likely to purchase products advertised by the Company's
clients. The Company is continually working to expand the size and
comprehensiveness of its database offerings based on the needs of its clients
and the availability of new lists.
CMG understands that there is only one other supplier of faculty mailing lists
and two other suppliers of college and university administrator lists. In
addition, CMG believes that it has identified virtually all North American
textbook publishers and that it supplies mailing lists derived from the College
List database to a majority of them.
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CMG also believes that most of the largest North American publishers of books
for professionals contribute their customer lists exclusively to the Information
Buyers List database and have agreed not to contribute their customer lists to
any other book buyer databases. These publishers also purchase mailing lists
and list services from the Company. Accordingly, CMG believes that the
Information Buyers List database is the only database of its kind and that the
College List database is the dominant database of its kind and that these
databases make CMG a leading supplier of mailing lists and related services to
educational and professional publishers.
The College List Database. The College List database, which the Company
believes is the dominant list of its type, includes approximately 700,000 names
and addresses of college and university deans, administrators and faculty at
every college, university, and junior college in North America. The Company
classifies each course taught, and the faculty teaching it, into one of
approximately 4,000 subject codes, which permits the Company to identify all
faculty teaching any particular course or subject and create lists identifying
the faculty so they can be targeted.
The resulting lists are valuable to publishers, as the classification system
of specific subject codes permits them to choose the professors most likely to
select a given book for a course and then to send promotional materials and/or a
sample copy of the textbook to them. In addition, the database classification
system helps publishers identify areas of study where new titles are needed and
define the size of the potential market.
The College List is compiled by the Company from course schedules and other
source documents published by colleges and universities and is updated twice
annually (i.e. each semester). The Company augments the information available
from the schedules with school catalogs, supplemental questionnaires, telephone
calls, and various other source documents collected from colleges and
universities.
The Information Buyers List Database. The Information Buyers List database
includes approximately 11 million names and addresses of professionals who
purchase books, periodicals, seminars and other information products through
mail order. The Information Buyers List is assembled from over 150 proprietary
lists of over 100 publishers and other organizations. Combining these separate
customer lists into a single database permits the Company to offer its clients a
larger group of potential customers across a broader range of target categories
than could be obtained from any single list. In addition to its size and
diversity, the database is also valuable because it is limited primarily to
those consumers who have actually purchased through mail order and are therefore
thought to be more likely to do so in the future. The Information Buyers List is
segmented under the same 4,000 subject codes as the College List.
When a participant's customer list is added to the database, the Company uses
its software to segment the list into the subject codes and to supplement the
database with information derived from the participant's customer list, such as
recency of purchase, gender and home or office address distinctions. This
classification system permits the Company to identify professionals that have
purchased information products pertaining to any given subject and to create
lists identifying the purchasers so they can be targeted.
The lists derived from the Information Buyers List database are used by
publishers and other companies in the business-to-business and consumer
publishing direct mail markets. The high degree of segmentation of the database
enables the Company to extract very specific, and thus, more responsive niches
of professionals with a demonstrated interest in purchasing very specific types
of information products. This level of selectivity also enables the Company to
identify and build other valuable lists that are not obvious properties of the
individual component lists used by the Company to maintain the database.
The Elementary/High School List Database. In 1992, the Company introduced the
Elementary/High School List or "ElHi List" database. In January 1994, the ElHi
List included the names and addresses of approximately 84,000 public elementary
and high schools, approximately 16,000 public school district offices,
approximately 8,400 public libraries and approximately 140,000 administrators.
The ElHi List is segmented into over 30 public school district demographic
categories and is used by publishers of textbooks, supplemental educational
materials and magazines and school supply distributors, among others. The ElHi
List is compiled from federal, state and local government files and the names of
school administrators and staff are developed through state directories,
mailings and telephone. CMG successfully completed the compilation of the ElHi
list in fiscal 1995. The Elementary and High School list consists of more than
2.8 million names of teachers and administrators associated with public
elementary through high schools. This database greatly enhances CMG's ability to
service its educational publishing clients and builds on CMG's reputation and
distinctive competence in the educational publishing industry.
List Management and Brokerage. The Company provides list management and list
brokerage to businesses that use direct marketing to promote their products. As
a list manager, the Company acts as the exclusive marketing agent for the
mailing lists of its list management clients. In conjunction with performing
list management services, the Company also provides list brokerage. This service
allows the Company to be a single source for virtually any brokered list
requested by a customer and provides the opportunity to generate additional
sales of the Company's other products.
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Database Services
CMG Direct Interactive.
CMG Direct Interactive's goal is to be the premier provider of direct,
interactive marketing environments, supplying innovative, world-class database
and direct marketing solutions to customers in a diverse range of businesses. In
all products and services, CMGDI's goal is to increase clients' ability to
identify and interact with their own customers on an individual basis. To
accomplish this task, the company draws on the CMG family's long history of
successful database direct marketing, and augments that experience with a
serious commitment to unlock the potential of bold new technologies.
Most businesses do not have the technology or expertise to build, maintain or
enhance their mailing lists or databases in-house. CMG Direct Interactive offers
these businesses a comprehensive service set including database design, program
specification, programming, testing, debugging and ongoing maintenance and
enhancement.
For clients that want to build a customer database, the Company provides
database analysis, design, software development, testing, debugging, and
maintenance. Once the database software is completed, the Company collects
customer and prospect data from its clients in a variety of forms for
standardization and inclusion into each client's customized database. This
involves working in depth with clients to discern their database maintenance,
fulfillment and reporting requirements, converting these requirements to
computer program specifications, and managing the project from start to finish.
Database management involves processing customer data, segmenting the
processed information to provide the level of detail and selectivity desired,
storing the information, and updating it to make it readily accessible for the
client's promotional, analytical and list rental activities. Lists may be
combined and enhanced with additional demographic information and other lists to
form databases which can be used as the basis of additional client promotions or
marketed to other list users.
If a client's mailing list is being combined with other lists or if a client
purchases several lists for a direct marketing campaign, the lists are often
combined into one master list. Typically, these lists will contain duplicate
names. The Company's merge/purge (duplicate elimination) software recognizes and
eliminates duplicate names, thereby preventing duplicate mailings and, thus,
lowering client mailing costs. In addition, identifying these multiple prospects
enables the direct-response client to recognize the duplicate name as a multi-
buyer. CMGDI also minimizes postal costs through postal pre-sorting, bar coding
and address standardization.
Direct Interactive also offers private database management as a service for
large volume mailers who mail to the same target lists regularly. A private
database is a targeted collection of mailing lists that is used repeatedly by a
restricted group of mailers. Ordinarily, this type of mailer would have to
contact a list broker, order lists and perform a number of processing functions
for each mailing. A private database maintained and updated by the Company
provides the mailer or group of mailers with a pool of mailing lists which have
proven effective for their mailing needs. Using the Company's services, the
mailer can perform research on the private database, select the names most
likely to respond and pay only for names used for targeting. Mailing costs are
reduced, lead times are shortened and the mailer gains more precise targeting
capability.
Private databases are part of Direct Interactive's overall strategy to give
the Company's clients greater ability to analyze, access, and eventually update
their customer and prospect databases. In addition to continual enhancements to
existing software, this strategy is being achieved in part by reengineering the
Company's proprietary database management software from a mainframe to a client
server environment. The Company believes that this transition will result in
more cost efficient and effective access to data for its clients and a
corresponding increase in the market for the Company's systems and services.
With a number of pathbreaking applications in development or the early stage
of beta testing, CMGDI enables marketers to rapidly assimilate, analyze, manage,
and apply vast quantities of information from disparate sources. In so doing,
the company helps marketers identify and fulfill customers' specific needs.
Very large-scale data warehouses are a vital cornerstone in the creation of
one-to-one marketing environments. CMGDI is developing creative products and
services to efficiently manage these immense repositories, helping customers
maximize access to critical information the data warehouses contain.
CMGDI is developing advanced software products and systems that will create
direct, interactive marketing environments (DIMEs). These DIMEs combine
techniques of very large scale database marketing with interactive data
collection and analysis to enable the complete direct marketing and sales cycle
including commerce on the Internet. This total environment makes possible one-
to-one marketing and ongoing, customer beneficial relationships.
Planned offerings to customers in fiscal 1997 include an advanced Data
Warehouse Manager, a graphical, object-based end-user
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data access and query tool; and an advanced interactive targeting framework.
SalesLink
Mutual funds receive thousands of requests daily for fund prospectuses,
marketing materials and other product literature. The volume of such requests,
and the increasing competitiveness of the mutual fund industry, place a premium
on filling requests rapidly and cost-effectively. The Company believes that
rather than building the costly and specialized computer and management systems
necessary to conduct cost effective literature fulfillment internally, mutual
funds have increasingly turned to outside providers of fulfillment, sales
lead/inquiry management and business-to-business telemarketing services. Most of
SalesLink's mutual fund clients previously performed these services in-house and
the Company has been informed by other mutual funds that they are analyzing the
relative costs and benefits of outsourcing these services rather than performing
them in-house. SalesLink contracts with mutual funds to take and fulfill orders
for fund literature and other materials, and to assist in the management of
sales leads and inquiries arising from this activity. In addition to mutual
funds, SalesLink also provides literature and product fulfillment to high
technology, bio technology and consumer electronics businesses.
SalesLink provides clients with three specialized direct marketing services:
(i) product and literature fulfillment; (ii) sales lead/inquiry management; and
(iii) inbound/outbound telemarketing. Most of SalesLink's revenue is derived
from clients that are mutual funds.
Product and Literature Fulfillment. On behalf of its fulfillment clients,
SalesLink takes orders for promotional literature and products from its client's
customers and prospects and "fulfills" the orders by assembling and shipping the
items requested. Depending on the client, the product or literature may be sent
directly to the end-user or to a broker or distributor. SalesLink's mutual fund
product and literature fulfillment services begin with the receipt of orders by
SalesLink's inbound telemarketing staff. Telemarketers answer calls by mutual
fund company name and key order requests into computers. Some clients
electronically transmit orders received by their own telemarketing staffs
directly into SalesLink's computers. Orders are then generated and presented to
the fulfillment production floor where fulfillment packages, including mailing
labels, are assembled and shipped. As necessary adjuncts to fulfillment
services, SalesLink provides product and literature inventory control and
warehousing. SalesLink also offers customer support and management reports
detailing orders, shipments, billings, back orders, and returns.
Sales Lead/Inquiry Management. In sales lead/inquiry management, SalesLink
provides prospects with information about a product or service that one of
SalesLink's clients is marketing. In response, SalesLink receives sales
inquiries and maintains central customer databases of the names and addresses of
each person inquiring about the product. SalesLink's clients use the databases
for market research, sales follow-up and management reports. Depending on the
criteria supplied by the client, SalesLink eliminates non-productive leads,
distributes sales inquiries to the client's sales force and ships fulfillment
packages containing the client's literature or products. After the disposition
of the inquiry, SalesLink is able to produce reports allowing the client to
evaluate the effectiveness of the marketing program which generated the inquiry
and evaluate the performance of the client's sales force in handling the
inquiry.
Telemarketing. SalesLink's telemarketing group offers comprehensive inbound
business-to-business telemarketing services to support its sales inquiry
management and order processing activities. Telemarketing services include lead
qualification, order processing fulfillment and marketing analysis. SalesLink
also offers outbound business telemarketing services that are tailored to an
individual client's needs. Outbound telemarketing programs can be used to update
a client's existing database, survey possible markets or prequalify sales leads.
New Products and Services. SalesLink has evolved a number of new products and
services to further its strategy to diversify into new vertical industry
markets. Most notably, the business delivered its new SL Flagship proprietary
software and the supporting data warehouse architecture. The system enables
customers and client service personnel to instantly access, manipulate and
analyze response data about customers prospects. With SL Flagship, customers
avoid the time and costs of extensive programming by making critical marketing
decisions using PC-based tools. Additionally, SalesLink has begun expanding its
capability of providing print-on-demand fulfillment services. SalesLink
further strengthened its management infrastructure over the past year and began
a new Total Quality Management initiative aimed at improving its already "best
in the industry" client service. SalesLink has begun cross-selling with CMGDI
and @Ventures companies. In fiscal 1997 SalesLink intends to integrate @Ventures
technologies into various information and end product delivery mechanisms to
enable customers to make increasingly efficient and effective sales and
marketing decisions.
Internet Investments
Lycos, Inc.
Lycos, CMG's publicly traded subsidiary offers one of the most popular catalog
and search tools on the World Wide Web (the
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Web). Lycos' underlying "spider" technology was designed to find, index, and
filter information on the Web, providing users with easy access to what's
available on the Internet.
In the beginning, the technology enabled users to explore the Web by topical,
word-specific searches. In September 1996, however, Lycos unveiled major
additions to its service. The catalog now can find any picture, sound, or topic
on the Web. In addition, Lycos has also expanded to become a full-fledged
source of editorial content. Services include Point Reviews, critical
assessments of web sites; City Guides, links to sites of regional interest; and
Sites by Subject, a directory of sites organized around 16 major categories and
hundreds of subcategories.
This ever-expanding suite of services has made Lycos site one of the most-
frequently visited on the Web and a significant advertising revenue generator.
Additionally, Lycos generates revenues through the licensing of its technology.
Lycos had 160 advertising customers at the end of fiscal 1996, including IBM,
Hilton, Ford, and Disney. Likewise, Lycos has attracted 24 licensee partners
worldwide including AT&T, Bertlesmann, and the Swedish Postal Service. Lycos
has also successfully partnered with other CMG companies. GeoCities offers
Lycos searches in each of its neighborhoods and Black Sun provides users a 3D
interface to Lycos' Point Reviews.
GeoCities
GeoCities builds and operates innovative, advertiser-supported special-
interest communities on the Web. As the most popular and largest collection of
free home pages on the web, GeoCities hosts 27 theme-based online communities
and has attracted more than 140,000 "homesteaders", or GeoCitizens.
Since launching its first four neighborhoods in June 1995, GeoCities has
steadily expanded its free services to foster a greater feeling of community.
Users receive a free megabyte of disk storage space, three levels of home page
editing capability, live help chat, visitor counters, guest books, free e-mail,
and mapping utilities. GeoCitizens can search their favorite neighborhood with
a custom-designed Lycos search engine, and soon will be able to create their own
3D home pages with Black Sun's VRML programs.
In communities with names like Silicon Valley, Wall Street, Napa Valley, and
TimesSquare, GeoCitizens create special-interest content and share their home
page thoughts and passions with like-minded friends and neighbors worldwide.
User traffic has increased to 54 million page views and 250 million hits per
month, according to GeoCities' Nielsen I/PRO audited report for August 1996. As
a result, the overall service is now consistently ranked among the 15 most-
visited sites on the Web.
Advertisers are attracted to GeoCities self-defined audiences, high traffic,
and innovative custom marketing programs. These programs provide brands with
high impact marketing opportunities within and well beyond GeoCities
neighborhoods. GeoCities' GeoRewards program is expected to generate even more
traffic as well as allowing advertisers access to GeoCitizens' home pages. And
a new online GeoStore will offer loyal GeoCitizens the opportunity to shop
online and will serve as an additional revenue source for the company.
Vicinity Corporation
Since its inception in August 1995, Vicinity Corporation has rapidly
established itself as a premier supplier of graphically-oriented ("GeoEnabled"),
content and services exclusively for the Web. Vicinity's GeoEnabling services
apply a spatial filter to business listings, classified ads, current events
listings and other data, to give end users a customizable, local view of
information.
Vicinity licenses its Your Town family of services to leading web search and
directory services, travel services, Yellow Pages providers, newspapers, and
other businesses, who brand the Vicinity services with their own company and
service names, their own graphical wrappers, and their own look and feel and
attitude. Included in the Your Town family are Vicinity interactive geographic
maps, business directories, proximity searching, driving directions, advertising
functionality, and other services.
Among Vicinity's current customers are such leading web sites as BellSouth,
GTE SuperPages, InfoSeek, Levi's Dockers, and Yahoo! as well as companies from
the CMG family - Lycos, Planet Direct, and GeoCities.
The Your town suite was launched in July 1996. The same month, Vicinity
announced its expansion into European markets. The company will offer high
quality, detailed, street-level interactive, web-based maps of most of
continental Europe in September 1996.
NetCarta Corporation
NetCarta makes web sites and intranets easier to manage and navigate, by
providing tools that improve Web quality and consistency. As web sites become
more numerous and complex, these tools will be critical to companies and
individuals interested in improving their productivity and online
communications.
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NetCarta Corporation is the leading provider of client/server-based tools that
simplify Web site management. NetCarta's software solutions enhance individual
online productivity and enable corporations to efficiently and cost-effectively
manage diverse web content.
The company's core technology is the NetCarta WebMap -- a compact database
that provides a visual guide to the structural relationships among all resources
in a web site. NetCarta WebMaps help webmasters analyze and manage their sites,
and help individuals find information on the Web more efficiently. Fiscal 1996
offerings to customers were:
* NetCarta WebMapper is a powerful site/server content management tool that
allows webmasters to clarify relationships among web objects, analyze and verify
links, and track site changes.
* CyberPilot Pro, released in April 1996, is a combination browser accelerator
and map maker that allows users to browse, create, and publish maps of any site
on the Web.
* CyberPilot, a low-cost viewing tool, enables users to view existing WebMaps.
Cyberpilot was developed as a cost-effective client complement to NetCarta
WebMapper for reading published maps of corporate intranet or Internet sites.
* The NetCarta WebMap Library, launched in July, is an expanding online library
of more than 25,000 NetCarta WebMaps of corporate, entertainment, education, and
government sites.
NetCarta has also developed and licensed its technology for product
development and partnering with original equipment manufactures (OEMs), who
incorporate the technology into their own products. OEM clients include
DocuMagix Corp., which recently released DocuMagic HotMap, a NetCarta WebMap
maker and viewing tool.
Within the CMG family, NetCarta technology has been incorporated in Ikonic's
Ringmaster web content coordination software, and NetCarta software is available
in GeoCities' online storefront. Lycos also offers users NetCarta WebMaps for
the majority of the content on its a2z Sites by Subject service.
Black Sun Interactive
Black Sun Interactive, with headquarters in San Francisco and Munich, develops
servers and authoring tools for use in three-dimensional web site environments.
Black Sun is the first company to offer multi-user interaction based on VRML
(virtual reality modeling language) programs. Now, it is leveraging its core
business expertise in extensible client/server architectures and distributed
databases to create the infrastructure for 3D environments that allow
individuals to meet, work, and play on the Web as naturally as they do in the
real world.
All Black Sun products are built on open industry programming standards (such
as VRML and Java), run on all major operating systems, and provide well-
documented plug-ins for maximum extensibility and integration.
Black Sun's fiscal 1996 product offerings were:
* CyberGate, a stand-alone multi-user VRML browser for visiting virtual worlds
and interacting with other people in those worlds.
* CyberHub Client, released for beta in September 1996, adds multi-user
functionality to the leading VRML browsers. It is available for Netscape's
Navigator 3.0 live 3D browser and Silicon Graphics' Cosmo Player.
* CyberHub, a high-performance multi-user interaction server that allows web
site operators to turn their sites into online 3D communities of any size.
* CyberSockets (in beta), is Black Sun's API (application plug-in) for
accessing the multi-user services of CyberHub. Based on VRML and Java, it
allows developers to add multi-user capabilities to existing applications and
games, and to customize product offerings for vertical markets such as
education, conferencing, and entertainment.
Also during fiscal 1996, Black Sun teamed with Lycos to release Point World,
the first large-scale multi-user VRML environment based on the popular web site
review service. In August 1996, Black Sun announced a strategic partnership
with GeoCities to bring VRML-based multi-user interaction to GeoCities' popular
web destinations.
Freemark Communications, Inc.
Freemark aims to provide the world's simplest e-mail service at no cost to
end-users. Freemark developed the first business model for advertiser-supported
Internet mail, and provides consumers with completely free e-mail service by
allowing national and local brand advertisers to sponsor personal mail delivery.
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Unlike the majority of online and Internet players whose businesses serve the
technically elite segment of the computing market, Freemark's service is aimed
at the roughly 50 million Americans who live in PC-equipped households but for
whom online use is daunting. The company also targets small businesses and
affinity organizations. Freemark's broad consumer appeal has enabled it to
attract national brand advertisers, including RJR Nabisco food products, The
Wall Street Journal and Citibank.
TeleT Communications
In September of 1996, CMG sold its equity interest in TeleT Communications to
Premiere Technologies in a stock and cash transaction. With TeleT, Premiere
establishes itself as a pioneer in leveraging the power of the Internet to
develop a product that links telephones and computers into one interchangable
business tool. Although TeleT is no longer a formal member of the CMG family of
companies, Planet Direct's Internet service offering will benefit from the
enhanced value of the combined services of Premiere and TeleT and joint
marketing and distribution programs will continue with NetCarta Corporation,
GeoCities and Lycos, Inc.
Ikonic Interactive
Ikonic provides site design and development services, consultation, and
products for companies that want to establish brand-building Web sites. With 11
years of experience designing intuitive interfaces for a range of interactive
media, Ikonic is a recognized leader in creating personalized, dynamic content.
In September 1996, Ikonic's Products Group released Ringmaster, the first web
site content coordination tool. Ringmaster enables editors, webmasters, and
contributors to coordinate web content submissions easily, within a single
application.
Ikonic's revenue base has shifted over the past few years, solidifying
Ikonic's position in the web community. By the fourth quarter of fiscal 1996,
77% of Ikonic's revenues were derived from the Internet. New service customers
included American Express, Microsoft, Virgin Records, and Pacific Bell.
Parable
In August 1996, CMG @Ventures invested in Parable, LLC. Parable is a start-up
software firm developing unique and unprecedented multimedia tools and
technology. Potential customers include entertainment, media, publishing and
software companies developing interactive titles for distribution on the
Internet, CD-ROM, and other digital delivery channels.
Planet Direct
In June, CMG announced the formation of Planet Direct, an Internet service
designed to draw on the strengths of the companies within the corporate CMG
family to create a comprehensive, new offering. Planet Direct plans to provide
Internet users a rich, deeply personalized experience, through a content model
organized around customers' personal interests and the places they live. The
goal is to create a global network of communities on the Web, each with its own
local content flavor.
Rather than becoming a "top-down" information provider, Planet Direct follows
a community-generated content model, giving users a true platform from which to
make themselves heard. It has been designed to elicit interesting and expansive
content, created in large part by members of the local communities it serves.
Marketed as "Where You Live On-Line", Planet Direct is intended to be a home
page in the actual and metaphoric senses of the word. It is the virtual barber
shop, or coffee house, or town hall.
In other words, Planet Direct will be a central meeting point where users will
congregate with fellow residents to share all manner of experiences. On subjects
from entertainment, to civic affairs, to personal finance, to sports, the
service will consist of vibrant interactive communities at the "X/Y"
intersection of personal interests and geography. This means localized content
that is appealing to users' interests, as well as specific to their locations.
To build the network, Planet Direct is partnering with Internet Service
Providers (ISPs) in domestic and international local markets. In each of these
markets, Planet Direct will be offered as a cobranded service of both CMG and
the respective local ISP. Cobranding the service with ISPs will accomplish a
number of goals. It helps Planet Direct leverage business and content
opportunities in local markets, via the ISPs' existing ties to their own
geographic regions. Additionally, compared to commercial online services, Planet
Direct's cost-of-acquisition for new customers will be minimal, because ISP
partners come to Planet Direct with existing client bases. For the ISPs, a
Planet Direct affiliation opens new advertising revenue streams and helps
differentiate them from competitors. This gives Planet Direct partners the
preemptive edge they need to acquire, retain, and expand their customer bases.
Planet Direct's development strategy exemplifies the synergies within the CMG
family. ADSmart and other Direct Interactive products will form the basis of
Planet Direct's advertising strategy. The personalized targeting ADSmart
technology will allow advertising through Planet Direct to be more responsive
than through traditional mass-market ads. And the involvement of ISPs
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greatly enhances Planet Direct's ability to acquire precise clickstream
information --the linchpin behavioral data that drives the entire Direct
Interactive strategy. Because advertisers can use it to pinpoint their audiences
with such accuracy, CMG believes this data will allow Planet Direct to sell
advertising at substantially higher-than-average rates.
On the content side, InfoMation's personalized Internet newspaper forms a
crucial segment of the Planet Direct service. So, too, does Lycos, with its
geographically organized City Guides and broader search capabilities. GeoCities
brings its vast experience providing personalized home pages to the Planet
Direct suite, and Parable's easy-to-use software will help Planet Direct users
create those home pages. Black Sun's three-dimensional chat and other VRML
offerings are also an exciting component of the Planet Direct model. And
although it is no longer owned by CMG, former affiliate TeleT (Premiere
Technologies) will also work closely with Planet Direct to provide advanced
telephony services.
InfoMation
CMG's personal electronic newspaper business was initiated in February 1996
when CMG acquired the exclusive perpetual license to sell BBN Corporation's
PINpaper technology. This new technology collects and organizes information
from the Web, from major news wires, and within corporate databases, delivering
it to end-users to their specification.
InfoMation will use CMG Direct Interactive's data warehouse and data access
and targeting tools to capture and analyze compelling amounts of clickstream
data. This data will be extremely useful for one-to-one target marketing
because it will be derived from sustained personal profile and preference data
obtained by monitoring user behavior. The product is thus positioned to
accumulate what every advertiser wants - demographic and psychographic profiles
of customers.
Further, InfoMation will be an integral part of the Planet Direct service,
will be distributed on Lycos and other web sites, and will be sold to
corporations wishing to manage information flow in corporate intranet
environments. This is expected to allow InfoMation to gain market share and
advertising revenue.
ADSmart
Web publishers are seeking to develop the means to sell, schedule, serve and
track the highly targeted advertising that is so critical to their
profitability. Advertising agencies are looking for information and results to
understand and measure the role web advertising should play in meeting their
clients' marketing goals. ADSmart is being developed to bridge the gap by
drawing on the combined targeting and tracking resources of CMG's core direct
marketing business and the web advertising expertise of CMG portfolio companies.
ADSmart expects to grow the Internet advertising market by helping agencies
and web sites better understand each other's needs, streamlining the advertising
buying process, and licensing its technology to individual web sites to manage
their own targeted ad sales and delivery. Lycos, GeoCities, Vicinity, NetCarta,
Planet Direct and InfoMation are charter members of ADSmart.net, a network of
web sites which agencies can evaluate and book online.
ADSmart's proprietary methodology enables direct mapping of audiences defined
by ad campaigns. The benefits are increased response rates -- due to higher ad
relevance to viewers, cost effectiveness for advertisers -- who spend less to
reach the same number of interested viewers, and improved agency productivity --
due to a centralized contact point and on-line booking of ads on ADSmart.net
sites.
Business Strategy
Each CMG business unit's mission is to become the predominant direct marketing
services provider within its respective market niche. The critical success
factors are: understanding, developing and applying information technology to
the Internet, interactive media markets, and data access and retrieval enabling
tools; narrowing market focus while consummating strategic alliances to
complement product and service offerings; investing in strategic Internet or
interactive media investments or acquisitions and , most importantly, a
continued understanding of customers' needs.
With respect to the businesses of CMG, the Company will seek to expand its
participation in the direct marketing products and services industry and
increase market share. Key elements of this strategy include:
Continue to enhance and expand the Company's products and services. The
Company has invested significant resources in new subsidiaries or investments
which seek to capitalize on opportunities surrounding the growth of the Internet
and the interactive marketing industry. The Company intends to continue to
pursue the growth and development of its technologies and services and continue
to introduce its products commercially. Additionally, the Company intends to
continue to evaluate new opportunities to further its investment in its direct
marketing strategy and also to seek out opportunities to realize significant
shareholder value
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through the sale of selected investments or technologies or
having separate subsidiaries sell a minority interest to outsiders.
Pursue Innovative Advertising Solutions. The Company is actively seeking to
develop innovative ways for advertisers to reach their target audiences through
the Internet effectively. The Company designs and offers customized packages
which include the ability to change advertisements quickly and frequently, to
link a specific search term to an advertisement, to conduct advertising test
campaigns with rapid result delivery and to track daily usage statistics. The
Company is currently developing software that will provide it with the ability
to target ads based on demographics and usage patterns.
Augment database offerings. The Company has expended significant resources to
develop the most comprehensive and accurate databases of their kind available to
publishers. The Company believes that its College List database is the dominant
list of its kind and that the Information Buyers List database is the only list
of its kind, complemented by the ElHi list database, which was successfully
compiled in fiscal 1995 and is positioned to be cross sold to gain market share.
The Company intends to maintain or improve its market position by expanding the
number, size, nature, comprehensiveness and segmentation of its database
offerings.
Maintain focus on marketers of information-based products. Publishers are
among the largest users of direct marketing services and constitute the
Company's largest client base. As society becomes more information driven, the
amount and value of business and educational information sold by publishers will
increase, as will the value of the effective direct marketing of this
information. The Company will continue to focus on the publishing industry to
participate in this growth.
Expand technological capabilities and computer services. The Company believes
that technological innovation will continue to increase the effectiveness of
direct marketing. Accordingly, the Company is increasing its technological
capabilities through the enhancement of existing software and the reengineering
of the Company's proprietary database software. This transition will give the
Company's clients greater ability to access, analyze and eventually update their
own databases through the use of the Company's computer services and software.
Cross-sell products and services. The Company is involved in many aspects of
the direct marketing sales cycle. The Company has experienced initial success in
increasing the number of products and services purchased by its existing clients
and intends to further this expansion.
Sales and Marketing
The Company markets its products and services through a marketing staff using
both telemarketing and direct sales. The Company maintains separate marketing
staffs for each product and service area, enabling the marketing personnel to
develop strong customer relationships and expertise in their respective areas.
The Company advertises its products and services through direct mail, space
advertising, directory listings, trade shows and Company sponsored user groups.
In addition, the Company's subsidiary, Lycos, has complemented the activities of
its direct sales force by retaining NetRep, a New York based Internet
advertising sales agency, to serve as a sales representative on a commission
basis.
The Company conducts numerous mailings of list catalogs, flyers, newsletters
and other product information throughout the year to primarily book, magazine,
journal, newsletter and software publishers and resellers, seminar companies,
professional associations, business supply catalogers, consumer electronic, high
technology and financial service organizations.
The Company also attends numerous trade shows in the book, library, mutual
fund, direct marketing and high technology markets, while further supplementing
its sales efforts with space advertising and product and services listings in
appropriate directories. In addition, the Company sponsors user group meetings
for its mutual fund clients and major list participants in the Information
Buyers List database, where new products and services are highlighted.
Competition
CMG Information Services, Inc. competes on the basis of the accuracy, size,
and comprehensiveness of its principal databases: the College List and the
Information Buyers List. The Company believes that the College List is the
dominant database of its kind and has only one competitor, while the ElHi list
is a new product offering that will compete with the same competitor as the
College List. The Information Buyers List is the only list of its kind. Direct
Interactive's products and services compete with numerous other service bureaus
and compete on the basis of their effectiveness in processing customer and
prospect list databases for publishers. The Company believes that no other
service bureau concentrates on the list processing needs of the publishing
industry to the same extent as the Company.
CMG's Internet investments compete in the electronic technology arena which is
comprised of numerous small and large companies providing different new
technologies including online, CD-Rom, interactive television, and screen based
telephones, all with varying applications. The market for Internet products and
services is highly competitive. In addition, the Company expects
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the market for Internet advertising, to the extent it develops, to be intensely
competitive. Although the Company believes that the diverse segments of the
Internet market will provide opportunities for more than one supplier of
products and services similar to those of the Company, it is possible that a
single supplier may dominate one or more market segments. The Company believes
the prinicpal competitive factors in this market are name recognition,
performance, ease of use, variety of value-added services, functionality and
features and quality of support. CMG's products and services are being developed
specifically for direct marketing applications, on the Internet or through
interactive media. Competitors would include a wide variety of companies and
organizations, including Internet software, content, service and technology
companies, telecommunication companies, cable companies and equipment/technology
suppliers. In the future, the Company may encounter competition from providers
of Web browser software and other Internet products and services that
incorporate competing features into their offerings. Many of the Company's
existing competitors, as well as a number of potential new competitors, have
significantly greater financial, technical and marketing resources than the
Company.
The Company may also be affected by competition from licensees of its products
and technology. There can be no assurance that the Company's competitors will
not develop Internet products and services that are superior to those of the
Company or that achieve greater market acceptance than the Company's offerings.
Moreover, a number of the Company's current advertising customers, licensees and
partners have also established relationships with certain of the Company's
competitors and future advertising customers, licensees and partners may
establish similar relationships. The Company may also compete with online
services and other Web site operators as well as traditional offline media such
as print and television for a share of advertisers' total advertising budgets.
There can be no assurance that the Company will be able to compete successfully
against its current or future competitors or that competition will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
SalesLink has two prominent competitors, Harte-Hanks Direct Marketing, a
division of Harte-Hanks Communications, Inc. and Output Technologies, Inc., for
the mutual fund literature fulfillment component of its business, and also
competes with the internal fulfillment operations of the mutual funds
themselves. SalesLink competes on the basis of pricing, geographic proximity to
its clients and the speed and accuracy with which orders are processed. There
are many businesses that compete with SalesLink's other services.
Research and Development
The Company develops and markets a variety of Internet related products and
services, as well as a number of database software technologies. These
industries are characterized by rapid technological development. The Company
believes that its future success will depend in large part on its ability to
continue to enhance its existing products and services and to develop other
products and services which complement existing ones. In order to respond to
rapidly changing competitive and technological conditions, the Company expects
to continue to incur significant research and development expenses during the
initial development phase of new products and services as well as on an on-going
basis.
During fiscal year 1996, the Company expended $6,971,000, or 24.5% of net
sales, on research and development. In addition, during fiscal year 1996, the
Company recorded $2,691,000 of in-process research and development expenses in
connection with acquisitions of subsidiaries and investments in affiliates.
Intellectual Property and Proprietary Rights
The Company regards its software technologies, databases and database
management software as proprietary. CMG's lists are sold under terms and
conditions which permit the Company's clients to use the list for a single
mailing only and prohibit the further use or resale of the lists or the names
included therein. The Company depends on trade secrets for protection of its
database management software. It has entered into confidentiality agreements
with its management and key employees with respect to this software, and limits
access to, and distribution of this, and other proprietary information.
Employees
As of July 31, 1996, the Company employed a total of 505 persons on a full-
time basis. In addition, depending on client demand, SalesLink utilizes manpower
agencies to contract between 50 and 75 persons on a temporary, part-time basis.
None of the Company's employees are represented by a labor union. The Company
believes that its relations with its employees are good.
Segment Information
Segment information is set forth in Note 3 of the Notes to Consolidated
Financial Statements referred to in Item 8(a) below and incorporated herein by
reference.
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Significant Customers
Significant customers information is set forth in Note 3 of the Notes to
Consolidated Financial Statements referred to in Item 8(a) below and
incorporated herein by reference.
ITEM 2. - PROPERTIES
Facilities
The location and general character of the Company's principal properties by
industry segment as of July 31, 1996 are as follows:
Lists and Database Services and Corporate Headquarters
The Company leases approximately 34,000 square feet of executive office,
engineering, sales and operations space in Wilmington, Massachusetts, under a
lease which expires in 2000.
Subsequent to July 31, 1996, the Company entered into a lease for
approximately 30,000 square feet of executive office, engineering, sales and
operations space in Andover, Massachusetts, which expires in 2002.
Fulfillment Services
The Company's operations are conducted from an approximately 175,000 square
foot leased facility in Boston, Massachusetts. The lease for this facility
expires in 1998. Additionally, the Company leases an approximately 51,000
square foot operating facility in Bedford Park, Illinois under a lease which
expires in 1999.
Investment and Development
The Company leases approximately 40,000 square feet of office, engineering,
sales and operations space in Cambridge, Massachusetts, Marlboro, Massachusetts,
New York, New York, Pittsburgh, Pennsylvania, Beverly Hills, California, Menlo
Park, California, San Francisco, California, Scotts Valley, California and
Munich, Germany under leases which expire from 1996 to 2000. This industry
segment also shares a portion of the Company's Wilmington, Massachusetts
facility described above.
Computer Operations
The Company's computer systems are primarily maintained at its Wilmington,
Massachusetts, Boston, Massachusetts, and Pittsburgh, Pennsylvania locations.
The Company's operations are dependent in part upon its ability to protect its
operating systems against physical damage from fire, floods, earthquakes, power
loss, telecommunications failures, break-ins and similar events. The Company
does not presently have a disaster recovery plan. Despite the implementation of
network security measures by the Company, its servers are also vulnerable to
computer viruses, break-ins and similar disruptive problems. The occurrence of
any of these events could result in interruptions, delays or cessations in
service to users of the Company's products and services which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
ITEM 3. - LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market information is set forth in Note 16 of the Notes to Consolidated
Financial Statements referred to in Item 8(a) below and incorporated herein by
reference.
(b) On October 22, 1996, there were 133 holders of record of common stock.
(c) The Company has never paid cash dividends on its common stock, and the
Company has no intention to pay cash dividends in the forseeable future.
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ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth on page 20 of the 1996 Annual Report to Shareholders
is incorporated herein by reference and is filed herewith as Exhibit 13.1.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth on pages 21-27 of the 1996 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.2.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following consolidated financial statements of the Company and
independent auditors' report set forth on pages 28-42 of the 1996 Annual Report
to Shareholders are incorporated herein by reference and are filed herewith as
Exhibit 13.3:
- Consolidated Balance Sheets as of July 31, 1996 and 1995
- Consolidated Statements of Operations for the three years ended July 31,
1996
- Consolidated Statements of Stockholders' Equity for the three years ended
July 31, 1996
- Consolidated Statements of Cash Flows for the three years ended July 31,
1996
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
(b) Selected Quarterly Financial Data (unaudited) is set forth in Note 16 of
the Notes to Consolidated Financial Statements referred to in Item 8 (a) above
and incorporated herein by reference.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the portions of the Definitive Proxy Statement
entitled "Proposal 1--Election of Directors" and "Additional Information."
ITEM 11. - EXECUTIVE COMPENSATION
Incorporated by reference from the portion of the Definitive Proxy Statement
entitled "Executive Compensation."
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the portion of the Definitive Proxy Statement
entitled "Security Ownership by Management and Principal Stockholders."
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Financial Statements, Financial Statement Schedules, and Exhibits
1. Financial Statements. The financial statements as set forth under Item
--------------------
8 of this report on Form 10-K are incorporated herein by reference.
2. Financial Statement Schedules. Financial Statement Schedule II of the
------------------------------
Company and the corresponding Report of Independent Auditors on
Financial Statement Schedule are included in this report.
All other financial statement schedules have been ommitted since they
are either not required, not applicable, or the information is
otherwise included.
3. Exhibits. Pursuant to Rule 12b-32 and General Instruction G, the
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following Exhibits are required to be filed with this Report by Item
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14 above and are incorporated by reference by the reference source
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cited in the Exhibit Index below or are filed herewith.
On November 10, 1993, the Company filed with the SEC a Registration Statement
on Form S-1, as amended by Amendment No. 1 filed with the SEC on December 14,
1993, Amendment No. 2 filed with the SEC on January 10, 1994, Amendment No. 3
filed with the SEC on January 19, 1994, Amendment No. 4 filed with the SEC on
January 24, 1994 and Post Effective Amendment No. 1 filed with the SEC on
January 25, 1994.
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit No. Title Method of Filing
- ----------- ----- ----------------
<S> <C> <C>
3 (i) (1) Amendment to the Restated Certificate of Incorporated by reference to Exhibit 3 (i) (1)
Incorporation to the Registrant's quarterly report on Form 10-Q
for the quarter ended April 30, 1996.
3 (i) (2) Restated Certificate of Incorporation Incorporated by reference from Registration
Statement Form S-1 as amended, filed on
November 10, 1993
3 (ii) Restated By-Laws Incorporated by reference from Registration
Statement Form S-1, as amended, filed on
November 10, 1993
4. Specimen Stock Certificate representing Incorporated by reference from Registration
the Common Stock Statement Form S-1, as amended, filed on
November 10, 1993
10.01 Form of Indemnification Agreement Incorporated by reference from Registration
between the Registrant and its Statement Form S-1, as amended, filed on
Directors November 10, 1993
10.04 Lease, dated November 21, 1991, Incorporated by reference from Registration
Between the Registrant and Statement Form S-1, as amended, filed on
Ballardvale Park Associates II November 10, 1993
Limited Partnership
10.05 Lease Agreement, dated September 2, 1992, Incorporated by reference from Registration
between SalesLink Corporation, the Statement Form S-1, as amended, filed on
subsidiary of the Registrant, and November 10, 1993
American National Bank & Trust Company of
Chicago as Trustee under Trust No. 1001971-01
</TABLE>
16
--
<PAGE>
<TABLE>
<S> <C> <C>
10.06 Amendment to Lease, dated May 10, 1992, Incorporated by reference from Registration
between SalesLink Corporation, the subsidiary Statement Form S-1, as amended, filed on
of the Registrant, and Drydock Associates November 10, 1993
Limited Partnership
10.07 1986 Stock Option Plan, as amended Incorporated by reference from Registration
Statement Form S-1, as amended, filed on
November 10, 1993
10.08 CMG Stock and Profit-Sharing Plan and Trust Incorporated by reference from Registration
Statement Form S-1, as amended, filed on
November 10, 1993
10.09 CMG/SalesLink Savings and Retirement Incorporated by reference from Registration
401(k) Plan Statement Form S-1, as amended, filed on
November 10, 1993
10.10 Employment Agreement, dated August 1, Incorporated by reference from Registration
1993, between the Registrant and Statement Form S-1, as amended, filed on
David S. Wetherell November 10, 1993
10.11 Incentive Compensation Agreement dated Incorporated by reference from Registration
August 1, 1990, between the Registrant Statement Form S-1, as amended, filed on
and Richard Torre November 10, 1993
10.12 Fulfillment and Inventory Management Incorporated by reference from Registration
Agreement between SalesLink Corporation, Statement Form S-1, as amended, filed on
the subsidiary of the Registrant, and November 10, 1993
MFS Financial Services, Inc.
10.13 Fulfillment and Mailing Agreement, Incorporated by reference from Registration
dated January 1, 1993, between SalesLink Statement Form S-1, as amended, filed on
Corporation, the subsidiary of the November 10, 1993
Registrant, and Kemper Financial
Services, Inc.
10.14 Agreement, dated January 15, 1991, Incorporated by reference from Registration
between ListLab, a division of the Statement Form S-1, as amended, filed on
Registrant, and Prentice-Hall, November 10, 1993
Business and Professional
Publishing Division
10.16 Account Indebtedness Letter Agreement, Incorporated by reference from Registration
dated as of November 9, 1993, between Statement Form S-1, as amended,
the Registrant and David S. Wetherell filed on November 10, 1993
10.17 Amendment to Account Indebtedness Letter Incorporated by reference from Registration
Agreement, dated as of January 10, 1994, Statement Form S-1, as amended, filed on
between the Registrant and David S. November 10, 1993
Wetherell
10.18 Amendment No. 1 to the Employment Incorporated by reference from Registration
Agreement, dated January 20, 1994, Statement Form S-1, as amended, filed on
between the Registrant and David S. November 10, 1993
Wetherell
10.20 Amendment No. 2 to Account Indebtedness Incorporated by reference from Registration
Letter Agreement, dated January 25, 1994 Statement Form S-1, as amended, filed on
between the Registrant and David S. November 10, 1993
Wetherell
10.22 Loan Agreement dated as of July 31, 1995, Incorporated by reference to Exhibit 10.22 to
between the Registrant, SalesLink the Registrant's annual report on Form 10-K
Corporation, CMG Securities Corp. and for the year ended July 31, 1995.
United States Trust Company
</TABLE>
17
--
<PAGE>
<TABLE>
<S> <C> <C>
10.24 Extension Agreement dated August 4, 1995 Incorporated by reference to Exhibit 10.24 to
to Fulfillment and Mailing Agreement dated the Registrant's annual report on Form 10-K for
January 1, 1993, between SalesLink Corporation the year ended July 31, 1995.
and Kemper Financial Services, Inc.
10.25 Fulfillment Master Purchase Agreement dated Incorporated by reference to Exhibit 10.25 to
March 28, 1994, between SalesLink Corporation the Registrant's annual report on Form 10-K
and Fidelity Investments Institutional Service for the year ended July 31, 1995.
Company, Inc.
10.26 Literature Fulfillment Agreement dated Incorporated by reference to Exhibit 10.26 to
August 1, 1995, between SalesLink Corporation the Registrant's annual report on Form 10-K
and Vista Capital Management for the year ended July 31, 1995.
10.27 License Agreement dated June 16, 1995, as Incorporated by reference to Exhibit 10.27 to
amended, between the Registrant, CMG@Ventures, the Registrant's annual report on Form 10-K
L.P., Carnegie Mellon University, and Lycos, Inc. for the year ended July 31, 1995.
10.28 Agreement and Plan of Reorganization dated Incorporated by reference from Report on
as of November 8, 1994, as amended, among the Form 8-K as filed with the commission
Registrant, BookLink Technologies, Inc., 01/01/95 (File No. 0-22846)
America Online, Inc. and BLT Acquisition
Corporation
10.29 1995 Employee Stock Purchase Plan Incorporated by reference to Exhibit 10.29 to
the Registrant's annual report on Form 10-K for
the year ended July 31, 1995.
10.30 1986 Stock Option Plan, as amended Incorporated by reference to Exhibit 10.30 to
the Registrant's annual report on Form 10-K
for the year ended July 31, 1995.
10.31 Termination Amendment as of July 31, 1994 Incorporated by reference to Exhibit 10.31 to
terminating CMG Stock and Profit-Sharing the Registrant's annual report on Form 10-K
Plan and Trust for the year ended July 31, 1995.
10.32 Partnership Agreement by and among CMG- Incorporated by reference to Exhibit 10.32 to
@Ventures, Inc., CMG@Ventures Capital the Registrant's quarterly report on Form 10-Q
Corp., the Registrant and various Profit for the quarter ended January 31, 1996.
Partners
10.33 Master Agreement dated as of February 13, Incorporated by reference to Exhibit 10.33 to
1996 between BBN Corporation and the the Registrant's quarterly report on Form 10-Q
Registrant. for the quarter ended January 31, 1996.
10.34 1995 Stock Option Plan for Non-Employee Incorporated by reference to Exhibit 10.34 to
Directors the Registrant's quarterly report on Form 10-Q
for the quarter ended January 31, 1996.
10.35 Amendments dated February 9, 1996 and Incorporated by reference to Exhibit 10.35 to
March 4, 1996 to License Agreement dated the Registrant's quarterly report on Form 10-Q
June 16, 1995, between the Registrant, CMG- for the quarter ended January 31, 1996.
@Ventures L.P., Carnegie Mellon University
and Lycos, Inc.
11 Statement of Computation of Earnings Per Share Filed herewith
</TABLE>
18
--
<PAGE>
<TABLE>
<S> <C> <C>
13.1 Selected Consolidated Financial Data Filed herewith
13.2 Management's Discussion and Analysis Filed herewith
of Financial Condition and Results of
Operations
13.3 Consolidated Financial Statements, Filed herewith
Supplementary Data, and Independent
Auditors' Report
22 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Auditors Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter
ended July 31, 1996.
19
--
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
CMG Information Services, Inc.:
Under date of September 16, 1996, we reported on the Consolidated Balance
Sheets of CMG Information Services, Inc. as of July 31, 1996 and 1995, and the
related Consolidated Statements of Operations, Stockholders' Equity, and Cash
Flows for each of the years in the three year period ended July 31, 1996, which
are included in the Form 10-K for the year ended July 31, 1996. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule of Valuation and
Qualifying Accounts in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 16, 1996
20
--
<PAGE>
CMG INFORMATION SERVICES, INC.
SCHEDULE II
Valuation and Qualifying Accounts
For the years ended July 31, 1994, 1995, 1996
<TABLE>
<CAPTION>
Additions Deductions
Charged to (Charged
Balance at Costs and against
Accounts Receivable, Allowance for Doubtful beginning of Expenses (Bad Accounts Balance at end
Accounts period Debt Expense) Receivable) of period
- -------- ------ ------------- ----------- ---------
<S> <C> <C> <C> <C>
1994 $ 96,000 $ 96,000 $ 55,000 $137,000
1995 $137,000 $ 60,000 $ 49,000 $148,000
1996 $148,000 $294,000 $ -- $442,000
</TABLE>
21
--
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CMG INFORMATION SERVICES, INC.
(Registrant)
Date: October 28, 1996
By: /s/ David S. Wetherell
------------------------------
David S. Wetherell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and on the date set forth above.
Signature Title
- ---------- -----
/s/ David S. Wetherell
- ------------------------------
David S. Wetherell Chairman of the Board, President, Chief
Executive Officer and Director (Principal
Executive Officer)
/s/ Andrew J. Hajducky III
- ------------------------------
Andrew J. Hajducky III, CPA Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
/s/ Gregory M. Avis
- ------------------------------
Gregory M. Avis Director
/s/ John A. McMullen
- ------------------------------
John A. McMullen Director
22
--
<PAGE>
Exhibit 11
CMG INFORMATION SERVICES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended July 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary:
Income from continuing
operations $ 14,322 $ 4,762 $ 1,960
Discontinued operations,
net of income taxes:
Loss from operations of
BookLink Technologies,
Inc. -- (690) (159)
Gain on disposal of
BookLink Technologies,
Inc. -- 24,143 --
--------- --------- --------
Net Income $ 14,322 $ 28,215 $ 1,801
========= ========= ========
Weighted average common
and common equivalent
shares outstanding:
Shares outstanding at the
beginning of the year 8,839 8,767 4,086
Conversion of 250 shares
of Series A Convertible
Preferred Stock -- -- 1,926
Weighted average shares
issued during the year 165 18 1,411
Weighted average common
stock equivalents 678 606 369
--------- --------- --------
Weighted average common
and common equivalent
shares outstanding 9,682 9,391 7,792
========= ========= ========
Income from continuing
operations $ 1.48 $ 0.51 $ 0.25
Discontinued operations,
net of income taxes:
Loss from operations of
BookLink Technologies,
Inc. -- (0.07) (0.02)
Gain on disposal of
BookLink Technologies,
Inc. -- 2.56 --
--------- --------- --------
Primary net income per
share $ 1.48 $ 3.00 $ 0.23
========= ========= ========
Fully diluted:
Income from continuing
operations $ 14,322 $ 4,762 $ 1,960
Discontinued operations,
net of income taxes:
Loss from operations of
BookLink Technologies,
Inc. -- (690) (159)
Gain on disposal of
BookLink Technologies,
Inc. -- 24,143 --
--------- --------- --------
Net Income $ 14,322 $ 28,215 $ 1,801
========= ========= ========
Weighted average common
and common equivalent
shares outstanding:
Shares outstanding at the
beginning of the year 8,839 8,767 4,086
Conversion of 250 shares
of Series A Convertible
Preferred Stock -- -- 1,926
Weighted average shares
issued during the
year 165 18 1,411
Weighted average common
stock equivalents 894 959 378
--------- --------- --------
Weighted average common
and common equivalent
shares outstanding 9,898 9,744 7,801
========= ========= ========
Income from continuing
operations per share $ 1.45 $ 0.49 $ 0.25
Discontinued operations,
net of income taxes:
Loss from operations of
BookLink Technologies,
Inc. -- (0.07) (0.02)
Gain on disposal of
BookLink Technologies,
Inc. -- 2.48 --
---------- ---------- ---------
Fully diluted net income
per share $ 1.45 $ 2.90 $ 0.23
========== ========== =========
</TABLE>
All share information contained in the per share calculations has been adjusted
to reflect 2-for-1, 3-for-2 and 2.6-for-1 common stock splits effected as stock
dividends on February 2, 1996, March 17, 1995 and November 9, 1993,
respectively.
23
--
<PAGE>
Exhibit 13.1
- ----------------------------------------- ----
selected consolidated financial data 20
- ----------------------------------------- ----
Selected Consolidated Financial Data - The following table sets forth selected
consolidated financial information of the company for the five years in the
period ended July 31, 1996. This selected financial information should be read
in conjunction with the company's Consolidated Financial Statements and related
Notes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Years Ended July 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales $ 28,485 $ 22,293 $ 19,388 $ 16,548 $ 13,827
Cost of sales 19,437 13,014 11,329 10,028 9,025
Research and development expenses 6,971 -- -- -- --
In-process research and development expenses 2,691 -- -- -- --
Selling, general and administrative expenses 19,960 6,387 4,792 4,225 3,773
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (20,574) 2,892 3,267 2,295 1,029
Interest income (expenses), net 2,691 225 (96) (323) (383)
Gain on sale of available-for-sale securities 30,049 4,781 -- -- --
Gain on issuance of stock by subsidiary 19,575 -- -- -- --
Other income (expense), net (746) (292) -- (139) 18
Income tax expense (16,673) (2,844) (1,211) (627) (279)
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 14,322 4,762 1,960 1,206 385
Gain from discontinued operations -- 23,453 (159) -- --
Cumulative effect of change in method of
accounting for income taxes -- -- -- -- 463
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 14,322 $ 28,215 $ 1,801 $ 1,206 $ 848
- ------------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share:
Income from continuing operations before
cumulative effect of change
in method of accounting for income taxes $ 1.45 $ 0.49 $ 0.25 $ 0.19 $ 0.06
Discontinued operations -- 2.41 (0.02) -- --
Cumulative effect of change in accounting
principle -- -- -- -- 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.45 $ 2.90 $ 0.23 $ 0.19 $ 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-fully
diluted 9,898 9,744 7,801 6,310 6,226
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $ 72,009 $ 47,729 $ 5,925 $ (1,441) $ (2,075)
Total assets 109,503 80,486 12,740 7,260 6,835
Long-term obligations 555 508 165 931 1,425
Redeemable convertible preferred stock -- -- -- 250 250
Stockholders' equity (deficit) 53,992 55,490 8,867 174 (1,015)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 13.2
- ----------------------------------------------
management's discussion & analysis of 21
financial condition & results of operations
- ----------------------------------------------
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below in "Risk
Factors that May Affect Future Results", as well as those discussed in this
section and elsewhere in this report.
Overview
In 1986, CMG Information Services, Inc. was formed through the acquisition of
College Marketing Group, Inc. which had been in operation since 1968. Since its
origins, the Company has expanded the breadth and depth of its product and
service offerings to the direct marketing industry. The Company completed and
introduced the College List database in 1973, and diversified its mailing list
product offerings in 1982 through the introduction of the Information Buyers
List database. In 1992, the Company introduced its Elementary/High School List
database. In the course of creating and developing these databases and lists,
the Company also developed expertise in servicing and managing customer and
prospect lists compiled by its clients, leading to the establishment of the
Company's ListLab and ListLine services in 1987 and 1989, respectively. In 1989,
the Company also completed the acquisition of the business of SalesLink
Corporation (SalesLink), which provides "fulfillment services" including sales
lead/inquiry management, product and literature fulfillment, and business-to-
business telemarketing services.
In February of 1994, the Company formed a new subsidiary, BookLink Technologies,
Inc. (BookLink), which developed InternetWorks, a PC-based viewer/browser for
the Internet. In December 1994, the Company sold all outstanding stock of
BookLink to America Online (AMER) for 1,420,000 shares of AMER common stock.
After selling its AMER stock, the Company realized a pretax gain on the
transaction in excess of $70 million.
In February 1995, the Company formed its Internet investment and development
arm, CMG @Ventures L.P., to provide intellectual and financial capital to
companies seeking to further the commercialization of the Internet and other
interactive media through the development and application of information-based
direct marketing products and services. The Company owns 100% of the capital
and is entitled to 77.5% of the net capital gains of CMG @Ventures, L.P. During
fiscal year 1995, the Company, (through CMG @Ventures) acquired, formed or
invested in four new companies. Two new consolidated subsidiaries, Lycos, Inc.
(Lycos), an Internet search and guide company, and NetCarta Corporation
(NetCarta), a developer of Internet Web navigation and content management tools,
were acquired and two minority investments were made including Freemark
Communications, Inc. (Freemark) an innovator in the development of advertising
sponsored e-mail services that are free to consumers, and Ikonic Inc., a
developer of web sites and interactive media. In fiscal year 1996, Lycos
successfully completed an initial public offering of 3,135,000 shares of its
common stock, raising net proceeds to Lycos of $46 million.
The Company continued its growth and development in fiscal year 1996 with the
acquisition, formation or investment in eight new companies. CMG @Ventures added
four new investments in companies, including Black Sun Interactive, Inc. (Black
Sun), a developer of three dimensional interactive software, GeoCities, a
builder and operator of special-interest online communities, Vicinity
Corporation (Vicinity), a provider of geographically oriented content and
services for the World Wide Web, and TeleT Communications (TeleT), a marketer of
products which allow direct telephone-to-Internet access for adding or editing
Web pages, and also enable users to communicate in their own voices to other Web
users. CMG @Ventures' investment in TeleT was made in April 1996 and totalled
$750,000. In September 1996, subsequent to fiscal 1996 year end, CMG @Ventures
sold its equity investment in TeleT to Premiere Technologies, Inc. receiving
cash and Premiere Technologies, Inc. common stock with a total value of
approximately $8,250,000 at the date of closing. Also, subsequent to fiscal 1996
year end, CMG @Ventures, acquired a minority investment interest in Parable LLC
(Parable), a start-up software firm developing multimedia tools and technology.
In August 1995, the Company formed a new subsidiary, CMG Direct Interactive,
Inc. (CMGDI) from the Company's former ListLab division. In addition to the
Company's traditional list management services, CMGDI is rapidly evolving into a
database and Internet systems company, focusing on direct marketing solutions.
As a result of this evolution, the Company's "lists and list services" segment
is now referred to as the "lists and database services" segment and includes the
operating results of this subsidiary.
Also during fiscal 1996, the Company formed three new wholly owned subsidiaries,
ADSmart Corporation (ADSmart), InfoMation Publishing Corporation (InfoMation)
and Planet Direct Corporation (Planet Direct). ADSmart was formed to capitalize
on Internet advertising opportunities, and InfoMation will organize and deliver
news feeds, web content and internal information to customers via environments
such as the Internet. Planet Direct was formed to combine and leverage the
Company's Internet technologies to provide a content based product for Internet
service providers.
<PAGE>
- -------------------------------------------------
management's discussion & analysis of financial 22
condition & results of operations (cont'd.) --
23
- -------------------------------------------------
The Company has adopted a strategy of seeking opportunities to realize
significant gains through the selective sale of investments or having separate
subsidiaries sell minority interests to outside investors. The Company believes
that this strategy provides the ability to significantly increase shareholder
value as well as provide capital to support the growth in the Company's
subsidiaries and investments. Gains from such transactions have been
substantial in recent years. The size and timing of these transactions are
dependent on market and other conditions that are beyond the Company's control.
Accordingly, there can be no assurance that the Company will be able to generate
gains from such transactions in the future.
In fiscal 1997, the Company will continue to develop and refine the products and
services of its businesses, with the goal of significantly increasing revenue
as new products are commercially introduced.
Discontinued Operations of SalesLink Subsequently Retained
During the second quarter of fiscal 1996, the Company decided to retain its
subsidiary SalesLink as part of the Company's continuing operations. SalesLink
was identified for disposition during the fourth quarter of fiscal 1995 and had
been accounted for as a discontinued operation from that time until the second
quarter of fiscal 1996. The decision was made to continue to operate SalesLink
because of its potential synergies with the Company's newly formed subsidiary,
CMGDI. Accordingly, the operating results of SalesLink are now included in
continuing operations, classified as the Company's fulfillment services segment,
and fiscal year 1995 and 1994 amounts have been reclassified to present
SalesLink within continuing operations in the accompanying consolidated
financial statements.
During fiscal years 1996, 1995 and 1994 SalesLink generated sales of
$12,070,000, $11,086,000 and $8,900,000, respectively, and operating income of
$1,566,000, $1,755,000 and $1,425,000, respectively. The total assets and
liabilities of SalesLink were $4,314,000 and $1,211,000, respectively, as of
July 31, 1995.
Results of Operations
The following table sets forth, for the years indicated, certain items from the
Company's Consolidated Statements of Operations expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 68 58 59
Research and development expenses 24 -- --
In-process research and development expenses 9 -- --
Selling, general and administrative expenses 71 29 25
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (72) 13 16
Interest income, net 9 1 --
Gain on sale of available-for-sale securities 105 21 --
Gain on issuance of stock by subsidiary 69 -- --
Equity in losses of affiliates (10) (1) --
Minority interest 8 -- --
Income tax expense (59) (13) (6)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 50% 21% 10%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's operations have been classified into three business segments (i)
lists and database services, (ii) fulfillment services, and (iii) investment and
development. (See note 3 of Notes to Consolidated Financial Statements.)
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
Net sales increased $6,192,000, or 27.8%, to $28,485,000 in 1996 from
$22,293,000 in 1995. The increase was primarily attributable to a sales
increase of $5,660,000 from the Company's investment and development segment
which was formed during the third quarter of fiscal 1995 and includes current
year sales of $5,257,000 from Lycos, Inc. Additionally, fulfillment services
segment sales increased $984,000 reflecting several new hi-tech and healthcare
customers, and lists and database services segment sales declined $452,000 due
to consolidation in the educational publishing industry and curtailed direct
mail activity due to high paper and postage costs in the first half of the year.
As the portfolio companies of the investment and development segment continue to
develop and introduce their products commercially, the Company expects to report
significant future revenue growth in this segment.
Cost of sales increased $6,423,000, or 49.4%, to $19,437,000 in 1996 from
$13,014,000 in 1995, due primarily to an increase of $4,910,000 in costs related
to the Company's new investment and development segment, an increase of $574,000
in the fulfillment services segment resulting from higher sales, and an increase
of $939,000 in the cost of sales for the lists and database services segment.
In the lists and database services segment, cost of sales as a percentage of net
sales increased to 62.3% in 1996 from 51.4% in 1995. This increase is primarily
attributable to increases in operating expenses related to the launching of the
Company's new Elementary/High School Database product line. Prior to fiscal
1996 all costs related to the development of the Elementary/High School Database
product were capitalized. With the development of this list now complete and
operations having commenced, operating costs are being incurred and previously
capitalized costs are now being amortized.
Research and development expenses totaled $6,971,000 in 1996, consisting of
$5,219,000 related to the operations of the investment and development segment,
$1,559,000 incurred by CMGDI within the lists and database services segment and
$193,000 relating to the fulfillment services segment. In addition, the Company
recorded $2,691,000 of in-process research and development expenses related to
the acquisition of several Internet investments. No research and development
costs were incurred in fiscal year 1995. The Company anticipates it will
continue to devote substantial resources to product development and that these
costs may substantially increase in future periods.
Selling expenses increased $7,113,000, or 235%, to $10,138,000 in 1996 from
$3,025,000 in 1995. This increase was primarily attributable to a $6,426,000
selling expense increase in the Company's new investment and development
segment, reflecting the sales and marketing efforts related to various product
launches. Additionally, selling expense increases of $541,000 and $146,000 were
incurred by the lists and database services and fulfillment services segments,
respectively. Selling expenses increased as a percentage of net sales to 35.6%
in fiscal 1996 from 13.6% in fiscal 1995. As the Company's subsidiaries
continue to introduce new products and expand sales, the Company expects to
incur significant promotional expenses, as well as expenses related to the
hiring of additional sales and marketing personnel and increased advertising
expenses, and anticipates that these costs will substantially increase in future
periods.
General and administrative expenses increased $6,460,000, or 192%, to $9,822,000
in fiscal 1996 from $3,362,000 in fiscal 1995. This increase was attributable
to the creation of the investment and development business segment during the
third quarter of fiscal 1995, which had expense increases of $5,729,000,
including payroll, facilities, goodwill amortization, legal and accounting,
depreciation and other general and administrative costs. Additionally, lists
and database services segment general and administrative expenses increased
$471,000, reflecting the strengthening of CMGDI's management infrastructure,
and general and administrative costs for the Company's fulfillment services
segment increased $260,000 over prior year. General and administrative expenses
increased as a percentage of net sales to 34.5% from 15.1% in fiscal 1995. The
Company anticipates that its general and administrative expenses will continue
to increase significantly in absolute dollar amounts as the Company's
subsidiaries, particularly in the investment and development segment, continue
to grow and expand their administrative staffs and infrastructures.
<PAGE>
- -------------------------------------------------
management's discussion & analysis of financial 24
condition & results of operations (cont'd) --
25
- -------------------------------------------------
Equity in losses of affiliates resulted from the Company's minority ownership in
certain investments, which were made through CMG @Ventures and are accounted for
under the equity method. Under the equity method of accounting the Company's
proportionate share of each affiliate's operating losses and amortization of the
Company's net excess investment over its equity in each affiliate's net assets
is included in equity in losses of affiliates. The 1995 results reflect one
investment, Freemark, which was acquired during the third quarter of 1995, with
$306,000 equity in losses being recognized in fiscal 1995, compared with
$2,915,000 for fiscal 1996, which included results from the Company's minority
ownership in Freemark, Ikonic, GeoCities, Vicinity, and TeleT. During the
fourth quarter of fiscal 1996, the Company increased its ownership in Freemark
and GeoCities above 50% and, accordingly, began including their operating
results in the Company's consolidated operating results beginning the dates on
which controlling interests were obtained. Also, subsequent to year-end the
Company sold its interest in TeleT and acquired a minority interest in Parable.
See Note 17 of Notes to Consolidated Financial Statements. The Company expects
its remaining portfolio companies to continue to invest in development of their
products and services, and to recognize operating losses, which will result in
future charges recorded by the Company to reflect its proportionate share of
such losses.
Gain on sale of available-for-sale securities occurred when the Company sold its
remaining 1,020,000 shares of America Online (AMER) common stock, realizing a
gain of $30,049,000 in October 1995. Gain on issuance of stock by subsidiary
represents the Company's $19,575,000 gain recorded as a result of the sale of
stock by its subsidiary, Lycos, in an initial public offering in April 1996.
This gain from the Lycos stock offering reflects the increase in the Company's
proportionate share of Lycos' equity. See Note 7 of Notes to Consolidated
Financial Statements for a more complete description of this transaction.
Interest income, net, increased primarily due to income from investment of the
proceeds from the sale of the AMER stock and the Lycos public offering.
Minority interest increased to $2,169,000 in fiscal 1996 from $14,000 in fiscal
1995, reflecting minority interest in net losses of consolidated subsidiaries
within the Company's investment and development business segment.
The Company's effective tax rates for the fiscal years ended July 31, 1996 and
1995 were 53.8% and 37.4%, respectively. The effective rate in fiscal 1996
differed from the federal statutory rate of 35% primarily due to the provision
for state income taxes and the Company's inability to record a tax benefit from
operating losses of certain entities not included in the Company's consolidated
income tax return. The effective rate in fiscal 1995 differed from the federal
statutory rate of 34% primarily due to the provision for state income taxes.
Fiscal 1995 Compared to Fiscal 1994
Net sales increased $2,900,000, or 15.0%, to $22,293,000 in 1995 from
$19,388,000 in 1994. The increase was primarily attributable to sales by the
Company's fulfillment services segment which grew by $2,186,000, resulting from
an expanded customer base and increased sales to existing customers. Sales in
the lists and database services segment increased $714,000 due to an increase in
the names available for sale, additional lists under management, the creation of
the new Elementary and High School List database and the Teachers Who Respond
database, and increased customer demand for those names.
Cost of sales increased $1,685,000, or 14.9%, to $13,014,000 in 1995 from
$11,329,000 in 1994 as a result of sales increases. In the lists and database
services segment, cost of sales as a percentage of net sales, however, decreased
to 51.4% in 1995 from 53.3% in 1994 due to the absorption of significant fixed
costs across a greater sales level, the results of cost containment measures,
and the realization of operating efficiencies.
Selling expenses increased $716,000, or 31.0%, to $3,025,000 in 1995 from
$2,309,000 in 1994, including increases of $323,000, $339,000 and $54,000 in the
lists and database services, fulfillment services and investment and development
segments, respectively. These increases were primarily attributable to
increases in payroll expenses, marketing, promotional and other costs incurred
in conjunction with the Company's sales growth, the addition of CMG @Ventures
and Lycos and the development of new product offerings. Selling expenses
increased as a percentage of net sales to 13.6% in 1995 from 11.9% in 1994.
<PAGE>
General and administrative expenses increased $879,000, or 35.4%, to $3,362,000
in 1995 from $2,483,000 in 1994. The increase was primarily attributable to the
creation of the investment and development business segment which had expenses
of $569,000 and to incremental costs incurred to support the requirements of a
public entity, which included payroll, insurance, legal and accounting fees.
General and administrative expenses increased as a percentage of sales to 15.1%
in 1995 from 12.8% in 1994.
Equity in losses of affiliates in fiscal 1995 resulted from the Company's 40.2%
ownership in one affiliate, Freemark. Under the equity method of accounting,
the Company included its $306,000 proportionate share of Freemark's operating
losses in equity in losses of affiliates.
Interest income (expense) improved $321,000 to income of $225,000 in 1995 from
net expenses of ($96,000) in 1994, primarily due to the repayment of all long-
term debt and line of credit borrowings and income from short-term investments,
as a result of funds received from the Company's initial public offering in
fiscal 1994. Gain on sale of available-for-sale securities occurred when the
Company sold 400,000 shares of AMER common stock, realizing a gain of
$4,781,000.
The Company's effective tax rates for the fiscal years ended July 31, 1995 and
1994 were 37.4% and 38.2%, respectively. The effective rate in both 1995 and
1994 differed from the federal statutory rate of 34% primarily due to the
provision for state income taxes.
Discontinued operations reflect a loss from the Company's wholly owned
subsidiary BookLink Technologies, Inc. and a gain on disposal of BookLink which
was sold to AMER for 1,420,000 shares of AMER common stock. The market value of
the stock on the date of closing (December 23, 1994) was $38,162,000.
Liquidity and Capital Resources
During fiscal 1996, the Company improved its working capital position from
$47,729,000 at July 31, 1995 to $72,009,000 at July 31, 1996 and increased its
cash and cash equivalents from $9,423,000 to $63,387,000, while continuing to
make significant investments in the future of its business. The increases in
cash and working capital were primarily a result of the Company's sale of its
AMER common stock and the initial public offering of stock by one of the
Company's consolidated subsidiaries, Lycos, offset by the Company's uses of its
capital.
During the first quarter of fiscal 1996, the Company sold its remaining
1,020,000 shares of AMER common stock, receiving net proceeds of $57,462,000.
In April 1996, Lycos, sold 3,135,000 of its common shares in an initial public
offering, receiving net proceeds of $46,021,000 and reducing the Company's
ownership in Lycos from approximately 76% to approximately 58%. The Company's
entire interest in Lycos (consisting of 8,000,000 shares of common stock) is
owned by its majority-owned subsidiary limited partnership, CMG @Ventures, L.P.
(See Notes 7 and 8 of Notes to Consolidated Financial Statements). The
Company's interest in Lycos is subject to further reduction because CMG
@Ventures, L.P. is obligated to sell to Lycos up to a total of 927,300 shares of
common stock of Lycos, as necessary, to provide shares issuable upon exercise of
options granted by Lycos under its stock option plans. Of these 927,300 shares,
CMG @Ventures, L.P. is obligated to sell 666,576 shares to Lycos at a purchase
price of $0.01 per share and 260,724 shares at prices ranging from $0.29 per
share to $9.60 per share.
During fiscal year 1996 the Company, through its limited partnership subsidiary,
CMG @Ventures, L.P. invested in eight companies, including Lycos, NetCarta,
Black Sun, Freemark, GeoCities, Ikonic, TeleT, and Vicinity.
In August 1995, CMG @Ventures formed Black Sun and provided a total of
$4,000,000 in funding in fiscal 1996. Also, during fiscal 1996, CMG @Ventures
provided $4,500,000 funding to NetCarta and $1,000,000 to Lycos. In December
1995, CMG @Ventures invested $1,750,000 to increase its ownership in Ikonic from
19.8% to 36.8%. With its increase in ownership in Ikonic, the Company began
using the equity method of accounting, rather than the cost method, for its
investment in Ikonic. On July 31, 1996, Black Sun successfully completed an
equity financing, issuing preferred stock to an outside party in exchange for
$2,000,000, and reducing CMG @Ventures' ownership in Black Sun to 92%.
<PAGE>
- -------------------------------------------------
management's discussion & analysis of financial 26
condition & results of operations (cont'd.) --
27
- -------------------------------------------------
CMG @Ventures invested $1,000,000 to purchase an initial 44.9% ownership
interest in GeoCities in January 1996, and increased its ownership to 61.2%
with an additional $1,100,000 investment in June 1996. Also in June 1996,
Freemark successfully completed a $5,100,000 equity financing. Pursuant to this
transaction, CMG @Ventures invested an additional $3,200,000 in Freemark,
including the conversion of $1,670,000 in notes which had been funded to
Freemark during fiscal 1996, and thereby increased its ownership from 43.8% to
54.3%. The Company accounted for its investments in GeoCities and Freemark on
the equity method during the period CMG @Ventures owned minority interests.
Beginning in June 1996, when controlling interests were acquired, the Company,
accordingly, began including the operating results of GeoCities and Freemark in
the Company's consolidated operating results.
In February and June 1996, CMG @Ventures invested $2,000,000 to acquire a 44.8%
interest in Vicinity and $750,000 to acquire a 45.6% interest in TeleT. During
fiscal 1996, the Company's investments in Vicinity and TeleT were accounted for
on the equity method. Subsequent to July 31, 1996, CMG @Ventures sold its equity
interest in TeleT to Premiere Technologies in exchange for $550,000 in cash and
320,883 shares of Premiere stock. The market value of the Premiere stock at the
date of closing was approximately $7,700,000.
The Company has committed to fund CMG @Ventures a total of $35,000,000, of which
$24,145,000 has been funded as of July 31, 1996. Subsequent to fiscal 1996 year
end, CMG @Ventures invested $2,000,000 to acquire a 46% minority interest in
Parable, which will be accounted for on the equity method, and funded an
additional $1,910,000 to NetCarta. The Company's subsidiary, Lycos, has a
$5,000,000 commitment under a "Premier Provider" agreement with Netscape
Communications Corporation.
The Company's investments in Black Sun, Freemark, GeoCities, Ikonic, TeleT and
Vicinity as well as its other Internet related investments in Lycos and NetCarta
were made through its majority-owned subsidiary limited partnership, CMG
@Ventures, L.P. and its wholly owned subsidiary CMG @Ventures, Inc. The Company
owns 100% of the capital interest and has all voting rights, and is entitled to
77.5% of the net capital gains, as defined, of these investments. The remaining
22.5% interest in the net capital gains on these investments are attributed to
profit partners, including the President and Chief Executive Officer of the
Company. Subsequent to July 31, 1996 the sharing of the net gains will be
changed to 80% to the Company and 20% to the profit partners. The Company is
responsible for all operating expenses of CMG @Ventures, L.P.
During fiscal year 1996, the Company also formed CMG Direct Interactive from the
Company's former ListLab division and formed three new wholly owned
subsidiaries, ADSmart, InfoMation, and Planet Direct. CMG has begun funding and
intends to provide all required funding for start-up costs of these new
ventures.
The Company's consolidated capital expenditures were $7,068,000 in fiscal 1996.
Additional computer equipment was leased in fiscal 1996, primarily under
operating leases. The Company's accounts receivable, accounts payable and
accrued expenses increased $5,321,000, $5,925,000 and $3,539,000, respectively,
compared with July 31, 1995, primarily as a result of the formation or
acquisition of new consolidated subsidiaries. Minority interest in the
Company's July 31, 1996 balance sheet increased $27,092,000 compared with July
31, 1995, primarily reflecting the impact of minority interests in the sales of
stock by Lycos and Black Sun and the consolidation of Freemark and GeoCities in
fiscal 1996.
Of the Company's consolidated cash and available-for-sale securities at July 31,
1996, 65% was held by subsidiaries that are not wholly owned
by the Company. This percentage may vary significantly over time. The
Company's ability to access assets held by its majority-owned subsidiaries
through dividends, loans, or other transactions is subject in each instance to a
fiduciary duty owed to minority shareholders of the relevant subsidiary. In
addition, dividends received from a subsidiary that does not consolidate with
the Company for tax purposes are subject to tax. Therefore, under certain
circumstances, a portion of the Company's consolidated cash and available-for-
sale securities may not be readily available to the Company or certain of its
subsidiaries.
At July 31, 1995, the Company's credit agreement included two revolving lines of
credit totaling $5.0 million. Since July 31, 1995, these lines have lapsed and
the Company has not pursued renewal. Lycos has a $1.0 million credit facility
which expires on June 1, 1997. No balances were outstanding under this agreement
at July 31, 1996.
The Company believes that existing working capital will be sufficient to fund
its current operations, investments and capital expenditures for the foreseeable
future. Should additional capital be needed to fund future investment and
acquisition activity, the Company may seek to raise additional capital through
additional public or private offerings of shares of the Company or its
subsidiaries' stock, or through debt financings.
<PAGE>
Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which established financial accounting and reporting standards
for stock-based employee compensation plans. Companies are encouraged, rather
than required, to adopt a new method that accounts for stock compensation awards
based on their fair value using an option pricing model. Companies that do not
adopt this new method will be required to make pro forma footnote disclosures of
net income as if the fair value-based method of accounting required by SFAS No.
123 had been applied. The Company is required to adopt SFAS No. 123 beginning in
fiscal 1997. Adoption of this pronouncement is not expected to have a material
impact on the Company's financial position or results of operations because the
Company intends to make pro forma footnote disclosures instead of adopting the
new accounting method.
Risk Factors That May Affect Future Results
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. Forward-looking
statements in this document and those made from time to time by the Company
through its senior management are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
concerning the expected future revenues or earnings or concerning projected
plans, performance, product development, product release or product shipment, as
well as other estimates related to future operations are necessarily only
estimates of future results and there can be no assurance that actual results
will not materially differ from expectations. The Company undertakes no
obligation to publicly release the results of any revisions to forward-looking
statements which may be made to reflect events or circumstances occurring after
the date such statements were made or to reflect the occurrence of unanticipated
events.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to the
following:
*The development of the Internet, the level of usage of the Internet, future
acceptance of the Company's Internet related products and services, demand for
Internet advertising, the introduction of new products and services by the
Company and its affiliates or its competitors and potential expense increases
associated with the Company's investments at the early stages of development
may materially affect the Company's operations. As a result, the Company's mix
of services and products may undergo substantial changes as the Company reacts
to competitive and other developments in the overall Internet market. If
widespread commercial use of the Internet does not develop, or if the Internet
does not develop as an effective advertising medium, the Company's business,
results of operations and financial condition will be materially adversely
affected.
*The Company's business model envisions additional opportunities to realize
value through gains on its strategic investment and development activities over
the next few years. Additionally, the Company's business model envisions
potentially leveraging its investment in present and future Internet
development opportunities through public and private placement of portions of
such investments with outside investors. The Company's business model is
therefore significantly impacted by capital market conditions and the
availability of future funding from public and private markets.
*Along with its investment and development segment, the Company's lists and
database services and fulfillment services segments are subject to industry
related risks, including continued acceptance of the Company's products and
services, the introduction of new products and services by the Company or its
competitors, changes in the mix of services sold and the channels through which
those services are sold, product pricing and cost changes, general economic
conditions and specific economic conditions in the direct marketing and
Internet industries.
<PAGE>
Exhibit 13.3
---------------------------
consolidated balance sheets 28
---------------------------
<TABLE>
<CAPTION>
(in thousands, except share amounts)
July 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,387 $ 9,423
Available-for-sale securities 13,069 56,228
Accounts receivable, trade, less allowance for doubtful
accounts of $442 and $148 in 1996 and 1995 10,666 5,345
License fees receivable 1,032 --
Prepaid expenses and other current assets 2,199 370
Refundable income taxes -- 666
Deferred income taxes 213 --
- -------------------------------------------------------------------------------------------------------------------
Total current assets 90,566 72,032
- -------------------------------------------------------------------------------------------------------------------
Property and equipment 14,657 7,176
Less accumulated depreciation and amortization 6,196 4,389
- -------------------------------------------------------------------------------------------------------------------
Net property and equipment 8,461 2,787
- -------------------------------------------------------------------------------------------------------------------
Investments in affiliates 4,073 2,700
Costs in excess of net assets of subsidiaries acquired, net of accumulated
amortization of $718 in 1996 and $287 in 1995 2,299 1,280
Other assets 4,104 1,687
- -------------------------------------------------------------------------------------------------------------------
$ 109,503 $ 80,486
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,251 $ 1,326
Accrued expenses 6,245 2,706
Deferred income taxes -- 19,886
Deferred revenues 4,620 --
Other 441 385
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,557 24,303
- -------------------------------------------------------------------------------------------------------------------
Deferred income taxes 9,122 --
Other long term liabilities 555 508
Minority interest 27,277 185
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value per share. Authorized 5,000,000 shares; none issued -- --
Common stock, $.01 par value per share. Authorized 40,000,000 shares; issued and
outstanding 9,166,747 shares at July 31, 1996 and 8,838,720 shares at July 31, 1995 92 88
Additional paid-in capital 9,243 7,062
Net unrealized holding gain -- 18,005
Retained earnings 44,657 30,335
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 53,992 55,490
- -------------------------------------------------------------------------------------------------------------------
$ 109,503 $ 80,486
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
see accompanying notes to consolidated financial statements
<PAGE>
-------------------------------------
29 consolidated statements of operations
-------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Years Ended July 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 28,485 $ 22,293 $ 19,388
Operating expenses:
Cost of sales 19,437 13,014 11,329
Research and development 6,971 -- --
In-process research and development 2,691 -- --
Selling 10,138 3,025 2,309
General and administrative 9,822 3,362 2,483
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 49,059 19,401 16,121
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (20,574) 2,892 3,267
- ---------------------------------------------------------------------------------------------------------------------------
Other income (deductions):
Interest income (expense), net 2,691 225 (96)
Gain on sale of available-for-sale securities 30,049 4,781 --
Gain on issuance of stock by subsidiary 19,575 -- --
Equity in losses of affiliates (2,915) (306) --
Minority interest 2,169 14 --
- ---------------------------------------------------------------------------------------------------------------------------
51,569 4,714 (96)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 30,995 7,606 3,171
Income tax expense 16,673 2,844 1,211
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 14,322 4,762 1,960
Discontinued operations, net of income taxes:
Loss from operations of BookLink Technologies, Inc. -- (690) (159)
Gain on disposal of BookLink Technologies, Inc. -- 24,143 --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 14,322 $ 28,215 $ 1,801
- ---------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) per share:
Income from continuing operations $ 1.48 $ 0.51 $ 0.25
Loss from discontinued operations of BookLink Technologies, Inc. -- (.07) (.02)
Gain on disposal of BookLink Technologies, Inc. -- 2.56 --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1.48 $ 3.00 $ 0.23
- ---------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings (loss) per share:
Income from continuing operations $ 1.45 $ 0.49 $ 0.25
Loss from discontinued operations of BookLink Technologies, Inc. -- (.07) (.02)
Gain on disposal of BookLink Technologies, Inc. -- 2.48 --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1.45 $ 2.90 $ 0.23
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Primary 9,682 9,391 7,792
- ---------------------------------------------------------------------------------------------------------------------------
Fully Diluted 9,898 9,744 7,801
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
see accompanying notes to consolidated financial statements
<PAGE>
- --------------------------------------------------
consolidated statements of stockholders' equity 30
- --------------------------------------------------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Net Related Total
Common paid-in unrealized Retained Treasury party stockholders'
stock capital holding gain earnings stock receivable equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1993
(4,085,538 shares) $ 41 $ 291 $ -- $ 319 $ (43) $ (434) $ 174
Net income -- -- -- 1,801 -- -- 1,801
Issuance of common stock
(2,792,136 shares) 28 6,294 -- -- -- -- 6,322
Conversion of preferred
stock into common
(1,925,926 shares) 19 231 -- -- -- -- 250
Retirement of treasury stock
(36,886 shares) -- (43) -- -- 43 -- --
Decrease in related party
receivable -- -- -- -- -- 320 320
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994
(8,766,714 shares) 88 6,773 -- 2,120 -- (114) 8,867
Net income -- -- -- 28,215 -- -- 28,215
Net unrealized holding gain -- -- 18,005 -- -- -- 18,005
Issuance of common stock
(72,006 shares) -- 103 -- -- -- -- 103
Tax benefit of stock option
exercises -- 186 -- -- -- -- 186
Decrease in related party
receivable -- -- -- -- -- 114 114
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995
(8,838,720 shares) 88 7,062 18,005 30,335 -- -- 55,490
Net income -- -- -- 14,322 -- -- 14,322
Issuance of common stock
(328,027 shares) 4 367 -- -- -- -- 371
Tax benefit of stock option
exercises -- 695 -- -- -- -- 695
Effect of subsidiaries'
equity transactions -- 1,119 -- -- -- -- 1,119
Sale of available-for-sale
securities -- -- (18,005) -- -- -- (18,005)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996
(9,166,747 shares) $ 92 $ 9,243 $ -- $ 44,657 $ -- $ -- $ 53,992
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
see accompanying notes to consolidated financial statements
<PAGE>
-------------------------------------
31 consolidated statements of cash flows
-------------------------------------
<TABLE>
<CAPTION>
(in thousands)
Years Ended July 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 14,322 $ 4,762 $ 1,960
Adjustments to reconcile income from continuing operations to net cash
provided by (used for) continuing operations:
Depreciation and amortization 2,823 896 979
Deferred income taxes 8,283 (92) 102
Gain on sale of available-for-sale securities (30,049) (4,781) --
Gain on issuance of stock by subsidiary (19,575) -- --
Equity in losses of affiliates 2,915 306 --
Minority interest (2,169) (14) --
In-process research and development 2,691 -- --
Changes in operating assets and liabilities, excluding effects of acquired companies:
Accounts and license fees receivable (7,269) 314 (1,499)
Prepaid expenses and other current assets (1,762) (54) (132)
Other assets (685) (78) (44)
Accounts payable and accrued expenses 8,232 564 974
Deferred revenues 4,595 -- --
Refundable and accrued income taxes 12,876 (444) (813)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) continuing operations (4,772) 1,379 1,527
Net cash used for discontinued operations -- (589) (485)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (4,772) 790 1,042
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in related party receivable -- 114 320
Additions to property and equipment (7,068) (1,474) (1,002)
Sale of property and equipment 705 -- --
Payments related to disposal of BookLink Technologies, Inc. -- (650) --
Income taxes paid related to disposal of BookLink Technologies, Inc.
and available-for-sale securities (20,554) (3,846) --
Proceeds from sale or maturities of available-for-sale securities 69,918 15,531 --
Purchase of available-for-sale securities (25,526) -- --
Investments in affiliates and acquisitions of subsidiaries (9,892) (3,006) --
Cash acquired through acquisitions of subsidiaries 3,882 -- --
Other (772) (966) (267)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 10,693 5,703 (949)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of common stock, net 371 128 6,272
Net proceeds from issuance of stock by subsidiaries 48,058 -- --
Net repayments under line of credit -- (3) (1,072)
Cash overdraft -- -- (799)
Other (386) (150) (1,539)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 48,043 (25) 2,862
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 53,964 6,468 2,955
Cash and cash equivalents at beginning of year 9,423 2,955 --
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 63,387 $ 9,423 $ 2,955
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
- ------------------------------------------ 32
notes to consolidated financial statements --
- ------------------------------------------ 33
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Presentation
The consolidated financial statements of CMG Information Services, Inc. (the
Company) include its wholly owned and majority-owned subsidiaries, CMG Direct
Interactive, Inc. (CMGDI), SalesLink Corporation (SalesLink), CMG @Ventures,
Inc., CMG @Ventures, L.P., Lycos, Inc. (Lycos), NetCarta Corporation (NetCarta),
Black Sun Interactive, Inc. (Black Sun), Freemark Communications, Inc.
(Freemark), ADSmart Corporation, InfoMation Publishing Corporation, Planet
Direct Corporation, and GeoCities. Lycos is a majority-owned public subsidiary.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company accounts for investments in businesses in which it
owns between 20% and 50% using the equity method. Financial information related
to BookLink Technologies, Inc. (BookLink) has been presented as discontinued
operations (see note 5).
(b) Revenue Recognition
Revenue from the sale of mailing lists is recognized when the mailing labels are
shipped. Revenue for services is recognized upon completion of the service.
The Company's advertising revenues are derived principally from short-term
Internet advertising contracts in which the Company guarantees a minimum number
of impressions for a fixed fee or on a per impressions basis with an established
minimum fee. Revenues from advertising are recognized as the services are
performed.
The Company's license and product revenues are derived principally from product
licensing fees and fees from maintenance and support of its products. License
and product revenues are generally recognized upon delivery provided that no
significant Company obligations remain and collection of the receivable is
probable. In cases where there are significant remaining obligations, the
Company defers such revenue until those obligations are satisfied. Fees from
maintenance and support of the Company's products including revenues bundled
with the initial licensing fees are deferred and recognized ratably over the
service period.
(c) Gain on Issuances of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time, the subsidiary is an operating entity and not
engaged principally in research and development, the Company records the
increase as a gain in its Consolidated Statements of Operations. Otherwise, the
increase is reflected in "effect of subsidiaries' equity transactions" in the
Company's Consolidated Statements of Stockholders' Equity.
If gains have been recognized on issuances of a subsidiary's stock and shares of
the subsidiary are subsequently repurchased by the subsidiary or by the Company,
gain recognition does not occur on issuances subsequent to the date of a
repurchase until such time as shares have been issued in an amount equivalent to
the number of repurchased shares. Such transactions are reflected as equity
transactions, and the net effect of these transactions is reflected in the
Consolidated Statements of Stockholders' Equity.
(d) Statement of Cash Flows
Investments with maturities of three months or less at the time of acquisition
are considered cash equivalents.
Net cash provided by (used for) operating and investing activities reflects cash
payments for interest expense and income taxes as follows:
<TABLE>
<CAPTION>
Fiscal Years ended July 31,
- -------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------
Interest expense $ 26,000 $ 23,000 $ 144,000
- -------------------------------------------------------------------
Income taxes $16,069,000 $6,753,000 $1,087,000
- -------------------------------------------------------------------
</TABLE>
During 1996, in a non-cash transaction, the Company's consolidated subsidiary,
Lycos, acquired Point Communications Corporation (Point) in exchange for 526,316
shares of Lycos stock. During fiscal year 1995 significant non-cash
transactions included the sale of BookLink in exchange for available-for-sale
securities (see note 5) and the acquisition of one subsidiary, NetCarta, in
exchange for notes payable (see note 8). During 1994, preferred stock with a
stated value of $250,000 was converted into common stock.
<PAGE>
(e) Marketable Securities
The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designation at each balance sheet
date. Marketable securities have been classified as available-for-sale and are
carried at fair value, based on quoted market prices, with unrealized holding
gains and losses reported as a separate component of stockholders' equity.
The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization, interest income,
realized gains and losses and declines in value judged to be other than
temporary are included in interest and other income. The cost of securities
sold is based on specific identification.
(f) Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
the Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present. On an on-going basis, management
reviews the value and period of amortization or depreciation of long-lived
assets. During this review, the Company reevaluates the significant assumptions
used in determining the original cost of long-lived assets. Although the
assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets based upon events or circumstances which have
occurred since acquisition.
(g) Fair Value of Financial Instruments
The carrying value for cash and cash equivalents, accounts receivable and
accounts payable, approximates fair value because of the short maturity of these
instruments.
(h) Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is
provided on the straight-line basis over the estimated useful lives of the
respective assets (three to seven years). Leasehold improvements are amortized
on a straight-line basis over the lesser of the estimated useful life of the
asset or the lease term.
Maintenance and repairs are charged to operating expenses as incurred. Major
renewals and betterments are added to property and equipment accounts at cost.
(i) Investments in Affiliates
The Company's investments in affiliated companies for which its ownership
exceeds 20%, but which are not majority-owned or controlled, are accounted for
using the equity method. Under the equity method, the Company's proportionate
share of each affiliate's operating results and amortization of the Company's
excess investment over its equity in each affiliate's net assets is included in
"equity in losses of affiliates". The unamortized excess of the Company's
investments in affiliates over its equity in the underlying net assets of those
affiliates at the date of acquisition was $2,847,000 and $2,381,000 at July 31,
1996 and 1995, respectively. Amortization is recorded on a straight-line basis
over periods ranging from five to ten years.
(j) Costs in Excess of Net Assets of Subsidiaries Acquired
The costs in excess of net assets of subsidiaries acquired (goodwill) are
principally being amortized over periods ranging from five to twenty years. The
Company accounts for goodwill at the lower of amortized cost or fair value.
(k) Deferred Mailing List Costs
Costs incurred to enhance or maintain the Company's mailing lists are expensed
in the period incurred.
Costs incurred to develop a new mailing list are capitalized until the mailing
list has been satisfactorily compiled for marketability. Deferred mailing list
costs are amortized over a five year period.
(l) Deferred Revenues
Deferred revenues are comprised of license fees to be earned in the future on
license agreements existing at the balance sheet date and billings in excess of
earnings on both license and advertising contracts.
<PAGE>
- ---------------------------------------------------- 34
notes to consolidated financial statements (cont'd.) --
- ---------------------------------------------------- 35
(m) Research and Development Costs
Expenditures related to the development of new products and processes, including
significant improvements and refinements to existing products and the
development of software, are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
working model of the product and ending when a product is available for general
release to customers. At July 31, 1996 and 1995, capitalized software
development costs of $344,000 and $251,000, respectively, are included in the
Company's Consolidated Balance Sheets. Additionally, at the date of acquisition,
the Company evaluates the components of the purchase price of each acquisition
or investment to identify amounts paid for in-process research and development.
Upon completion of acquisition accounting and valuation (based on independent
appraisals), such amounts are charged to expense if technological feasibility
had not been reached at the acquisition date.
(n) Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method under which
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.
(o) Earnings Per Share
Earnings per share is computed based on the weighted average number of common
shares outstanding during each period, after giving effect to stock options and
convertible preferred shares considered to be dilutive common stock equivalents.
The weighted average number of common shares outstanding prior to the Company's
January 1994 initial public offering (IPO), have been determined pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, whereby
common stock issued for consideration below the IPO price and stock options and
warrants granted with exercise prices below the IPO price during the twelve-
month period preceding the date of the initial filing of the registration
statement have been included in the calculation of common equivalent shares,
using the treasury stock method, as if they were outstanding for all related
periods.
(p) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(q) New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which established financial
accounting and reporting standards for stock-based employee compensation plans.
Companies are encouraged, rather than required, to adopt a new method that
accounts for stock compensation awards based on their fair value using an option
pricing model. Companies that do not adopt this new method will be required to
make pro forma footnote disclosures of net income as if the fair value-based
method of accounting required by SFAS No. 123 had been applied. The Company is
required to adopt SFAS No. 123 beginning in fiscal 1997. Adoption of this
pronouncement is not expected to have a material impact on the Company's
financial position or results of operations because the Company intends to make
pro forma footnote disclosures instead of adopting the new accounting method.
(2) Discontinued Operations of SalesLink Subsequently Retained
During the second quarter of fiscal 1996, the Company decided to retain its
subsidiary SalesLink as part of the Company's continuing operations. SalesLink
was identified for disposition during the fourth quarter of fiscal 1995 and had
been accounted for as a discontinued operation from that time until the second
quarter of fiscal 1996. The decision was made to continue to operate SalesLink
because of its potential synergies with the Company's newly formed subsidiary
CMGDI. Accordingly, the operating results of SalesLink are now included in
continuing operations, classified as the Company's fulfillment services segment,
and fiscal year 1995 and 1994 amounts have been reclassified to present
SalesLink within continuing operations in the accompanying consolidated
financial statements.
<PAGE>
During fiscal years 1996, 1995 and 1994, SalesLink generated sales of
$12,070,000, $11,086,000 and $8,900,000, respectively, and operating income of
$1,566,000, $1,755,000 and $1,425,000, respectively. The total assets and
liabilities of SalesLink were $4,314,000 and $1,211,000, respectively, as of
July 31, 1995.
(3) Segment Information
The Company's continuing operations have been classified in three primary
business segments, (i) lists and database services, (ii) fulfillment services,
and (iii) investment and development. Lists and database services, which has
historically included customer and prospect list databases and list services,
began increasing its database capacity during fiscal 1996, positioning itself to
serve additional markets, including database opportunities afforded by the
Internet. Fulfillment services, which are provided by SalesLink, include
telemarketing, sales/lead inquiry management, and product and literature
fulfillment. Investment and development is a business segment formed during the
third quarter of fiscal year 1995 to focus on strategic investment and
development opportunities afforded by the Internet and interactive media
markets. Corporate and other includes available-for-sale securities and certain
cash equivalents which are not identifiable to the operations of the Company's
primary business segments.
During the fiscal years ended July 31, 1996, 1995 and 1994 one significant
customer accounted for approximately 13%, 14% and 12%, respectively, of net
sales in the lists and database services segment. In the fulfillment services
segment, three customers individually accounted for 15%, 15% and 13% of segment
net sales in fiscal 1996 and 19%, 19% and 12% of segment net sales in fiscal
1995. Similarly, three customers individually accounted for 28%, 16% and 11% of
fulfillment services segment 1994 net sales. Summarized financial information
by business segment for the fiscal years ended July 31, 1996, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
Years Ended July 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Lists and database services $ 10,750,000 $11,202,000 $10,488,000
Fulfillment services 12,070,000 11,086,000 8,900,000
Investment and development 5,665,000 5,000 ---
- --------------------------------------------------------------------------------
$ 28,485,000 $22,293,000 $19,388,000
- --------------------------------------------------------------------------------
Operating income (loss):
Lists and database services $ (2,179,000) $ 1,782,000 $ 1,842,000
Fulfillment services 1,566,000 1,755,000 1,425,000
Investment and development (19,961,000) (645,000) ---
- --------------------------------------------------------------------------------
$(20,574,000) $ 2,892,000 $ 3,267,000
- --------------------------------------------------------------------------------
Total assets:
Lists and database services $ 8,338,000 $10,424,000 $ 8,661,000
Fulfillment services 6,366,000 4,314,000 3,651,000
Investment and development 68,256,000 5,243,000 ---
Corporate and other 26,543,000 60,505,000 ---
- --------------------------------------------------------------------------------
$109,503,000 $80,486,000 $12,312,000
- --------------------------------------------------------------------------------
Capital expenditures:
Lists and database services $ 3,224,000 $ 492,000 $ 342,000
Fulfillment services 791,000 794,000 660,000
Investment and development 3,053,000 188,000 ---
- --------------------------------------------------------------------------------
$ 7,068,000 $ 1,474,000 $ 1,002,000
- --------------------------------------------------------------------------------
Depreciation and amortization:
Lists and database services $ 906,000 $ 546,000 $ 562,000
Fulfillment services 450,000 326,000 417,000
Investment and development 1,467,000 24,000 ---
- --------------------------------------------------------------------------------
$ 2,823,000 $ 896,000 $ 979,000
- --------------------------------------------------------------------------------
</TABLE>
(4) Available-for-Sale Securities
At July 31, 1996, available-for-sale securities consist of U.S. Government
agency obligations, carried at fair value, which the Company does not intend to
hold to maturity. The fair value of each investment at July 31, 1996
approximates its amortized cost.
<PAGE>
- --------------------------------------------------- 36
notes to consolidated financial statements (cont'd) --
- --------------------------------------------------- 37
At July 31, 1995, available-for-sale securities included 1,020,000 shares of
America Online (AMER) stock. The unrealized holding gain, based on the change
in market value of the stock from date of acquisition to July 31, 1995, is
presented in the equity section of the July 31, 1995 Consolidated Balance Sheet,
net of deferred income taxes. During fiscal 1996, the Company sold 1,020,000
shares of AMER stock. The net proceeds from the sale were $57,462,000 and the
Company realized a gain on the sale of $30,049,000.
During fiscal 1995, the Company sold 400,000 shares of AMER stock. The net
proceeds from the sale were $15,531,000. The Company realized a gain on the
sale of $4,781,000.
(5) Discontinued Operations
On November 8, 1994, the Company entered into a definitive agreement to sell all
outstanding stock of its wholly owned subsidiary, BookLink to AMER for
$30,000,000 of AMER common stock. The Company closed the transaction on
December 23, 1994 by exchanging all of the outstanding shares (800,000 shares)
of BookLink common stock for 1,420,000 shares (adjusted to reflect a 2-for-1
stock split) of AMER common stock. Discontinued operations reflect a loss from
BookLink operations and a gain on disposal of $24,143,000, net of income taxes
of $13,144,000, in fiscal 1995. The market value of the AMER stock on the date
of closing was $38,163,000, and deferred income taxes of $13,144,000 were
provided as part of the transaction.
The Company's consolidated financial statements reflect the results of BookLink
as discontinued operations for all periods presented. Accordingly, the net
results of discontinued operations have been reflected as loss from discontinued
operations in the Consolidated Statements of Operations. BookLink's fiscal 1995
results of operations included sales, loss before income taxes and income tax
benefit of $100,000, $1,149,000 and $459,000, respectively. Booklink's fiscal
1994 results included $266,000 loss before income taxes and a $107,000 income
tax benefit.
(6) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 8,344,000 $3,738,000
Software 2,871,000 759,000
Office furniture and equipment 1,592,000 1,284,000
Leasehold improvements 953,000 617,000
Other equipment 897,000 778,000
- --------------------------------------------------------------------------------
$14,657,000 $7,176,000
- --------------------------------------------------------------------------------
</TABLE>
(7) Transactions in Stock of Subsidiaries
In October 1995, the Company's majority-owned subsidiary, Lycos acquired 100% of
Point, a company involved in reviewing and ranking sites on the Internet, in
exchange for a minority interest in Lycos. The former owner of Point also
received an option to purchase 343,000 additional shares of Lycos at an exercise
price of $2.00 per share. The option has a ten-year term and became fully vested
at the closing of Lycos' initial public offering in April 1996. As a result of
this transaction, the Company's ownership interest in Lycos was reduced from
approximately 80% to approximately 76% and the Company's net equity in Lycos
increased by $190,000, net of $132,000 of deferred income taxes. The increase
has been reflected as an equity transaction included in "effect of subsidiaries'
equity transactions" in the accompanying Consolidated Statements of
Stockholders' Equity.
In April 1996, Lycos sold 3,135,000 shares of its previously unissued common
stock in an initial public offering at $16 per share, receiving net proceeds of
$46,021,000. With this transaction, the Company's ownership interest in Lycos
was reduced from approximately 76%, to approximately 58%, and the Company's net
investment in Lycos increased from approximately $1 million to approximately
$20.6 million, resulting in the recognition of a pretax gain of $19,575,000.
This gain reflects the increased book value of the Company's investment in Lycos
resulting from the net proceeds received by Lycos from the sale of its stock.
The Company provided $8,026,000 for deferred income taxes resulting from the
gain.
On July 31, 1996, another of the Company's subsidiaries, Black Sun, successfully
completed an equity financing, issuing 400,000 shares of preferred stock to an
outside party in exchange for $2,000,000. With this transaction, the Company's
net equity in Black Sun increased from approximately $780,000 to approximately
$2,082,000. Since at the time of the transaction Black Sun was engaged
principally in research and development, the resulting $768,000 increase, net of
$534,000 of deferred income taxes, has been reflected as an equity transaction
included in "effect of subsidiaries' equity transactions" in the accompanying
Consolidated Statements of Stockholders' Equity.
<PAGE>
The above gain on issuance of stock by subsidiary and effects of subsidiaries'
equity transactions are reported net of the 22.5% interest attributed to CMG
@Ventures' profit partners (see note 8).
Lycos develops and provides on-line guides to the Internet's World Wide Web,
enabling users of the Internet to identify, select, and access the resources and
information of interest to them. Black Sun develops three dimensional
interactive software. The Company's entire interests in Lycos and Black Sun are
owned by its majority-owned subsidiary limited partnership, CMG @Ventures, L.P.
The Company's interest in Lycos (consisting of 8,000,000 shares of common stock)
is subject to further reduction because CMG @Ventures, L.P. is obligated to
sell to Lycos up to a total of 927,300 shares of common stock of Lycos to
provide shares issuable upon exercise of options granted by Lycos under its
stock option plans. Of these 927,300 shares, CMG @Ventures, L.P. is obligated to
sell 666,576 shares to Lycos at a purchase price of $0.01 per share and 260,724
shares at prices ranging from $0.29 per share to $9.60 per share.
(8) Investment in Affiliates and Subsidiaries
During fiscal year 1995 the Company, through its subsidiary limited partnership,
CMG @Ventures, L.P. (CMG @Ventures), invested in two affiliates. In fiscal
1995, the Company included its share of the prorata losses from one affiliate,
Freemark, in the other income section of the Consolidated Statement of
Operations as the Company owned in excess of 20% of the outstanding stock of
this affiliate. The Company owned less than 20% of the other affiliate, Ikonic,
Inc. (Ikonic), and as such it was accounted for under the cost method of
accounting.
Also, during fiscal year 1995, the Company acquired NetCarta for $773,000. The
acquisition of NetCarta was primarily funded through term notes which are
included in other current and long term liabilities in the accompanying
Consolidated Balance Sheets. The notes require payment in three annual
installments (including interest at the annual rate of 6%) of $334,000, $233,000
and $233,000, the first installment of which was paid in fiscal year 1996. The
acquisition was accounted for using the purchase method. Accordingly, the
purchase price was allocated to assets acquired based on their estimated fair
values.
During fiscal year 1995, the Company also formed and incorporated Lycos,
capitalizing it with an initial $1,000,000. The Company then purchased, for
$500,000 and 20% of Lycos, Inc. stock, an exclusive license to the Lycos
software technology from Carnegie Mellon University.
During fiscal year 1996 the Company, through CMG @Ventures, invested in or
acquired eight companies, including Lycos, NetCarta, Black Sun, Freemark,
GeoCities, Ikonic, TeleT Communications (TeleT), and Vicinity Corporation
(Vicinity).
In August 1995, CMG @Ventures formed Black Sun and provided a total of
$4,000,000 in funding in fiscal 1996. Also, during fiscal 1996, CMG @Ventures
provided $4,500,000 funding to NetCarta and $1,000,000 to Lycos. In December
1995, CMG @Ventures invested $1,750,000 to increase its ownership in Ikonic
from 19.8% to 36.8%. With its increase in ownership in Ikonic, the Company
began using the equity method of accounting, rather than the cost method, for
its investment in Ikonic. On July 31, 1996, Black Sun successfully completed
an equity financing, issuing preferred stock to an outside party in exchange
for $2,000,000, and reducing CMG @Ventures' ownership in Black Sun to 92%.
(See Note 7)
CMG @Ventures invested $1,000,000 to purchase an initial 44.9% ownership in
GeoCities in January 1996, and increased its ownership to 61.2% with an
additional $1,000,000 investment in June 1996. Also in June 1996, Freemark
successfully completed a $5,100,000 equity financing. Pursuant to this
transaction, CMG @Ventures invested an additional $3,200,000 in Freemark,
including the conversion of $1,670,000 of notes which had been funded to
Freemark during fiscal 1996, and increased its ownership from 43.8% to 54.3%.
The Company accounted for its investments in GeoCities and Freemark on the
equity method during the period CMG @Ventures owned minority interests.
Beginning in June 1996, when controlling interests were acquired, the Company,
accordingly, began including the operating results of GeoCities and Freemark in
the Company's consolidated operating results.
<PAGE>
- ---------------------------------------------------- 38
notes to consolidated financial statements (cont'd.) --
- ---------------------------------------------------- 39
In February and June 1996, CMG @Ventures invested $2,000,000 to acquire a 44.8%
interest in Vicinity and $750,000 to acquire a 45.6% interest in TeleT. During
fiscal 1996, the Company's investments in Vicinity and TeleT were accounted for
on the equity method.
The Company's investments in Lycos, NetCarta, Black Sun, Freemark, GeoCities,
Ikonic, TeleT and Vicinity were made through its majority-owned subsidiary
limited partnership, CMG @Ventures, L.P. and its wholly owned subsidiary CMG
@Ventures, Inc. The Company owns 100% of the capital interest and has all
voting rights, and is entitled to 77.5% of the net capital gains, as defined, of
these investments. The remaining 22.5% interest in the net capital gains on
these investments are attributed to profit partners, including the President and
Chief Executive Officer of the Company. The Company is responsible for all
operating expenses of CMG @Ventures, L.P.
The acquisition accounting and valuation for the Company's or its subsidiaries'
investments in Freemark, NetCarta, GeoCities, Point, and Vicinity resulted in a
total of $2,691,000 being identified as in-process research and development,
which was expensed because technological feasibility had not been reached at the
dates the investments were made.
(9) Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation and benefits $1,538,000 $ 481,000
Accrued list owners' commissions 1,168,000 1,152,000
Other 3,539,000 1,073,000
- --------------------------------------------------------------------------------
$6,245,000 $2,706,000
- --------------------------------------------------------------------------------
</TABLE>
(10) Commitments
The Company leases office space, machinery and equipment, and automobiles under
various noncancelable operating leases. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
Year ending July 31:
- --------------------------------------------------------------------------------
<S> <C>
1997 $3,438,000
1998 3,464,000
1999 2,145,000
2000 593,000
2001 42,000
- --------------------------------------------------------------------------------
$9,682,000
- --------------------------------------------------------------------------------
</TABLE>
Total rent expense charged to continuing operations was $2,112,000, $1,093,000
and $890,000 for the years ended July 31, 1996, 1995 and 1994, respectively.
In April 1996, Lycos entered into a one year "Premier Provider" agreement
("the Agreement") with Netscape Communications Corporation ("Netscape")
pursuant to which Lycos was designated one of five "Premier Providers" of
search and navigation services accessible from the "Net Search" button on the
Netscape browser. Under the terms of the Agreement, Lycos is obligated to make
installment payments totaling $5 million over the term of the Agreement. The
Company is recording the cost of the Agreement ratably over its one year term,
included in "cost of sales" in the Consolidated Statements of Operations. Thus,
included in "cost of sales" for the year ended July 31, 1996, is the prorated
portion of the Agreement since the service commenced in April 1996.
(11) Stockholders' Equity
During fiscal year 1996, the Company's stockholders approved an increase in the
Company's authorized common shares to 40,000,000.
On February 2, 1996, March 17, 1995 and November 9, 1993, the Company effected
2-for-1, 3-for-2 and 2.6-for-1 common stock splits, respectively, in the form
of stock dividends. Accordingly, all data shown in the accompanying consoli-
dated financial statements has been retroactively adjusted to reflect these
events.
<PAGE>
(12) Stock Option Plans
The Company has two stock option plans currently in effect: the 1986 Stock
Option Plan (the "1986 Plan") and the 1995 Stock Option Plan For Non-Employee
Directors (the "Directors' Plan"). The Directors' Plan was adopted by the Board
of Directors on May 31, 1995, and was approved by the stockholders of the
Company at the 1995 Annual Meeting of Stockholders. Options under both plans
are granted at fair market value on the date of the grant.
Options granted under the 1986 Plan are generally exerciseable in equal
cumulative installments over a three-to-ten year period beginning one year after
the date of grant. Options under the Directors' Plan become exerciseable in
five equal annual installments beginning immediately after each Annual
Stockholders Meeting following grant. Outstanding options under both Plans at
July 31, 1996, expire through 2005.
Under the 1986 Plan, non-qualified stock options may be granted to the Company's
key employees. The Board of Directors administers this plan, selects the
individuals to whom options will be granted, and determines the number of shares
and exercise price of each option. 1,500,000 shares of the Company's common
stock were initially reserved for issuance under this plan. During fiscal 1994,
the Company's Board of Directors reserved 1,533,024 additional shares of common
stock for issuance upon the exercise of options. Effective upon the acquisition
of BookLink by America Online, the tandem stock options held by BookLink
employees, which provided them with an option to purchase the Company's common
stock or BookLink common stock, became null and void with respect to the option
to purchase the Company's common stock. The number of options voided upon the
sale was 398,250, having option strike prices ranging from $2.67 to $5.34. All
BookLink options were assumed by America Online. See note 5 for additional
information.
Pursuant to the Directors' Plan, 282,000 shares of the Company's common stock
were initially reserved. Options for 47,000 shares are to be granted to each
Director who is neither an officer or full time employee of the Company, nor an
affiliate of an institutional investor which owns shares of common stock of the
Company. Options were granted to existing Directors with five years of
continuous service at the date the Plan was adopted, and are to be granted to
future Directors at the time of election to the Board.
The status of the plans during the three fiscal years ended July 31, 1996, was
as follows:
<TABLE>
<CAPTION>
Options
available Options Option
for grant outstanding price
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1993 229,086 411,840 $ 0.128-0.657
Authorized 1,533,024 -- --
Issued (805,350) 805,350 1.539-3.334
Exercised -- (75,234) 0.128-0.657
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 956,760 1,141,956 $ 0.231-3.334
Authorized 282,000 -- --
Issued (600,338) 600,338 2.833-13.375
Exercised -- (65,700) 0.231-1.539
Cancelled 473,520 (473,520) 1.539-5.334
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 1,111,942 1,203,074 $ 0.231-13.375
Issued (228,456) 228,456 10.125-35.625
Exercised -- (320,842) 0.231-8.25
Cancelled 88,830 (88,830) 0.231-12.875
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 972,316 1,021,858 $ 1.539-35.625
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options were exerciseable with respect to 142,896 shares at July 31,1996
(13) Employee Stock Purchase Plan
On October 4, 1994, the Board of Directors of the Company adopted the 1995
Employee Stock Purchase Plan (the Plan). The purpose of the Plan is to provide a
method whereby all eligible employees of the Company and its subsidiaries may
acquire a proprietary interest in the Company through the purchase of shares of
common stock. Under the Plan, employees may purchase the Company's common stock
through payroll deductions.
At the beginning of each of the Company's fiscal quarters, commencing with
February 1, 1995, employees are granted an option to purchase shares of the
Company's common stock at an option price equal to 85% of the fair market value
of the Company's common stock on either the first business day or last business
day of the applicable quarterly period, whichever is lower.
Employees purchased 8,324 and 7,374 shares of common stock of the Company during
fiscal 1996 and 1995, respectively.
<PAGE>
- ---------------------------------------------------- 40
notes to consolidated financial statements (cont'd.) --
- ---------------------------------------------------- 41
(14) Income Taxes
The provision for income taxes from continuing operations for the years ended
July 31, consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
- ------------------------------------------------------
July 31, 1994:
- ------------------------------------------------------
<S> <C> <C> <C>
Federal $1,017,000 $ 67,000 $ 1,084,000
State 92,000 35,000 127,000
- ------------------------------------------------------
$1,109,000 $ 102,000 $ 1,211,000
- ------------------------------------------------------
July 31, 1995:
- ------------------------------------------------------
Federal $2,569,000 $ (70,000) $ 2,499,000
State 367,000 (22,000) 345,000
- ------------------------------------------------------
$2,936,000 $ (92,000) $ 2,844,000
- ------------------------------------------------------
July 31, 1996:
- ------------------------------------------------------
Federal $7,758,000 $6,448,000 $14,206,000
State 632,000 1,835,000 2,467,000
- ------------------------------------------------------
$8,390,000 $8,283,000 $16,673,000
- ------------------------------------------------------
</TABLE>
Excluded from the tax provision in fiscal 1996 but included in deferred income
tax liabilities are $666,000 provided for the effect of subsidiaries' equity
transactions and $78,000 related to the difference in bases of acquired assets.
Excluded from the tax provision in fiscal 1995 but included in deferred income
tax liabilities were $10,810,000 provided for unrealized holding gains from the
increase in the market value of available-for-sale securities and $ 9,298,000
owed in conjunction with the disposal of BookLink.
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:
<TABLE>
<CAPTION>
July 31, 1996 July 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
Current Non-current Total Current Non-current Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Accounts receivable
allowance for bad debts $ 82,000 $ -- $ 82,000 $ 61,000 $ -- $ 61,000
Other 131,000 -- 131,000 161,000 153,000 314,000
- --------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax
assets 213,000 -- 213,000 222,000 153,000 375,000
- --------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Gain on issuance of stock
by subsidiary -- 8,042,000 8,042,000 -- -- --
Effect of subsidiaries'
equity transactions -- 666,000 666,000 -- -- --
Differences in tax
depreciation and
amortization -- 336,000 336,000 -- 96,000 96,000
Differences in bases of
acquired assets -- 78,000 78,000 -- -- --
Gain on available-for-sale
securities -- -- -- 20,108,000 -- 20,108,000
- --------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax
liabilities -- 9,122,000 9,122,000 20,108,000 96,000 20,204,000
- --------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset
(liability) $ 213,000 $ (9,122,000) $ (8,909,000) $ (19,886,000) $ 57,000 $ (19,829,000)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
State income tax expenses for the year ended July 31, 1994 have been reduced by
approximately $178,000 resulting from the realization of state operating loss
carryforwards.
The following table reconciles the income tax expense based on the federal
statutory income tax rate to the Company's actual income tax expense:
<TABLE>
<CAPTION>
July 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes at federal
statutory rate $10,848,000 $2,586,000 $1,078,000
Increase (reduction) in income taxes
resulting from:
Amortization of goodwill 146,000 5,000 5,000
In-process research and development 784,000 -- --
Subsidiaries' operating losses not
benefited 2,959,000 -- --
Equity in losses of affiliates 1,020,000 -- --
Minority interest (759,000) -- --
State income taxes, net of federal
benefit 1,604,000 228,000 84,000
Other 71,000 25,000 44,000
- --------------------------------------------------------------------------------
Actual income tax expense $16,673,000 $2,844,000 $1,211,000
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
(15) Lines of Credit
At July 31, 1995, the Company's credit agreement included two revolving lines of
credit totaling $5.0 million. Since July 31, 1995 these lines have lapsed and
the Company has not pursued renewal. Lycos has a $1.0 million credit facility
which expires on June 1, 1997. No balances were outstanding under this
agreement at July 31, 1996.
(16) Selected Quarterly Financial Information (unaudited)
The following table sets forth selected quarterly financial and stock price
information for the years ended July 31, 1996 and 1995. The operating results
for any given quarter are not necessarily indicative of results for any future
period. The Company's common stock is traded on the NASDAQ National Market
System ("NASDAQ/NMS") under the symbol CMGI. Included below are the high and
low sales prices (adjusted for a 3-for-2 stock split effected on March 17, 1995,
and a 2-for-1 stock split effected on February 2, 1996) during each quarterly
period for the shares of common stock as reported by NASDAQ/NMS.
<TABLE>
<CAPTION>
(in thousands, except per share data)
Fiscal 1996 Quarter ended Fiscal 1995 Quarter ended
- ------------------------------------------------------------------------------------------------------------------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31 Jan. 31 Apr. 30 Jul. 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 5,835 $ 6,105 $ 7,484 $ 9,061 $5,663 $ 5,540 $ 5,978 $5,112
Cost of sales 3,593 3,827 5,266 6,751 3,108 3,285 3,488 3,133
Research and development expenses 500 1,449 1,751 3,271 -- -- -- --
In-process research and
development expenses -- 452 -- 2,239 -- -- -- --
Selling, general and
administrative expenses 2,776 3,643 5,270 8,271 1,369 1,489 1,717 1,812
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (1,034) (3,266) (4,803) (11,471) 1,186 766 773 167
Interest income, net 239 829 474 1,149 26 21 22 156
Gain on sale of
available-for-sale securities 30,049 -- -- -- -- -- 4,781 --
Gain on issuance of stock by
subsidiary -- -- 19,575 -- -- -- -- --
Equity in losses of affiliates (270) (751) (931) (963) -- -- (48) (258)
Minority interest 43 257 517 1,352 -- -- -- 14
Income tax (expense) benefit (10,849) 286 (7,418) 1,308 (485) (315) (2,005) (39)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 18,178 (2,645) 7,414 (8,625) 727 472 3,523 40
Gain (loss) from discontinued
operations -- -- -- -- (211) 23,664 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,178 $(2,645) $ 7,414 $ (8,625) $ 516 $24,136 $ 3,523 $ 40
- ------------------------------------------------------------------------------------------------------------------------------------
Market Price
High $ 18.00 $ 50.25 $ 47.25 $ 33.00 $ 5.59 $ 7.75 $ 9.25 $13.63
Low $ 9.63 $ 17.38 $ 26.13 $ 12.25 $ 2.75 $ 4.92 $ 6.00 $ 5.50
</TABLE>
(17) Subsequent Events (unaudited)
In August 1996, CMG @Ventures invested $2,000,000 to acquire a 46% minority
interest in Parable LLC, a start-up software firm developing multi-media tools
and technology, which will be accounted for on the equity method. Also,
subsequent to July 31, 1996, the Company funded an additional $1,910,000 to
NetCarta.
In September 1996, the Company sold its equity interest in TeleT to Premiere
Technologies, Inc. (Premiere) in exchange for $550,000 and 320,883 shares of
Premiere stock. The market value of the Premiere stock at the date of closing
was approximately $7,700,000. The Company's entire interest in TeleT was owned
by its majority-owned subsidiary limited partnership CMG @Ventures L.P.
Subsequent to July 31, 1996, the Company entered into noncancelable operating
leases for office space and machinery and equipment with total future minimum
lease payments of $4,065,000.
<PAGE>
independent auditors' report 42
--
The Board of Directors CMG Information Services, Inc.:
We have audited the accompanying Consolidated Balance Sheets of CMG
Information Services, Inc. and subsidiaries as of July 31, 1996 and 1995, and
the related Consolidated Statements of Operations, Stockholders' Equity, and
Cash Flows for each of the years in the three-year period ended July 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CMG Information Services, Inc. and subsidiaries at July 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended July 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 16, 1996
<PAGE>
Exhibit 22
CMG INFORMATION SERVICES, INC.
SUBSIDIARIES OF THE REGISTRANT
1. SalesLink Corporation, a Massachusetts corporation.
2. CMG Securities Corporation, a Massachusetts corporation.
3. CMG @Ventures, Inc., a Delaware corporation.
4. CMG @Ventures Capital Corporation, a Delaware corporation.
5. CMG @Ventures, L.P., a Delaware limited partnership.
6. Lycos, Inc., a Delaware corporation
7. NetCarta Corporation, a California corporation
8. CMG Direct Interactive, Inc., a Delaware corporation.
9. Black Sun Interactive, Inc., a Delaware corporation.
10. Freemark Communications, Inc., a Delaware corporation.
11. GeoCities, a California corporation.
12. Planet Direct Corporation, a Delaware corporation.
13. CyberVillages Corporation, a Delaware corporation.
14. ADSmart Corporation, a Delaware corporation.
15. InfoMation Publishing Corporation, a Delaware corporation.
24
--
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CMG Information Services, Inc.:
We consent to the incorporation by reference in the registration statements of
CMG Information Services, Inc. on Form S-8 (File No. 33-86742 and File No. 33-
06745) of our reports dated September 16, 1996, relating to the Consolidated
Balance Sheets of CMG Information Services, Inc. and subsidiaries as of July 31,
1996 and 1995, and the related Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows and related schedule for each of the years
of the three-year period ended July 31, 1996, which reports appear in the July
31, 1996 annual report on Form 10-K of CMG Information Services, Inc.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 28, 1996
25
--
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JULY 31,
1996 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED JULY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 63,387
<SECURITIES> 13,069
<RECEIVABLES> 10,666
<ALLOWANCES> 442
<INVENTORY> 0
<CURRENT-ASSETS> 90,566
<PP&E> 14,657
<DEPRECIATION> 6,196
<TOTAL-ASSETS> 109,503
<CURRENT-LIABILITIES> 18,557
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 53,900
<TOTAL-LIABILITY-AND-EQUITY> 109,503
<SALES> 28,485
<TOTAL-REVENUES> 28,485
<CGS> 19,437
<TOTAL-COSTS> 49,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,691)
<INCOME-PRETAX> 30,995
<INCOME-TAX> 16,673
<INCOME-CONTINUING> 14,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,322
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.45
</TABLE>
