<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
_____________________________
For the quarter ended April 30, 1996 Commission File Number 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)
187 Ballardvale Street, Suite B110 01887
Wilmington, Massachusetts (Zip Code)
(Address of principal executive offices)
(508) 657-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
--- ---
Number of shares outstanding of the issuer's common stock, as of June 7, 1996
Common Stock, par value $.01 per share 9,162,076
-------------------------------------- ----------------------------
Class Number of Shares Outstanding
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
April 30, 1996 and July 31, 1995 3
Consolidated Statements of Operations
Three and nine months ended April 30, 1996 and 1995 4
Consolidated Statements of Cash Flows
Nine months ended April 30, 1996 and 1995 5
Notes to Interim Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Part II. OTHER INFORMATION 14-15
SIGNATURE 16
Page 2
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
April 30, 1996 July 31, 1995
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,877,000 $ 9,423,000
Available-for-sale securities 22,834,000 56,228,000
Accounts receivable, trade, less allowance for doubtful
accounts 8,255,000 5,345,000
License fees receivable 2,409,000 -
Prepaid expenses and other current assets 1,319,000 370,000
Refundable income taxes - 666,000
------------ -----------
Total current assets 98,694,000 72,032,000
Property and equipment, net 7,061,000 2,787,000
Investments in affiliates 4,748,000 2,700,000
Cost in excess of net assets of subsidiaries acquired, net of
accumulated amortization 1,363,000 1,280,000
Deferred mailing list costs 623,000 733,000
Notes receivable - affiliate 1,670,000 -
Other assets 2,994,000 954,000
------------ -----------
$117,153,000 $80,486,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,816,000 $4,095,000
Accrued income taxes 5,484,000 -
Deferred revenues 3,762,000 -
Deferred income taxes - 19,886,000
Other 2,118,000 322,000
------------ -----------
Total current liabilities 20,180,000 24,303,000
Deferred income taxes 8,503,000 -
Other long term liabilities 477,000 508,000
Minority interest 26,292,000 185,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 40,000,000 shares; issued and
outstanding 9,161,768 shares at April 30, 1996 and 8,838,720 shares
at July 31, 1995 92,000 88,000
Additional paid-in capital 8,327,000 7,062,000
Net unrealized holding gain - 18,005,000
Retained earnings 53,282,000 30,335,000
------------ -----------
Total stockholders' equity 61,701,000 55,490,000
------------ -----------
$117,153,000 $80,486,000
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 3
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months months ended April 30,
---------------------------- ----------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 7,484,000 $ 5,977,000 $19,424,000 $17,181,000
Operating expenses:
Cost of sales 5,266,000 3,487,000 12,686,000 9,881,000
Research and development expenses 1,751,000 - 3,702,000 -
In process research and development - - 452,000 -
Selling expenses 2,685,000 823,000 5,548,000 2,231,000
General and administrative expenses 2,585,000 894,000 6,139,000 2,344,000
----------- ---------- ----------- -----------
Total operating expenses 12,287,000 5,204,000 28,527,000 14,456,000
----------- ---------- ----------- -----------
Operating income (loss) (4,803,000) 773,000 (9,103,000) 2,725,000
----------- ---------- ----------- -----------
Other income (deductions):
Gain on sale of available-for-sale securities - 4,781,000 30,049,000 4,781,000
Gain on issuance of stock by subsidiary 19,575,000 - 19,575,000 -
Equity in losses of affiliates (931,000) (48,000) (1,952,000) (48,000)
Interest income, net 474,000 22,000 1,542,000 69,000
Minority interest 517,000 - 817,000 -
----------- ---------- ----------- -----------
19,635,000 4,755,000 50,031,000 4,802,000
----------- ---------- ----------- -----------
Income from continuing operations
before income taxes 14,832,000 5,528,000 40,928,000 7,527,000
Income tax expense 7,418,000 2,006,000 17,981,000 2,805,000
----------- ---------- ----------- -----------
Income from continuing operations 7,414,000 3,522,000 22,947,000 4,722,000
Discontinued operations, net of income taxes:
Loss from operations of
BookLink Technologies, Inc. - - - (690,000)
Gain on disposal of
BookLink Technologies, Inc. - - - 24,143,000
----------- ---------- ----------- -----------
Net income $ 7,414,000 $ 3,522,000 $22,947,000 $28,175,000
=========== ========== =========== ===========
Net income per share:
Income from continuing operations $ 0.74 $ 0.37 $ 2.32 $ 0.50
Loss from discontinued operations of
BookLink Technologies, Inc. - - - (0.07)
Gain on disposal of
BookLink Technologies, Inc. - - - 2.58
----------- ---------- ----------- -----------
Net income $ 0.74 $ 0.37 $ 2.32 $ 3.01
=========== ========== =========== ===========
Weighted average shares outstanding 9,969,000 9,394,000 9,907,000 9,376,000
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 4
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended April 30,
---------------------------
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 22,947,000 $ 4,722,000
Adjustments to reconcile net income to net
cash provided by (used for) continuing operations:
Depreciation and amortization 1,606,000 682,000
Deferred income taxes 8,308,000 (3,698,000)
Gain on sale of available-for-sale securities (30,049,000) (4,781,000)
Gain on issuance of stock by subsidary (19,575,000) -
Equity in losses of affiliates 1,952,000 48,000
Minority interest (817,000) -
In process research and development 452,000 -
Changes in operating assets and liabilities, excluding effects
of acquired company:
Accounts and license fees receivable (5,894,000) (1,404,000)
Prepaid expenses and other current assets (869,000) (47,000)
Other assets (554,000) (16,000)
Accounts payable and accrued expenses 4,493,000 519,000
Deferred revenues 3,739,000 -
Refundable and accrued income taxes 13,024,000 5,295,000
------------ -----------
Net cash provided by (used for) continuing operations (1,237,000) 1,320,000
Net cash used for discontinued operations - (589,000)
------------ -----------
Net cash provided by (used for) operating activities (1,237,000) 731,000
------------ -----------
Cash flows from investing activities:
Proceeds from sale or maturity of available-for-sale securities 60,154,000 15,531,000
Income taxes paid related to sale of available-for-sale-securities (15,416,000) -
Purchase of available-for-sale securities (25,526,000) -
Additions to property and equipment (5,959,000) (1,187,000)
Sale of property and equipment 705,000 -
Investments in affiliates (4,000,000) (1,750,000)
Issuance of notes receivable to affiliate (1,670,000) -
Payments related to disposal of BookLink Technologies, Inc. - (650,000)
Other (696,000) (235,000)
------------ -----------
Net cash provided by investing activities 7,592,000 11,709,000
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 381,000 34,000
Net proceeds from issuance of stock by subsidiary 46,021,000 -
Proceeds from short-term borrowings 940,000 -
Repayment of short-term borrowings (940,000) -
Other 1,697,000 (136,000)
------------ -----------
Net cash provided by (used for) financing activities 48,099,000 (102,000)
------------ -----------
Net increase in cash and cash equivalents 54,454,000 12,338,000
Cash and cash equivalents at beginning of period 9,423,000 2,955,000
------------ -----------
Cash and cash equivalents at end of period $ 63,877,000 $15,293,000
============ ===========
Supplemental disclosure information:
Cash paid during the period for:
Interest $ 44,000 $ 18,000
============ ===========
Income taxes $ 12,005,000 $ 748,000
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
Page 5
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated financial statements have been prepared
by the Company in accordance with generally accepted accounting principles. In
the opinion of management, the accompanying consolidated financial statements
contain all adjustments, consisting only of those of a normal recurring nature,
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows at the dates and for the periods indicated. While
the Company believes that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 1995, which are contained in the Company's Form 10-K.
The results of the three and nine month periods ended April 30, 1996
are not necessarily indicative of the results to be expected for the full fiscal
year. Financial information related to BookLink Technologies, Inc. (BookLink)
has been presented as discontinued operations. Certain prior year amounts in the
consolidated financial statements have been reclassified in accordance with
generally accepted accounting principles to conform with current year
presentation.
During the quarter ended April 30, 1996, the Company adopted a policy of
recognizing gains on issuance of stock by its subsidiaries in the Company's
consolidated statement of operations if the Company determines the conditions
prescribed by Staff Accounting Bulletin number 51 have been met. 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. Under the
Company's policy, if at that time the subsidiary is an operating entity and not
engaged principally in research and development, the Company records the
increase as gain.
B. Discontinued Operations of SalesLink Corporation Subsequently Retained
During the second quarter of 1996, the Company decided to retain its
subsidiary SalesLink Corporation (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 since that
time. The decision was made to continue to operate SalesLink because of its
potential synergies with the Company's newly formed subsidiary CMG Direct
Interactive, Inc. Accordingly, the operating results of SalesLink are now
included in continuing operations, classified as the Company's fulfillment
services segment, and the accompanying consolidated balance sheet as of July 31,
1995 has been reclassified to present SalesLink within continuing operations.
During the first quarter of fiscal 1996, SalesLink generated sales and
operating income of $2,473,000 and $172,000, respectively. The total assets and
liabilities of SalesLink were $4,989,000 and $1,255,000, respectively, as of
October 31, 1995, and $4,400,000 and $1,211,000, respectively as of July 31,
1995.
C. Public Sale of Subsidiary Company Stock
In April, 1996, the Company's subsidiary, Lycos, Inc. (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.
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. 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. The Company's interest
in Lycos is subject to further reduction because CMG@Ventures, L.P. has agreed
to sell to Lycos up to a total of 999,776 shares of common stock of Lycos to
provide shares issuable upon exercise of options granted by Lycos under its
stock option plans. Of these 999,776 shares, CMG@Ventures, L.P. is obligated to
sell 709,480 shares to Lycos at a purchase price of $0.01 per share and 290,296
shares at prices ranging from $0.29 per share to $16 per share.
Page 6
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
D. Acquisitions and Investments
On October 15, 1995, the Company's majority owned subsidiary, Lycos,
acquired 100% of Point Communications Corporation (Point), a company involved in
reviewing and ranking sites on the Internet, in exchange for a minority interest
in Lycos. The acquisition accounting and valuation for the Point acquisition by
Lycos resulted in $452,000 of the total $542,000 purchase price being identified
as in process research and development, which was expensed because technological
feasibility had not been reached at the acquisition date. This amount was
charged to operating results in the second quarter when the acquisition
valuation and accounting was determined. The former owner of Point also received
an option to purchase 343,000 additional Lycos shares 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.
During the second quarter of fiscal year 1996 the Company, through its
subsidiary limited partnership, CMG @Ventures, L.P. invested $2,750,000 to
increase its ownership in its affiliate, Ikonic Interactive, Inc. (Ikonic), from
19.8% to 36.8% and to purchase a minority ownership interest in a new affiliate,
GeoCities, which is a builder and operator of special-interest on-line
communities. With its increase in ownership in Ikonic, the Company now uses the
equity method of accounting, rather than the cost method, for its investment in
Ikonic. The Company's investment in GeoCities is accounted for on the equity
method.
In the third quarter of fiscal 1996 and in June, 1996, CMG@Ventures,
L.P. invested $2,750,000 to acquire minority interests in Vicinity Corporation
(formerly Proximus) and TELET Communications (formerly Connect). Vicinity
Corporation is a provider of geographical mapping services for the World Wide
Web and TELET sells products which allow direct telephone to Internet access for
adding or editing Web pages (Dial Web) and also enable users to communicate in
their own voice to other Web users (AMail). The Company's investments in
Vicinity and TELET are accounted for on the equity method.
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 $4,507,000 and $2,381,000 at April 30, 1996 and July 31, 1995,
respectively. Amortization included in "Equity in losses of affiliates" was
$106,000 and $299,000 for the three and nine months ended April 30, 1996,
respectively. Amortization is recorded on a straight-line basis over 10 years.
On June 7, 1996, FreeMark Communications Inc. (FreeMark), in which CMG
@Ventures L.P. owned a 43.8% ownership interest at April 30, 1996, successfully
completed a $5.1 million equity financing. Pursuant to this transaction,
CMG@Ventures L.P. invested an additional $3.2 million in FreeMark, including the
conversion of $1,670,000 notes which were included in notes receivable -
affiliate in the Company's April 30, 1996 balance sheet.
Including the FreeMark transaction, the acquisition accounting and
valuation for investments totaling $6,950,000 to date may result in a
significant portion of the purchase price being identified as in-process
research and development, which will be charged to operating results in the
fourth quarter of fiscal 1996 when the acquisition accounting is determined.
The Company's investments in Lycos, Ikonic, FreeMark, TELET, Vicinity,
and GeoCities (as well as its other Internet related investments in NetCarta
Corp. and Black Sun Interactive, Inc.) are owned 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 attributable to six 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.
E. Available-for-Sale Securities
At July 31, 1995 available-for-sale securities included 1,020,000
shares of America Online Stock, which the Company sold during the quarter ended
October 31, 1995. The net proceeds from the sale were $57,462,000 and the
Company realized a gain on the sale of $30,049,000.
At April 30, 1996, available-for-sale securities consist of debt
securities, carried at fair value, which the Company does not intend to hold to
maturity. The estimated fair value of these securities consists of $18,780,000
of U.S. Government agency obligations and $4,054,000, of municipal obligations.
The estimated fair value of each investment approximates its amortized cost.
Page 7
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
F. Segment Information
The Company's operations are classified in three primary business
segments: (i) list and database services, (ii) fulfillment services and (iii)
investment and development. Summarized financial information by business segment
is as follows:
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
List and database services $ 2,468,000 $ 2,598,000 $ 8,290,000 $ 8,507,000
Fulfillment services 3,437,000 3,379,000 8,513,000 8,674,000
Investment and development 1,579,000 - 2,621,000 -
----------- ----------- ----------- -----------
$ 7,484,000 $ 5,977,000 $19,424,000 $17,181,000
=========== =========== =========== ===========
Operating income (loss):
List and database services $ (787,000) $ 201,000 $ (710,000) $ 1,510,000
Fulfillment services 561,000 762,000 1,014,000 1,405,000
Investment and development (4,577,000) (190,000) (9,407,000) (190,000)
----------- ----------- ----------- -----------
$(4,803,000) $ 773,000 $(9,103,000) $ 2,725,000
=========== =========== =========== ===========
</TABLE>
G. Commitments
In April 1996, the Company's consolidated subsidiary, 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. For the three months ended April 30, 1996, Lycos
has recorded a pro-rata portion of this obligation of approximately $278,000 in
"Cost of Revenues" and "Accrued Expenses".
During the quarter ended April 30, 1996, the Company through its
subsidiaries entered into operating lease commitments with future minimum lease
payments totaling $2,133,000 through fiscal 2001.
As of April 30, 1996, the Company was obligated to continue to fund
its portfolio companies a total of $2,000,000 in the form of working capital or
additional equity ownership, plus approximately $3,350,000 upon the achievement
of certain milestones.
H. Earnings Per Share
Net income per common share is computed based upon the weighted
average number of common and common equivalent shares outstanding during each
period. Common equivalent shares, using the treasury stock method, are included
in the per share calculations only when the effect of their inclusion would be
dilutive. Common stock equivalent shares consist of stock options. On February
2, 1996 and March 17, 1995, the Company effected two-for-one and three-for-two
common stock splits, respectively, in the form of stock dividends. Accordingly,
the financial statements have been retroactively adjusted to reflect these
events.
Page 8
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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.
Discontinued Operations of SalesLink Corporation Subsequently Retained
During the second quarter of fiscal 1996, the Company decided to
retain its subsidiary SalesLink Corporation (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 since that time. The decision was made to continue to operate
SalesLink because of its potential synergies with the Company's newly formed
subsidiary CMG Direct Interactive Inc. (CMGDI). Accordingly, the operating
results of SalesLink are now included in continuing operations, classified as
the Company's fulfillment services segment, and the accompanying consolidated
balance sheet as of July 31, 1995 has been reclassified to present SalesLink
within continuing operations.
During the first quarter of fiscal 1996, SalesLink generated sales and
operating income of $2,473,000 and $172,000, respectively. The total assets and
liabilities of SalesLink were $4,989,000 and $1,255,000, respectively, as of
October 31, 1995, and $4,400,000 and $1,211,000, respectively, as of July 31,
1995.
Formation of CMG Direct Interactive Inc.
During fiscal 1996, the Company formed a new subsidiary, 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 former "list and list services" segment is now referred
to as the "list and database services" segment and includes the results of this
subsidiary.
Three months ended April 30, 1996 compared to three months ended April 30, 1995
Net sales for the quarter ended April 30, 1996 increased $1,507,000 or
25%, to $7,484,000 from $5,977,000 for the quarter ended April 30, 1995. The
increase was primarily attributable to sales of $1,579,000 from the Company's
investment and development segment which was formed during the third quarter of
fiscal 1995, but did not begin generating revenues until the fourth quarter of
fiscal 1995. This increase was partially offset by a $130,000 sales decrease
compared to the prior year in the Company's list and database services segment,
due to increases in paper and postage costs which have impacted the entire
direct marketing industry. As the portfolio companies of the investment and
development segment continue to develop and introduce their products
commercially in the coming months, the Company expects to report further revenue
growth in this segment.
Cost of sales increased $1,779,000, or 51%, to $5,266,000 in the third
quarter of fiscal 1996 from $3,487,000 for the corresponding period in fiscal
1995, due to $1,472,000 of costs related to the Company's new investment and
development segment and increases of $179,000 and $128,000 in the cost of sales
for the list and database services segment and fulfillment services segment,
respectively. In the list and database services segment, cost of sales as a
percentage of net sales increased to 65% in the third quarter of fiscal 1996
from 55% in the third quarter of fiscal 1995. The increase in the list and
database services cost of sales 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 initial development of this list now complete and operations
commencing, operating costs are being incurred and previously capitalized costs
are now being amortized.
Research and development expenses totaled $1,751,000 in the quarter
ended April 30, 1996, primarily consisting of $1,220,000 related to the
operations of the investment and development segment and $461,000 incurred by
CMGDI in the list and database services segment. No research and development
costs were incurred in the third quarter of fiscal year 1995. The Company
anticipates it will continue to devote substantial resources to product
development and that these costs may substantially increase in absolute dollars
in future periods.
Selling expenses increased $1,862,000, or 226%, to $2,685,000 in the
third quarter ended April 30, 1996 from $823,000 for the corresponding period in
fiscal 1995. This increase was primarily attributable to $1,815,000 incurred in
the Company's new investment and development segment, reflecting the sales and
marketing efforts related to various product launches. Selling expenses
increased as a percentage of net sales to 36%, in the third quarter of fiscal
1996 from 14% in the third quarter of fiscal 1995. The Company expects continued
increases in sales and marketing expenses.
Page 9
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, (Continued)
General and administrative expenses increased $1,691,000, or 189%, to
$2,585,000 in the third quarter of fiscal 1996 from $894,000 for the
corresponding period in fiscal 1995. The 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 $1,458,000, compared with
the third quarter of 1995, including payroll, facilities, legal and accounting,
depreciation and other general and administrative costs. General and
administrative expenses increased as a percentage of net sales to 35% in the
third quarter of fiscal 1996 from 15% in the third quarter of 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, expand
their administrative staffs and infrastructures.
Equity in losses of affiliates resulted from the Company's minority
ownership in FreeMark Communications (FreeMark), Ikonic Interactive, Inc.
(Ikonic), GeoCities, Vicinity Corporation (Vicinity) and TELET Communications
LLC (TELET). These investments, which were made through CMG@Ventures, L.P., are
accounted for under the equity method, whereby the Company's proportionate share
of each affiliate's operating losses 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. Since the Company's first investment accounted for on
the equity method, FreeMark, was made during the third quarter of fiscal 1995,
only $48,000 equity in losses were recognized during the three months ended
April 30, 1995 compared with $931,000 for the three months ended April 30, 1996.
The Company expects its 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. See Note D of Notes to Interim Consolidated Financial
Statements.
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. This gain represents the increase in the
Company's proportionate share of Lycos' equity. See Notes C and D of Notes to
Interim Consolidated Financial Statements for a more complete description of
this transaction.
Interest income, net increased $452,000 compared to the quarter ended
April 30, 1995. The increase is primarily due to income from investment of the
proceeds from the sale of America Online common stock, and the Lycos initial
public offering which occurred in October, 1995, and April, 1996, respectively.
Income tax expense in the third quarter of fiscal 1996 was $7,418,000.
The Company provides for income taxes on a year to date basis at an effective
rate based upon its estimate of full year earnings. In determining the Company's
effective rate, equity in losses of affiliates is excluded, since no tax benefit
on such losses is recognized by the Company.
Nine months ended April 30, 1996 compared to nine months ended April 30, 1995
Net sales increased $2,243,000, or 13%, to $19,424,000 for the nine
months ended April 30, 1996 from $17,181,000 for the corresponding period in
fiscal 1995. The increase was attributable to sales of $2,621,000 from the
Company's investment and development segment which was formed during the third
quarter of fiscal 1995, offset by sales declines of $217,000 and $161,000, in
the Company's list and database services and fulfillment services segments,
respectively. As the portfolio companies of the investment and development
segment continue to develop and introduce their products commercially in the
coming months, the Company expects to report revenue growth in this segment.
Cost of sales increased $2,805,000, or 28%, to $12,686,000 for the
nine months ended April 30, 1996 from $9,881,000 for the corresponding period in
fiscal 1995, due primarily to $2,139,000 of costs related to the Company's new
investment and development segment and an increase of $708,000 in the cost of
sales for the list and database services segment.
In the list and database services segment, cost of sales as a
percentage of net sales increased to 60%, in the first nine months of fiscal
1996 from 51%, in the same period in fiscal 1995. The increase in the list and
database services cost of sales 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 initial development of this list now complete and operations
commencing, operating costs are being incurred and previously capitalized costs
are now being amortized.
Page 10
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, (Continued)
Research and development expenses totaled $3,702,000 in the nine
months ended April 30, 1996, primarily consisting of $2,794,000 related to the
operations of the investment and development segment and $784,000 incurred by
CMGDI within the list and database services segment. In addition, in the nine
months ended April 30, 1996, the Company recorded $452,000 of in process
research and development expenses incurred by its consolidated subsidiary,
Lycos, related to the acquisition of Point. No research and development costs
were incurred in the first nine months of fiscal year 1995. The Company
anticipates it will continue to devote substantial resources to product
development and that these costs may substantially increase in absolute dollars
in future periods.
Selling expenses increased $3,317,000, or 149%, to $5,548,000 in the
nine months ended April 30, 1996 from $2,231,000 for the corresponding period in
fiscal 1995. This increase was primarily attributable to $2,916,000 incurred in
the Company's new investment and development segment, reflecting the sales and
marketing efforts related to various product launches. Selling expenses
increased as a percentage of net sales to 29% in the first nine months of fiscal
1996 from 13% in the first nine months of 1995. 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 absolute dollars in
future periods.
General and administrative expenses increased $3,795,000 or 162%, to
$6,139,000 in the first nine months of fiscal 1996 from $2,344,000 for the
corresponding period in fiscal 1995. The 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 $3,536,000, including
payroll, facilities, legal and accounting, depreciation and other general and
administrative costs. General and administrative expenses increased as a
percentage of net sales to 32% in the first nine months of fiscal 1996 from 14%
in the first nine months of 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, expand their administrative staffs and
infrastructures.
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. Interest income, net,
increased primarily due to income from investment of the proceeds from the sale
of the AMER stock.
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. This gain represents the increase in the
Company's proportionate share of Lycos' equity. See Note C of Notes to Interim
Consolidated Financial Statements for a more complete description of this
transaction.
Equity in losses of affiliates resulted from the Company's minority
ownership in FreeMark, Ikonic, GeoCities, Vicinity and TELET. These investments,
which were made through CMG@Ventures, L.P., are accounted for under the equity
method, whereby 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.
Since the Company's first investment accounted for on the equity method,
FreeMark, was made during the third quarter of fiscal 1995, only $48,000 equity
in losses were recognized during the first nine months of fiscal 1995, compared
with $1,952,000 for the first nine months of fiscal 1996. See Note D of Notes to
Interim Consolidated Financial Statements. The Company expects its 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.
Income tax expense in the first nine months of fiscal 1996 was
$17,981,000. The Company provides for income taxes on a year to date basis at an
effective rate based upon its estimate of full year earnings. In determining the
Company's effective rate, equity in losses of affiliates is excluded, since no
tax benefit on such losses is recognized by the Company.
Page 11
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, (Continued)
New Accounting Pronouncements
During October 1995, the Financial Accounting Standards Boards issued
Statement No. 123 ("SFAS 123") which establishes a fair value based method of
accounting for stock based compensation plans. While the Company is studying the
impact of the pronouncement, it continues to account for employee stock options
under APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123
will be effective for fiscal years beginning after December 15, 1995, or fiscal
1997 for the Company.
Liquidity and Capital Resources
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, the Company's consolidated subsidiary, Lycos, sold
3,135,000 of its 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 C and D of Notes to Interim
Consolidated Financial Statements). The Company's interest in Lycos is subject
to further reduction because CMG@Ventures, L.P. has agreed to sell to Lycos up
to a total of 999,776 shares of common stock of Lycos to provide shares issuable
upon exercise of options granted by Lycos under its stock option plans. Of these
999,776 shares, CMG@Ventures, L.P. is obligated to sell 709,480 shares to Lycos
at a purchase price of $0.01 per share and 290,296 shares at prices ranging from
$0.29 per share to $16 per share.
Working capital at April 30, 1996 increased to $78.5 million compared
to $47.7 million at July 31, 1995, as a result of the sale of AMER stock and the
Lycos initial public offering, offset by the Company's uses of capital. The
Company's principal uses of capital during the first nine months of fiscal 1996
were for payment of income taxes related to the Company's sale of available-for-
sale securities, purchases of property and equipment, investments in affiliates,
funding of start-up activities in the Company's new investment and development
segment and issuance of notes receivable to the Company's minority owned
affiliate, FreeMark. As of April 30, 1996 the Company was obligated to continue
to fund its portfolio companies a total of $2,000,000 in the form of working
capital or additional equity ownership, plus approximately $3,350,000 upon the
achievement of certain milestones. The Company intends to continue to fund
existing and future Internet and interactive media investment and development
efforts.
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 April 30, 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 financing.
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 Ligation 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 occurence of unanticipated
events.
Page 12
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, (Continued)
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, as such factors as 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
list 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 13
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held a Special Meeting of Stockholders on March 22, 1996.
Proposal I submitted to a vote of security holders at the meeting was a proposal
to amend the Company's Restated Certificate of Incorporation by increasing the
authorized shares of Common Stock of the Company from 10,000,000 to 40,000,000
shares.
Votes cast were as follows:
FOR AGAINST ABSTAINED BROKER NON-VOTES
- - --- ------- --------- ----------------
6,178,606 599,692 2,500,600 600
The proposal was approved.
Page 14
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are filed herewith or incorporated by
reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934:
<TABLE>
<CAPTION>
Exhibit No. Title Method of Filing
----------- ----- ----------------
<S> <C> <C>
3(i) (1) Amendment to the Filed herewith
Restated Certificate of
Incorporation
3(i) (2) Restated Certificate of Incorporated by reference from
Incorporation Registration Statement on Form S-1
as amended, filed on November 10,
1993 (Registration No. 33-71518)
3(ii) Restated By-Laws Incorporated by reference from
Registration Statement on Form S-1
as amended, filed on November 10,
1993 (Registration No. 33-71518)
4 Rights of Common Stockholders Incorporated by reference to Article
FOURTH of the Registrant's Restated
Certificate of Incorporation and
ARTICLE II of the Registrant's
Restated By-Laws.
11 Statement re computation of per Filed herewith
share earnings
27 Financial data schedule Filed herewith
</TABLE>
(b) Reports on Form 8-K
No report on Form 8-K was required to be filed during the quarter
ended April 30, 1996.
Page 15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMG Information Services, Inc.
Date: June 13, 1996 By: /s/ Andrew J. Hajducky III
--------------------------
Andrew J. Hajducky III, CPA
Chief Financial Officer
Page 16
<PAGE>
Exhibit 3(i)(1)
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "CMG INFORMATION SERVICES, INC.", FILED IN THIS OFFICE ON THE TWENTY-SIXTH
DAY OF MARCH, A.D. 1996, AT 4 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
-------------------------------
(SEAL) Edward J. Freel, Secretary of State
2090118 8100 AUTHENTICATION: 7883582
960087859 DATE: 03-26-96
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CMG INFORMATION SERVICES, INC.
CMG INFORMATION SERVICES, INC. a corporation organized and existing under
the laws of the State of Delaware, does hereby certify as follows:
FIRST: That the Board of Directors of said Corporation by unanimous vote
pursuant to Section 141 of the General Corporation Law of Delaware adopted a
resolution proposing and declaring advisable the following amendment to the
Restated Certificate of Incorporation of the Corporation and directing that said
amendment be submitted to the stockholders for their review and consent:
VOTED:
That the Board of Directors of CMG Information
Services, Inc. hereby approves and declares advisable
an amendment to the Restated Certificate of
Incorporation of this Corporation as follows:
That ARTICLE FOURTH (a) of the Restated Certificate of
Incorporation of this Corporation be and it is hereby
amended to increase the number of authorized shares of
capital stock of the Corporation from 15,000,000 to
45,000,000 so that said ARTICLE FOURTH (a) shall be and
read as follows:
FOURTH. (a) The total number of shares of capital stock which the
Corporation is authorized to issue is 45,000,000 of which 40,000,000 shares
shall be common stock, par value $.01 per share ("Common Stock") and 5,000,000
shares shall be preferred stock, par value $.01 per share ("Preferred Stock").
and further,
VOTED:
That the foregoing amendment to the Restated
Certificate of Incorporation of this Corporation be
submitted to the stockholders of this Corporation for
their approval at the 1996 Special Meeting of
Stockholders.
SECOND: That thereafter, pursuant to the resolution of the Board of
Directors, the 1996 Special Meeting of the Stockholders of the Corporation was
duly called and held, upon notice in accordance with Section 222 of the General
Corporation Law of Delaware, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
<PAGE>
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation law of
Delaware.
FOURTH: That the capital of the Corporation shall not be reduced under or
by reason of the aforesaid amendment.
IN WITNESS WHEREOF, CMG INFORMATION SERVICES, INC. has caused this
Certificate to be signed by David S. Wetherell, its President, and William
Williams II, its Assistant Secretary, this 22/nd/ day of March, 1996.
(SEAL) CMG INFORMATION SERVICES, INC.
By: /s/ D.S. Wetherell
-----------------------------
David S. Wetherell, President
ATTEST: /s/ William Williams II
----------------------------------------
William Williams II, Assistant Secretary
<PAGE>
Exhibit 11
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended April 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Primary:
Income from continuing operations $22,947,000 $ 4,722,000
Discontinued operations, net of income taxes:
Loss from operations of BookLink Technologies, Inc. - (690,000)
Gain on disposal of BookLink Technologies, Inc. - 24,143,000
----------- -----------
Net income $22,947,000 $28,175,000
=========== ===========
Weighted average common and common equivalent shares outstanding:
Shares outstanding at the beginning of the period 8,839,000 8,767,000
Weighted average shares issued during the period 122,000 3,000
Weighted average common stock equivalents 946,000 606,000
----------- -----------
Weighted average common and common equivalent shares outstanding 9,907,000 9,376,000
=========== ===========
Income from continuing operations per share $ 2.32 $ 0.50
Discontinued operations per share, net of income taxes:
Loss from operations of BookLink Technologies, Inc. - (0.07)
Gain on disposal of BookLink Technologies, Inc. - 2.58
----------- -----------
Primary net income per share $ 2.32 $ 3.01
=========== ===========
Fully Diluted:
Income from continuing operations $22,947,000 $ 4,722,000
Discontinued operations, net of income taxes:
Loss from operations of BookLink Technologies, Inc. - (690,000)
Gain on disposal of BookLink Technologies, Inc. - 24,143,000
----------- -----------
Net income $22,947,000 $28,175,000
=========== ===========
Weighted average common and common equivalent shares outstanding:
Shares outstanding at the beginning of the period 8,839,000 8,767,000
Weighted average shares issued during the period 122,000 3,000
Weighted average common stock equivalents 958,000 824,000
----------- -----------
Weighted average common and common equivalent shares outstanding 9,919,000 9,594,000
=========== ===========
Income from continuing operations per share $ 2.31 $ 0.49
Discontinued operations per share, net of income taxes:
Loss from operations of BookLink Technologies, Inc. - (0.07)
Gain on disposal of BookLink Technologies, Inc. - 2.52
----------- -----------
Fully diluted net income per share $ 2.31 $ 2.94
=========== ===========
</TABLE>
All share information has been adjusted to reflect a 2-for-1 common stock split
effected as a stock dividend on February 2, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CMG
INFORMATION SERVICES, INC. AND SUBSIDIARIES APRIL 30, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 63,877,000
<SECURITIES> 22,834,000
<RECEIVABLES> 8,255,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 98,694,000
<PP&E> 7,061,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 117,153,000
<CURRENT-LIABILITIES> 20,180,000
<BONDS> 0
0
0
<COMMON> 92,000
<OTHER-SE> 61,609,000
<TOTAL-LIABILITY-AND-EQUITY> 117,153,000
<SALES> 19,424,000
<TOTAL-REVENUES> 19,424,000
<CGS> 12,686,000
<TOTAL-COSTS> 28,527,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,542,000)
<INCOME-PRETAX> 40,928,000
<INCOME-TAX> 17,981,000
<INCOME-CONTINUING> 22,947,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,947,000
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 2.31
</TABLE>
