<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, 1997 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)
100 BRICKSTONE SQUARE, FIRST FLOOR 01810
ANDOVER, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(508) 684-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [_]
Number of shares outstanding of the issuer's common stock, as of June 7, 1997
COMMON STOCK, PAR VALUE $.01 PER SHARE 9,642,379
- -------------------------------------- ----------------------------
Class Number of shares outstanding
<PAGE>
CMG INFORMATION SERVICES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
Part I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
April 30, 1997 and July 31, 1996..................................... 3
Consolidated Statements of Operations
Three and nine months ended April 30, 1997 and 1996.................. 4
Consolidated Statements of Cash Flows
Nine months ended April 30, 1997 and 1996............................ 5-6
Notes to Interim Consolidated Financial Statements................... 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 12-17
Part II. OTHER INFORMATION.................................................... 18
SIGNATURE............................................................ 19
</TABLE>
Page 2
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,742 $ 63,387
Available-for-sale securities 7,435 13,069
Accounts receivable, trade, less allowance for
doubtful accounts 17,842 10,666
License fees receivable 4,589 1,032
Prepaid expenses and other current assets 9,915 2,199
Refundable and deferred income taxes 2,912 213
-------- --------
Total current assets 104,435 90,566
Long term license fees receivable 1,700 952
Property and equipment, net 10,455 8,461
Investments in affiliates 4,545 4,073
Cost in excess of net assets of subsidiaries acquired, net of
accumulated amortization 16,747 2,299
Other assets 3,613 3,152
-------- --------
$141,495 $109,503
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 12,194 $ --
Current installments of long term debt 2,836 245
Accounts payable 8,559 7,251
Accrued expenses 17,746 6,245
Deferred revenues 7,913 4,620
Other current liabilities 178 196
-------- --------
Total current liabilities 49,426 18,557
Long term debt, less current installments 12,377 208
Long term deferred revenues 1,500 --
Deferred income taxes 9,241 9,122
Other long term liabilities 167 347
Minority interest 23,847 27,277
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 --- 9,636,997 shares at
April 30, 1997 and 9,166,747 shares at
July 31, 1996 96 92
Additional paid-in capital 16,399 9,243
Net unrealized holding gain 792 --
Retained earnings 27,650 44,657
-------- --------
Total stockholders' equity 44,937 53,992
-------- --------
$141,495 $109,503
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 3
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>s
Three months ended April 30, Nine months ended April 30,
------------------------------ -----------------------------
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 19,010 $ 7,484 $ 48,547 $ 19,424
Operating expenses:
Cost of sales 12,523 5,266 31,675 12,686
Research and development 6,466 1,751 18,163 3,702
In-process research and development -- -- 1,312 452
Selling 7,401 2,685 23,221 5,548
General and administrative 4,376 2,585 13,190 6,139
-------- ------- -------- --------
Total operating expenses 30,766 12,287 87,561 28,527
-------- ------- -------- --------
Operating loss (11,756) (4,803) (39,014) (9,103)
Other income (deductions):
Gain on sale of available-for-sale
securities -- -- -- 30,049
Gain on issuance of stock by subsidiary -- 19,575 -- 19,575
Gain on sale of investment in affiliate -- -- 3,616 --
Gain on sale of subsidiary -- -- 15,111 --
Minority interest 492 517 3,939 817
Equity in losses of affiliates (1,924) (931) (4,013) (1,952)
Interest income, net 328 474 1,512 1,542
-------- ------- -------- --------
(1,104) 19,635 20,165 50,031
-------- ------- -------- --------
Income (loss) before income taxes (12,860) 14,832 (18,849) 40,928
Income tax benefit (expense) 2,584 (7,418) 1,842 (17,981)
-------- ------- -------- --------
Net income (loss) $(10,276) $ 7,414 $(17,007) $ 22,947
======== ======= ======== ========
Primary earnings (loss) per share $(1.07) $0.74 $(1.82) $2.32
======== ======= ======== ========
Weighted average shares outstanding 9,622 9,969 9,327 9,907
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Page 4
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended April 30,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(17,007) $ 22,947
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization 3,757 1,606
Deferred income taxes (703) 8,308
Gain on sale of available-for-sale securities -- (30,049)
Gain on issuance of stock by subsidiary -- (19,575)
Gain on sale of investment in affiliate (3,616) --
Gain on sale of subsidiary (15,111) --
Equity in losses of affiliates 4,013 1,952
Minority interest (3,939) (817)
In-process research and development 1,312 452
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts and license fees receivable (7,344) (5,894)
Prepaid expenses and other assets (7,480) (1,423)
Accounts payable and accrued expenses 9,888 4,493
Deferred revenues 4,907 3,739
Refundable and accrued income taxes (2,523) 13,024
-------- --------
Net cash used for operating activities (33,846) (1,237)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (5,233) (5,959)
Proceeds from sale or maturities of available-for-
sale securities 11,056 60,154
Income taxes paid related to sale of available-for-
sale securities -- (15,416)
Purchase of available-for-sale securities -- (25,526)
Investments in affiliates and acquisitions of
subsidiaries (26,282) (4,000)
Proceeds from sales of subsidiary and investment
in affiliate 19,018 --
Other (832) (1,661)
-------- --------
Net cash provided by (used for)investing activities (2,273) 7,592
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable and long
term debt 28,452 940
Repayment of notes payable and long-term debt (1,000) (940)
Net proceeds from issuance of stock by subsidiary -- 46,021
Sale of common and treasury stock 7,723 381
Purchase of treasury stock (984) --
Other 283 1,697
-------- --------
Net cash provided by financing activities 34,474 48,099
-------- --------
Net increase (decrease) in cash and cash equivalents (1,645) 54,454
Cash and cash equivalents at beginning of period 63,387 9,423
-------- --------
Cash and cash equivalents at end of period $ 61,742 $ 63,877
======== ========
</TABLE>
Page 5
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended April 30,
---------------------------
1997 1996
----------- --------------
Supplemental disclosure information:
Cash paid during the period for:
<S> <C> <C>
Interest $ 757 $ 44
===== =======
Income taxes $ 799 $12,005
===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
<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 prevent the
information from being misleading, these consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended July 31, 1996 which are contained in the Company's Form
10-K. The results for the three and nine month periods ended April 30, 1997 are
not necessarily indicative of the results to be expected for the full fiscal
year. 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.
B. ACQUISITIONS AND INVESTMENTS
During the first quarter of fiscal 1997, the Company, through its limited
partnership subsidiary, CMG@Ventures L.P. and its limited liability company
subsidiary, CMG @Ventures II LLC, invested a total of $3,250,000 to acquire a
46% minority interest in Parable LLC (Parable), a developer of easy-to-use
interactive multimedia software, and a 26% minority interest in Silknet
Software, Inc. (Silknet), a provider of Web-based customer service software.
The Company's investments in Parable and Silknet are accounted for on the equity
method. The acquisition accounting for the Company's investments in Parable and
Silknet resulted in a total of $1,312,000 being identified as in-process
research and development, which was expensed during the first quarter because
technological feasibility had not been reached at the dates the investments were
made.
During fiscal 1997, the Company completed its original commitment of $35 million
in capital to its limited partnership subsidiary, CMG @Ventures L.P. and formed
a new limited liability company subsidiary, CMG @Ventures II LLC, to continue
the Company's model of providing intellectual and financial capital to companies
seeking to further the commercialization of the Internet and other interactive
media through the development and application of direct marketing products and
services. The Company's investment in Silknet in the first quarter of fiscal
1997 was made through CMG @Ventures II LLC. The Company expects to seek outside
financing commitments to provide funding for CMG @Ventures II LLC.
On October 24, 1996, the Company's fulfillment services subsidiary, SalesLink,
acquired Pacific Link, a company specializing in high technology product and
literature fulfillment and turnkey outsourcing. The consideration for the
acquisition was $17 million, $8.5 million of which was paid in cash at the date
of acquisition, $1 million of which SalesLink paid (along with interest at the
annual rate of 7%) in February 1997, and the remaining $7.5 million of which was
financed through a seller's note. The seller's note is supported by a bank
letter of credit, bears interest at 7% per year and is payable monthly in
arrears over a term of 30 months beginning July 31, 1997. The sources of the
cash portion of the purchase price were $3 million from corporate funds provided
by the Company to SalesLink for the acquisition and $5.5 million from a bank
loan. The bank loan provides for the option of interest at the London Interbank
Offered Rate (LIBOR) or the higher of 1) the rate announced by First National
Bank of Boston as its base rate, or 2) one half percent above the Federal Funds
Effective Rate plus, in any case, an applicable margin based on SalesLink's
leverage ratio. The bank loan is repayable in quarterly installments beginning
January 31, 1998 through July 31, 2001, with the remaining balance to be repaid
on October 1, 2001. Additional purchase price of up to $1 million could be paid
if certain future performance goals are met.
Page 7
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
B. ACQUISITIONS AND INVESTMENTS (CONTINUED)
The acquisition of Pacific Link has been accounted for using the purchase method
of accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon their fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $16.1 million and has been recorded as goodwill,
which will be amortized on a straight line basis over 15 years.
The net purchase price was allocated as follows:
Working capital $ 197,000
Property, plant and equipment 668,000
Other assets 181,000
Goodwill 16,077,000
Other liabilities (123,000)
-----------
Purchase price $17,000,000
===========
In December 1996, the Company's consolidated subsidiary FreeMark Communications,
Inc. (FreeMark) ceased all operations of its free email service. The suspension
of FreeMark's operations did not have a material adverse impact on the Company's
consolidated financial statements. In January 1997, GeoCities successfully
completed a $9 million equity financing round in which CMG @Ventures contributed
$2,000,000. With this round of financing, CMG @Ventures' ownership in GeoCities
decreased from approximately 61% to approximately 41%, and the Company began
accounting for its investment in GeoCities under the equity method of
accounting, rather than the consolidation method. Prior to these events, the
operating results of GeoCities and FreeMark were consolidated within the
operating results of the Company's investment and development segment. Also,
during the second quarter of fiscal 1997, Vicinity Corporation (Vicinity)
successfully completed a $5 million equity financing round in which CMG
@Ventures contributed $1,845,000. With this round of financing, CMG @Ventures'
ownership in Vicinity decreased from approximately 47% to approximately 45%.
C. SALE OF INVESTMENT IN TELE T COMMUNICATIONS
On September 19, 1996, the Company sold its equity interest in TeleT
Communications, LLC (TeleT) to Premiere Technologies (Premiere) for $550,000 in
cash and 320,833 shares of Premiere stock. The Company, through CMG@Ventures,
acquired its equity interest in TeleT for $750,000 during April 1996. As a
result of the sale, the Company recognized a pretax gain of $3,616,000, reported
net of the 22.5% interest attributed to CMG@Ventures' profit partners, reflected
as "Gain on sale of investment in affiliate". Of the shares received, 37,500
are to be held in escrow for a six year period, subject to certain customary
conditions, and have been classified in other long term assets with a carrying
value of $450,000. The remaining shares are subject to an average one year
lock-up period, and have been classified in available-for-sale securities, with
a carrying value at the time of acquisition of $4,080,000, net of market value
discount to reflect the lock-up period requirement.
D. SALE OF NETCARTA CORPORATION
On December 9, 1996 Microsoft Corporation ("Microsoft") entered into a
definitive agreement to acquire one of the Company's subsidiaries, NetCarta
Corp. (NetCarta), for $20,000,000 in cash, subject to certain customary
conditions. On January 31, 1997 the sale of NetCarta was finalized, with the
Company receiving proceeds of $18,468,000, net of proceeds to former NetCarta
employees who exercised employee stock options. As a result of the sale, the
Company recognized a pretax gain of $15,111,000, reported net of the 22.5%
interest attributed to CMG@Ventures' profit partners, reflected as "Gain on sale
of subsidiary". Of the proceeds received, $2,000,000 included in "Cash and cash
equivalents" at April 30, 1997, is currently held on the Company's behalf by an
outside escrow agent, to secure certain indemnification obligations of the
Company and CMG@Ventures related to the sale of NetCarta, and is restricted for
this purpose through February 1998.
Page 8
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
E. SALE OF COMMON STOCK
Pursuant to a stock purchase agreement entered into as of December 10, 1996, the
Company sold 470,477 shares of its common stock (the "CMG Shares") to Microsoft
on January 31, 1997, representing 4.9% of CMG's total outstanding shares of
common stock following the sale. The CMG Shares were priced at $14.50 per
share, with proceeds to CMG totaling $6,821,917. The CMG Shares purchased by
Microsoft are not registered under the Securities Act of 1933 and carry a one
year prohibition on transfer or sale. Under the terms of the agreement and
following the one-year period, Microsoft is entitled to two demand registration
rights as well as piggy back registration rights. Additionally, Microsoft is
subject to "stand still" provisions, whereby it is prohibited for a period of
three years, without the consent of CMG, (i) from increasing its ownership in
CMG above ten percent of CMG's outstanding shares, (ii) from exercising any
control or influence over CMG, and (iii) from entering into any voting agreement
with respect to its CMG Shares.
F. NOTES PAYABLE
Notes payable at April 30, 1997 consisted of $10,000,000 in collateralized
corporate borrowings and $2,194,000 line of credit borrowing by the Company's
subsidiary, SalesLink Corporation. The Company's $10,000,000 borrowing is
collateralized by 784,314 of the Company's common shares of its subsidiary,
Lycos, Inc. (Lycos), with interest payable quarterly at a rate of LIBOR plus
1.75 percent, and is payable in full on January 17, 1998. SalesLink's
borrowings were made under its $2,500,000 revolving credit note agreement with a
bank. The revolving credit note is payable in full on October 1, 1998 and
provides for the option of interest at the London Interbank Offered Rate (LIBOR)
or the higher of 1) the rate announced by First National Bank of Boston as its
base rate, or 2) one half percent above the Federal Funds Effective Rate plus,
in any case, an applicable margin based on SalesLink's leverage ratio.
G. AVAILABLE-FOR-SALE SECURITIES
At April 30, 1997, available-for-sale securities consist of equity and debt
securities, carried at fair value. The estimated fair value of these securities
consists of $5,422,000 of Premiere Technologies common stock and $2,013,000 of
U.S. Government agency obligations which the Company does not intend to hold to
maturity. An unrealized holding gain of $792,000, based on the change in fair
value of the Premiere shares from the date of acquisition to April 30, 1997, is
presented in the equity section of the balance sheet, net of income taxes.
Since the estimated fair value, based on quoted market prices, of each
investment in U.S. Government agency obligations approximates its carrying value
or amortized cost, there are no unrealized holding gains or losses reflected on
these securities as of April 30, 1997.
H. EARNINGS (LOSS) PER SHARE
Net income (loss) 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. Accordingly, since the Company reported a net loss for the three and
nine months ended April 30, 1997, common equivalent shares have not been
included in the calculation of weighted average shares outstanding for these
periods. Common stock equivalent shares consist of stock options. On February
2, 1996, the Company effected a two-for-one common stock split in the form of a
stock dividend. Accordingly, the consolidated financial statements have been
retroactively adjusted to reflect this event.
Page 9
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
I. SEGMENT INFORMATION
The Company's operations are classified in three primary business segments: (i)
investment and development, (ii) fulfillment services and (iii) lists and
database services. Summarized financial information by business segment is as
follows:
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
------------------------------ -----------------------------
1997 1996 1997 1996
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales:
Investment and development $ 6,015,000 $ 1,579,000 $ 15,454,000 $ 2,621,000
Fulfillment services 10,587,000 3,437,000 24,746,000 8,513,000
Lists and database services 2,408,000 2,468,000 8,347,000 8,290,000
------------ ----------- ------------ -----------
$ 19,010,000 $ 7,484,000 $ 48,547,000 $19,424,000
============ =========== ============ ===========
Operating income (loss):
Investment and development $ (9,481,000) $(4,577,000) $(34,827,000) $(9,407,000)
Fulfillment services 1,160,000 561,000 3,257,000 1,014,000
Lists and database services (3,435,000) (787,000) (7,444,000) (710,000)
------------ ----------- ------------ -----------
$(11,756,000) $(4,803,000) $(39,014,000) $(9,103,000)
============ =========== ============ ===========
</TABLE>
J. COMMITMENTS
In March 1997, Lycos renewed its one year "Premier Provider" agreement (the
Agreement) with Netscape Communications Corporation (Netscape) which commenced
in May 1997 for an additional one year term, pursuant to which Lycos was
designated as one of four "Premier Providers" of search and navigation services
accessible from the "Net Search" button on the Netscape browser. Lycos is
obligated to make minimum payments of $4.7 million under the terms of the
Agreement. To the extent that the minimum guaranteed exposures are exceeded,
Lycos is obligated to remit additional payments. In addition, during the term
of the Agreement, Netscape is required to purchase advertising and services on
the Lycos Web Site valued at $1.5 million. The cost of the Agreement will be
recognized over its term.
K. SUBSEQUENT EVENTS
On May 8, 1997, CMG @Ventures II LLC invested $2,000,000 to acquire a 15%
minority interest in KOZ, Inc. (KOZ), a provider of an integrated set of Web-
based publishing solutions that allow organizations or groups to share
information with their members and the community at large. The Company's
investment in KOZ will be accounted for on the cost method of accounting.
The Company's subsidiary, Lycos, entered into a joint venture agreement with
Bertelsmann Internet Services, GmbH (Bertelsmann) dated as of May 1, 1997, to
create Internet navigation centers throughout Eastern and Western Europe.
Bertelsmann will provide $5,000,000 in equity capital, and an additional
$5,000,000 loan facility to the venture and Lycos will contribute its technology
and Internet expertise. Lycos and Bertelsmann will each own a 50% stake in the
new venture, named Lycos-Bertelsmann. The venture has commenced operations in
Germany, the United Kingdom and France and is expected to establish operations
by September in Italy, Belgium, Netherlands, Luxembourg and Spain.
On May 14, 1997, the Company entered into a revolving credit note agreement with
a bank. The agreement provides for borrowings up to $10,000,000, matures on May
14, 1998 and provides for the option of interest at 1) LIBOR plus 2.5% or 2) the
rate announced by BankBoston as its base rate plus 0.5%.
Page 10
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
K. SUBSEQUENT EVENTS (CONTINUED)
On May 28, 1997, the Company announced a new venture stock dividend program in
connection with the Company's CMG @Ventures Internet investments. Subject to
restrictions on transfer, the program envisions distributing up to 10% of the
stock held by CMG @Ventures following an initial public offering by any one of
the companies in which it holds an investment. The Company may also announce
from time to time other stock dividends in connection with its Internet
investments. Such dividends are subject to approval of the Company's Board of
Directors and subject to holding requirements by regulatory agencies such as the
Securities and Exchange Commission. The program may be altered or discontinued
at the discretion of the Company. The Company also announced its first dividend
under the new program, payable on July 31, 1997, of one share of Lycos common
stock for every sixteen shares of the Company's common stock held by
stockholders of record on June 5, 1997. The declaration of the distribution of
the Lycos stock will result in the recognition of a one time gain in the
Company's fourth quarter ended July 31, 1997, and is not expected to reduce the
Company's ownership percentage in Lycos below 50% upon distribution.
Page 11
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this report contain 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 in this
section and elsewhere in this report, and the risks discussed in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section included in the Company's 1996 Annual Report on Form 10-K.
THREE MONTHS ENDED APRIL 30, 1997 COMPARED TO THREE MONTHS ENDED APRIL 30, 1996
Net sales for the quarter ended April 30, 1997 increased $11,526,000, or
154%, to $19,010,000 from $7,484,000 for the quarter ended April 30, 1996. The
increase was largely attributable to an increase of $7,150,000 in net sales for
the Company's fulfillment services segment, reflecting the acquisition of
Pacific Link on October 24, 1996. Additionally, net sales in the Company's
investment and development segment increased $4,436,000 primarily reflecting
increased sales by the Company's subsidiary, Lycos, Inc. (Lycos). Net sales in
the Company's lists and database services segment for the quarter were
consistent with the prior year due to competitive pricing pressure. The Company
believes that the portfolio companies of the investment and development segment
will continue to develop and introduce their products commercially and,
therefore, expects to report future revenue growth.
Cost of sales increased $7,257,000, or 138%, to $12,523,000 in the third
quarter of fiscal 1997 from $5,266,000 for the corresponding period in fiscal
1996, comprised mainly of increases of $5,836,000 and $1,237,000 in the
fulfillment services and investment and development segments, respectively,
resulting from increased sales. In the investment and development segment, cost
of sales as a percentage of net sales decreased to 45% in the quarter ended
April 30, 1997 from 93% in the prior year's third quarter due to the ability to
spread fixed costs, such as facilities and equipment costs, over a larger
revenue base. In the fulfillment services segment, cost of sales as a
percentage of net sales increased to 76% in the third quarter of fiscal 1997
from 63% in the third quarter of fiscal 1996 due to a change in the mix of
services, primarily associated with the acquisition of Pacific Link.
Research and development expenses increased $4,715,000, or 269%, to
$6,466,000 in the quarter ended April 30, 1997 from $1,751,000 in the prior
year's third quarter. The increase consists primarily of an increase of
$3,224,000 in research and development expenses for the investment and
development segment as product development activities continued at all of the
Company's consolidated Internet investments. Additionally, research and
development expenses increased $1,561,000 in the lists and database services
segment due to the continued development of Engage Technologies' (formerly CMG
Direct Interactive) data mining, querying, analysis and targeting products and
services. The Company anticipates it will continue to devote substantial
resources to product development and that these costs may substantially increase
in absolute dollar amounts in future periods.
Selling expenses increased $4,716,000, or 176% to $7,401,000 in the third
quarter of fiscal 1997 from $2,685,000 for the third quarter of fiscal 1996.
This increase was primarily attributable to a $3,855,000 selling expense
increase in the Company's investment and development segment, reflecting the
sales and marketing efforts related to several product launches and continued
growth of sales and marketing infrastructures. Also during the quarter, Lycos
launched a national advertising campaign which contributed to the increased
selling expenses in the investment and development segment. Selling expenses in
the fulfillment services segment increased by $381,000 in comparison with the
third quarter of fiscal 1996 due to the acquisition of Pacific Link, and selling
expenses in the lists and database services segment increased by $480,000 versus
last year's third quarter due to product launch expenses and the continued
building of sales and marketing infrastructure for Engage Technologies. Selling
expenses increased as a percentage of net sales to 39% in the third quarter of
fiscal 1997 from 36% for the corresponding period in fiscal 1996. The Company
anticipates that its subsidiaries will continue to introduce new products and
expand sales and, therefore, 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
may substantially increase in absolute dollar amounts in future periods.
Page 12
<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 $1,791,000, or 69%, to
$4,376,000 in the quarter ended April 30, 1997 from $2,585,000 for the quarter
ended April 30, 1996. The investment and development segment and lists and
database services segment experienced increases of $1,024,000 and $363,000,
respectively, due to the addition of management personnel and infrastructure in
several of the Company's Internet investments and Engage Technologies. General
and administrative expenses in the fulfillment services segment increased by
$404,000 in comparison with the third quarter of fiscal 1996 due to the
acquisition of Pacific Link, including approximately $267,000 of goodwill
amortization charges for the quarter. General and administrative expenses
decreased as a percentage of net sales to 23% in the third quarter of fiscal
1997 from 35% in the third quarter of fiscal 1996. 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 expand their administrative
staffs and infrastructures.
Gain on issuance of stock by subsidiary in fiscal 1996 represented the
Company's $19,575,000 gain recorded as a result of the sale of stock by Lycos in
an initial public offering in April 1996. Interest income, net, decreased
$146,000 compared with the third quarter of fiscal 1996, primarily due to lower
average corporate cash balances in the third quarter of fiscal 1997 compared to
prior year, combined with $280,000 interest expense related to borrowings
incurred to finance the Company's acquisition of Pacific Link and $180,000
interest expense related to the Company's $10,000,000 collateralized corporate
note payable which was issued in January 1997. These decreases were partially
offset by income earned by Lycos from the investment of the proceeds of their
initial public offering which occurred in April 1996.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments which 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 results for the quarter ended April 30,
1996 reflect five investments: FreeMark Communications (FreeMark), Ikonic
Interactive, Inc. (Ikonic), GeoCities, Vicinity Corporation (Vicinity) and TeleT
Communications LLC (TeleT). During the fourth quarter of fiscal 1996, the
Company increased its ownership in FreeMark above 50% and, accordingly, began
including their operating results in the Company's consolidated operating
results. FreeMark was consolidated through December 1996, when it suspended
operations. The Company sold its equity interest in TeleT to Premiere
Technologies, Inc. (Premiere) in September 1996. Equity in losses of affiliates
for the quarter ended April 30, 1997 include the results from the Company's
minority ownership in Ikonic, Vicinity, GeoCities, Parable LLC (Parable) and
Silknet Software, Inc. (Silknet). 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.
Minority interest decreased to $492,000 in the third quarter of fiscal
1997 from $517,000 in the corresponding period of fiscal 1996 reflecting
minority interest in net losses of consolidated subsidiaries within the
Company's investment and development segment.
Income tax benefit in the quarter ended April 30, 1997 was $2,584,000.
The Company provides for income taxes on a year to date basis at an effective
rate based upon its estimate of full year earnings, excluding taxes provided for
significant, unusual or extraordinary items that will be reported separately.
In determining the Company's effective rate for fiscal 1997, equity in losses of
affiliates, gain on sale of subsidiary, and gain on sale of investment in
affiliate were excluded.
Page 13
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED APRIL 30, 1997 COMPARED TO NINE MONTHS ENDED APRIL 30, 1996
Net sales increased $29,123,000, or 150%, to $48,547,000 for the nine
months ended April 30, 1997 from $19,424,000 for the corresponding period in
fiscal 1996. The increase was largely attributable to increases of $16,233,000
and $12,833,000 in net sales for the Company's fulfillment services and
investment and development segments, respectively. The fulfillment services
increase reflects the acquisition of Pacific Link on October 24, 1996 and the
addition of several new SalesLink accounts closed in the second half of fiscal
year 1996. The increase in net sales for the Company's investment and
development segment primarily reflects increased sales by the Company's
subsidiary, Lycos. The Company believes that the portfolio companies of the
investment and development segment will continue to develop and introduce their
products commercially and, therefore, expects to report future revenue growth.
Cost of sales increased $18,989,000, or 150%, to $31,675,000 for the nine
months ended April 30, 1997 from $12,686,000 for the corresponding period in
fiscal 1996, primarily comprised of increases of $12,237,000 and $6,399,000
related to the fulfillment services and investment and development segments,
respectively, resulting from higher sales. In the investment and development
segment, cost of sales as a percentage of net sales decreased to 55% in the nine
months ended April 30, 1997 from 82% in the nine months ended April 30, 1996 due
to the ability to spread fixed costs, such as facilities and equipment costs,
over a larger revenue base. In the fulfillment services segment, cost of sales
as a percentage of net sales increased to 72% in the first nine months of fiscal
1997 from 66% in the first nine months of fiscal 1996 due to the mix of services
associated with the acquisition of Pacific Link at the end of the first quarter
of fiscal 1997.
Research and development expenses increased $14,461,000, or 391%, to
$18,163,000 in the first nine months of fiscal 1997 from $3,702,000 for the
first nine months of fiscal 1996. The increase consists primarily of an
increase of $10,335,000 in research and development expenses for the investment
and development segment as product development activities continued at all of
the Company's consolidated Internet investments. Also, research and development
expenses increased $4,218,000 in the lists and database services segment
reflecting the continued development of Engage Technologies' data mining,
querying, analysis and targeting products and services. In addition, the Company
recorded $1,312,000 of in-process research and development expenses related to
investments in Parable and Silknet during the first nine months of fiscal 1997,
compared with $452,000 of in-process research and development expenses incurred
by Lycos in the first nine months of fiscal 1996, related to the acquisition of
Point Communications Corp. The Company anticipates it will continue to devote
substantial resources to product development and that these costs may
substantially increase in absolute dollar amounts in future periods.
Selling expenses increased $17,673,000, or 319% to $23,221,000 for the
nine months ended April 30, 1997 from $5,548,000 for the corresponding period in
fiscal 1996. This increase was primarily attributable to a $15,706,000 selling
expense increase in the Company's investment and development segment, reflecting
the sales and marketing efforts related to several product launches and
continued growth of sales and marketing infrastructures. Also during the first
nine months of fiscal 1997, Lycos launched a national advertising campaign which
contributed to the increased selling expenses in the investment and development
segment. Selling expenses in the fulfillment services segment increased by
$894,000 in comparison with the first nine months of fiscal 1996 due to the
acquisition of Pacific Link. Selling expenses in the lists and database
services segment increased by $1,073,000 versus the first nine months of last
year due to product launch expenses and the continued building of sales and
marketing infrastructure for Engage Technologies. Selling expenses increased as
a percentage of net sales to 48% in the nine months ended April 30, 1997 from
29% for the corresponding period in fiscal 1996. The Company anticipates that
its subsidiaries will continue to introduce new products and expand sales and,
therefore, 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 may
substantially increase in absolute dollar amounts in future periods.
Page 14
<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 $7,051,000, or 115%, to
$13,190,000 for the first nine months of fiscal 1997 from $6,139,000 for the
corresponding period in fiscal 1996. The investment and development segment and
lists and database services segment experienced increases of $4,953,000 and
$1,147,000, respectively, due to the addition of management personnel and
infrastructure in several of the Company's Internet investments and Engage
Technologies. General and administrative expenses in the fulfillment services
segment increased by $951,000 in comparison with the first nine months of fiscal
1996 due to the acquisition of Pacific Link, including approximately $534,000 of
goodwill amortization charges. General and administrative expenses decreased as
a percentage of net sales to 27% in the nine months ended April 30, 1997 from
32% for the corresponding period in fiscal 1996. The Company anticipates that
its general and administrative expenses will continue to increase in absolute
dollar amounts as the Company's subsidiaries, particularly in the investment and
development segment, continue to expand their administrative staffs and
infrastructures.
Gain on sale of subsidiary in fiscal 1997 reflects the Company's pretax
gain of $15,111,000 on the sale of NetCarta Corporation on January 31, 1997.
Gain on sale of investment in affiliate in fiscal 1997 resulted when the Company
sold its equity interest in TeleT to Premiere in exchange for $550,000 and
320,833 shares of Premiere stock in September 1996. Gain on sale of available-
for-sale securities in fiscal 1996 occurred when the Company sold its remaining
1,020,000 shares of America Online common stock, realizing a gain of $30,049,000
in October 1995. Gain on issuance of stock by subsidiary in fiscal 1996
represented the Company's $19,575,000 gain recorded as a result of the sale of
stock by Lycos in an initial public offering in April 1996.
Interest income, net, decreased $30,000 compared with the first nine
months of fiscal 1996, reflecting increases in both interest income and interest
expense. Interest expense increased primarily due to $555,000 interest expense
related to borrowings incurred to finance the Company's acquisition of Pacific
Link and $210,000 interest expense related to the Company's $10,000,000
collateralized corporate note payable which was issued in January 1997.
Interest income increased compared with the first nine months of fiscal year
1996, reflecting income earned by Lycos from the investment of the proceeds of
their initial public offering which occurred in April 1996, partially offset by
the impact of lower corporate cash balances in the first nine months of fiscal
1997.
Equity in losses of affiliates resulted from the Company's minority
ownership in certain investments which 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 results for the nine months ended April 30,
1996 reflect five investments: 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. FreeMark was
consolidated through December 1996 when it suspended operations. Equity in
losses of affiliates for the nine months ended April 30, 1997 include the
results from the Company's minority ownership in Ikonic, Vicinity, Parable,
Silknet and TeleT (through the date of the sale of TeleT in September 1996).
Also, in January 1997 GeoCities successfully completed a $9 million equity
financing round in which CMG @Ventures contributed $2 million. With this round
of financing, CMG @Ventures' ownership in GeoCities decreased from approximately
61% to approximately 41%, and the Company began accounting for its investment in
GeoCities under the equity method of accounting, rather than the consolidation
method, and accordingly began including the results of its ownership in
GeoCities in equity in losses of affiliates. 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.
Minority interest increased to $3,939,000 in the first nine months of
fiscal 1997 from $817,000 in the corresponding period of fiscal 1996 reflecting
minority interest in net losses of consolidated subsidiaries within the
Company's investment and development segment.
Page 15
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Income tax benefit in the first nine months of fiscal 1997 was $1,842,000.
The Company provides for income taxes on a year to date basis at an effective
rate based upon its estimate of full year earnings, excluding taxes provided for
significant, unusual or extraordinary items that will be reported separately. In
determining the Company's effective rate for fiscal 1997, equity in losses of
affiliates, gain on sale of subsidiary, and gain on sale of investment in
affiliate were excluded.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 30, 1997 decreased to $55.0 million compared to
$72.0 million at July 31, 1996. The Company's principal uses of capital during
the first nine months of fiscal 1997 were for funding of start-up activities in
the Company's investment and development segment, the acquisition of Pacific
Link, investments in Parable, Silknet, Vicinity and GeoCities, purchases of
property and equipment, and purchases of treasury stock. The Company's principal
sources of capital during the first nine months of fiscal 1997 were from short
and long term borrowings, sale of NetCarta and sale of common stock. The
Company intends to continue to fund existing and future Internet and interactive
media investment and development efforts.
The Company's acquisition of Pacific Link in the first quarter of fiscal
1997 was financed through $3 million from corporate funds, a $5.5 million, 5
year bank loan, a $7.5 million, 3 year seller's note, and a $1 million seller's
note which was paid in February 1997. The Company received net cash proceeds of
$18,468,000 from the sale of NetCarta, of which $2,000,000 included in "Cash and
cash equivalents" at April 30, 1997, is currently held on the Company's behalf
by an outside escrow agent, to secure certain indemnification obligations of the
Company and CMG@Ventures related to the sale of NetCarta, and is restricted for
this purpose through February 1998. Additionally, the Company received proceeds
of $550,000 in cash and 320,833 shares of Premiere Technologies common stock
from the sale of its investment in TeleT during the first quarter of fiscal
1997.
During the first quarter of fiscal 1997, the Company's Board of Directors
authorized the Company to buy back up to 500,000 shares of its common stock.
During the first and second quarters of fiscal 1997, 100,000 shares were
repurchased at an average cost of $9.84 per share, for a total of $984,000. On
January 31, 1997, the Company sold 470,477 shares of its common stock (the "CMG
Shares"), including the 100,000 treasury shares acquired in fiscal 1997, to
Microsoft Corporation ("Microsoft") at a price of $14.50 per share. The shares
sold to Microsoft represented 4.9% of CMG's total outstanding shares of common
stock following the sale, with proceeds to CMG totaling $6,822,000.
During the first quarter of fiscal 1997, the Company, through its limited
partnership subsidiary, CMG@Ventures L.P. and its limited liability company
subsidiary, CMG @Ventures II LLC, invested a total of $3,250,000 to acquire a
46% minority interest in Parable, a developer of easy-to-use interactive
multimedia software, and a 26% minority interest in Silknet, a provider of Web-
based customer service software. In December 1996, the Company's consolidated
subsidiary, FreeMark, suspended all operations of its free email service. In
January 1997, GeoCities successfully completed a $9 million equity financing
round in which CMG @Ventures L.P. contributed $2,000,000. With this round of
financing, CMG @Ventures L.P.'s ownership in GeoCities decreased from
approximately 61% to approximately 41%, and the Company began accounting for its
investment in GeoCities under the equity method of accounting, rather than the
consolidation method. Prior to these events, the operating results of GeoCities
and FreeMark were consolidated within the operating results of the Company's
investment and development segment. Also during the second quarter of fiscal
year 1997, Vicinity successfully completed a $5 million equity financing round
in which CMG @Ventures L.P. contributed $1,845,000. With this round of
financing, CMG @Ventures L.P.'s ownership in Vicinity decreased from
approximately 47% to approximately 45%.
Page 16
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company's investments in Parable, Vicinity and GeoCities during the
first nine months of fiscal 1997 (as well as its previous investments in Lycos,
NetCarta, FreeMark, Blaxxun (formerly Black Sun), GeoCities, Ikonic, TeleT and
Vicinity) were made through its majority-owned limited partnership, CMG@Ventures
L.P. 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 and the Chief Financial Officer of the Company. The Company
is responsible for all operating expenses of CMG@Ventures L.P.
During fiscal 1997, the Company completed its original commitment of $35
million in capital to its limited partnership subsidiary, CMG @Ventures L.P.,
and formed a new limited liability company subisidiary, CMG @Ventures II LLC, to
continue the Company's model of providing intellectual and financial capital to
companies seeking to further the commercialization of the Internet and other
interactive media through the development and application of direct marketing
products and services. The Company's investment in Silknet in the first quarter
of fiscal 1997 was made through CMG @Ventures II LLC. On May 8, 1997, CMG
@Ventures II LLC invested $2,000,000 to acquire a 15% minority interest in KOZ,
Inc., a provider of an integrated set of Web-based publishing solutions that
allow organizations or groups to share information with their members and the
community at large.
The Company's subsidiary, Lycos, entered into a joint venture agreement
with Bertelsmann Internet Services, GmbH (Bertelsmann) dated as of May 1, 1997,
to create Internet navigation centers throughout Eastern and Western Europe.
Bertelsmann will provide $5,000,000 in equity capital, and an additional
$5,000,000 loan facility to the venture and Lycos will contribute its technology
and Internet expertise. Lycos and Bertelsmann will each own a 50% stake in the
new venture, named Lycos-Bertelsmann. The venture has commenced operations in
Germany, the United Kingdom and France and is expected to establish operations
by September in Italy, Belgium, Netherlands, Luxembourg and Spain.
On May 14, 1997, the Company entered into a revolving credit note
agreement with a bank allowing for borrowings up to $10 million. On May 28,
1997, the Company announced a new venture dividend program in connection with
the Company's CMG@Ventures Internet investments. Subject to restrictions on
transfer, the program envisions distributing up to 10% of the stock held by CMG
@Ventures following an initial public offering by any one of the companies in
which it holds an investment. The Company may also announce from time to time
other stock dividends in connection with its Internet investments. Such
dividends are subject to approval of the Company's Board of Directors and
subject to holding requirements by regulatory agencies such as the Securities
and Exchange Commission. The program may be altered or discontinued at the
discretion of the Company. The Company also announced its first dividend under
the new program, payable on July 31, 1997, of one share of Lycos, Inc. common
stock for every sixteen shares of the Company's common stock held by
stockholders of record on June 5, 1997. The distribution of the Lycos stock is
not expected to reduce the Company's ownership percentage in Lycos below 50%.
The Company believes that existing working capital and available
borrowings under revolving credit note agreements will be sufficient to fund its
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 public or
private offerings of the Company's or its subsidiaries' stock, or through debt
financings. Further, the Company continues to see a strong flow of strategic
opportunities that fit within its investment and development business model and
expects to seek to secure additional financing commitments from third parties
for CMG @Ventures II LLC in the near future.
Page 17
<PAGE>
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
---------------------
On January 31, 1997, the Company sold 470,477 shares of its common
stock to Microsoft Corporation at a price of $14.50 per share, representing 4.9%
CMG's total outstanding shares of common stock following the sale, with proceeds
to CMG totaling $6,822,000. The shares sold to Microsoft were sold in a private
placement in reliance upon the exemption provided by section 4 (2) of the
Securities Act of 1933.
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 Restated Certificate of Incorporation Incorporated by reference to Exhibit 3
(i) (1) 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 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.
10.1 CMG @Ventures, Inc. Deferred Compensation Plan Filed herewith.
11 Statement re computation of per share earnings Filed herewith.
27 Financial data schedule Filed herewith.
</TABLE>
(B) Reports on Form 8-K.
On February 14, 1997, the Company filed a report on Form 8-K
dated January 31, 1997 in conjunction with the sale by the Company of 470,477
shares of its common stock to Microsoft Corporation.
Page 18
<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.
By: /s/ Andrew J. Hajducky III
_______________________________
Date: June 12, 1997 Andrew J. Hajducky III, CPA
Chief Financial Officer
Page 19
<PAGE>
Exhibit 10.1
CMG@VENTURES, INC.
DEFERRED COMPENSATION PLAN
I. GENERAL
-------
1.1 Establishment of Plan. CMG@Ventures, Inc., a Delaware corporation
---------------------
having its principal place of business at 100 Brickstone Square, 1st Floor,
Andover, Massachusetts ("CMG@Ventures, Inc."), hereby establishes the
CMG@Ventures, Inc. Deferred Compensation Plan (the "Plan"), effective as of
April 1, 1997, for the purpose of establishing deferred compensation accounts
for certain individuals who have contributed significantly to certain
investments made by CMG@Ventures, Inc. and the realization of gain with respect
to those investments (collectively, "Participants"), subject to the terms and
conditions of this Plan.
1.2 No Right to Corporate Assets. This Plan is unfunded and CMG@Ventures,
----------------------------
Inc. and all companies controlling, controlled by and under common control with
CMG@Ventures, Inc. ("Affiliates") will not be required to set aside, segregate,
or deposit any funds or assets of any kind to meet the obligations of
CMG@Ventures, Inc. hereunder. Nothing in this Plan will give a Participant or
any other person any equity or other interest in the assets of CMG@Ventures,
Inc. or any of its Affiliates, or create a trust of any kind or a fiduciary
relationship of any kind between CMG@Ventures, Inc. or any of its Affiliates on
the one hand and any Participant or any such other person on the other. Any
rights that a Participant or any other person may have under this Plan will be
solely those of a general unsecured creditor of CMG@Ventures, Inc.
1.3 Limitation on Rights Created by Plan. Nothing in this Plan will give
------------------------------------
a Participant any right to continue as an officer or employee or in any other
capacity of or with CMG@Ventures, Inc., or any of its Affiliates.
1.4 Nonalienation of Benefits. The rights and benefits of a Participant
-------------------------
in this Plan are personal to the Participant. No interest, right or claim under
this Plan and no distribution therefrom will be assignable, transferable or
inheritable in any respect or subject to sale, testamentary disposition,
mortgage, pledge, hypothecation, anticipation, garnishment, attachment,
execution or levy.
1.5 Binding Effect of Plan. This Plan will be binding upon and inure to
----------------------
the benefit of the Participants individually and will be binding upon and inure
to the benefit of CMG@Ventures, Inc. and its assigns and successors in interest.
1.6 Administration. This Plan will be administered by the Compensation
--------------
Committee of the Board of Directors of CMG@Ventures, Inc., which will have sole
discretion with respect to its interpretation and implementation.
<PAGE>
1.7 Interpretation. This Plan will be construed, enforced and
--------------
administered according to the laws of the Commonwealth of Massachusetts.
II. DEFERRED COMPENSATION
---------------------
2.1 Deferral of Compensation. The Compensation Committee of the Board of
------------------------
Directors of CMG@Ventures, Inc. may from time to time recognize the services
performed by certain individuals as employees and officers of CMG@Ventures, Inc.
in connection with the making of certain investments and the realization of
gains with respect to those investments by CMG@Ventures, Inc.; and in connection
therewith, the Compensation Committee of the Board of Directors of CMG@Ventures,
Inc. may set aside in its sole discretion cash bonuses to be paid to said
individuals as Participants in this Plan, which will generally equal 20% to
22.5% of said gains as determined by said Committee, subject to the terms and
conditions hereof. A list of the names of the Participants and their dates of
hire (the "Participant List") shall be maintained in the office of the chief
financial officer of CMG@Ventures, Inc. Any cash bonuses awarded to any
Participants in this Plan shall be reflected in deferred compensation accounts
as provided in this Plan, and distributions from those accounts shall be subject
to vesting and forfeiture as provided in this Plan.
2.2 Deferred Compensation Accounts. At such time as the Compensation
------------------------------
Committee of the Board of Directors of CMG@Ventures, Inc. determines in its sole
discretion to award cash bonuses to Participants in this Plan in connection with
the realization of a gain with respect to a particular investment, the
Compensation Committee shall adopt a Schedule of Deferred Compensation Accounts
in the form maintained in the office of the chief financial officer of
CMG@Ventures, Inc. (the "Schedule of Deferred Compensation Accounts"), and
CMG@Ventures, Inc. will thereupon establish and maintain an account for each
Participant which reflects the cash bonus thereby awarded to the Participant in
a deferred compensation account as set forth in Schedule of Deferred
Compensation Accounts established pursuant to and subject to the terms and
conditions of this Plan. These deferred compensation accounts shall be
maintained only on the books of CMG@Ventures, Inc. and shall not be funded in
any respect, and the amounts of deferred compensation reflected in said accounts
shall always be entirely the property of CMG@Ventures, Inc. and its Affiliates
and shall be available to CMG@Ventures, Inc. and its Affiliates from time to
time for the payment of their debts, liabilities and commitments generally. The
Compensation Committee of the Board of Directors of CMG@Ventures, Inc. may, in
its sole discretion, adopt a Schedule of Deferred Compensation Accounts based
upon a preliminary estimate (or updated interim estimate) of gain realized with
respect to a particular investment prior to the determination of the final gain
realized. In such event, the Compensation Committee may issue a preliminary
Schedule of Deferred Compensation Accounts with respect to that investment
followed by updated interim schedules and then by a final schedule at such time
as the actual gain has been finally determined by the Committee. Cash bonuses
awarded to, and deferred compensation accounts established for, Participants in
this Plan and distributions made to those Participants based upon a preliminary
or interim Schedule of Deferred Compensation Accounts in connection with the
gain realized with respect to a particular investment shall thereupon be
adjusted to reflect any interim or final Schedule of Deferred
-2-
<PAGE>
Compensation Accounts. All adjustments to any Schedule of Deferred Compensation
Accounts shall be made at the sole discretion of the Compensation Committee.
2.3 Vesting of Deferred Compensation Accounts. The vesting of any
-----------------------------------------
deferred compensation account established as provided in this Plan pursuant to
the adoption of a Schedule of Deferred Compensation Accounts shall vest with
respect to each Participant in forty (40) quarter-annual cumulative and
consecutive installments of three and three-quarters percent (3 3/4%) each for
the first five (5) years and one and one-quarter percent (1 1/4%) each for the
second five (5) years, with the first four (4) installments vesting on the first
anniversary of the date of hire of each respective Participant as set forth in
the Participant List, and with each subsequent installment vesting in arrears at
the end of each consecutive quarter-annual period following the first
anniversary of each respective Participant's date of hire and with the entire
deferred compensation account of such Participant vesting by the tenth
anniversary of such date of hire, provided that on each such vesting date, each
such Participant must then be a full-time employee of CMG@Ventures, Inc. or one
of its Affiliates and must be in compliance with, and not in default of, all of
his or her obligations hereunder and under any other agreement between said
Participant and CMG@Ventures, Inc. and any of its Affiliates in order for such
vesting to occur. No portion of any Deferred Compensation Account established
with respect to any Participant shall vest in any respect whatsoever after the
date of termination of said Participant's employment relationship with
CMG@Ventures, Inc. and its Affiliates as provided herein.
2.4 Interest. Interest will not be credited to the deferred compensation
--------
accounts established pursuant to this Plan.
2.5 Distributions; Repayments. Upon the adoption of a Schedule of
-------------------------
Deferred Compensation Accounts by the Compensation Committee of the Board of
Directors of CMG@Ventures, Inc., distributions shall be made to Participants
according to that schedule to the extent Participants' deferred compensation
accounts are vested at the time of the implementation of each such schedule, and
distributions shall continue to be made to Participants on each quarterly
vesting date established pursuant to this Plan with respect to each
Participant's deferred compensation account to the extent of that portion of
each deferred compensation account that then becomes vested for each
Participant. Upon the adoption of any updated interim or final Schedule of
Deferred Compensation Accounts in connection with the gain realized with respect
to a particular investment, additional distributions of vested amounts may be
made in accordance with such updated interim or final schedule. In the event
there is any distribution to a Participant pursuant to a preliminary or updated
interim schedule which exceeds the amount properly distributable to such
Participant pursuant to a later updated interim or final schedule, the
Participant shall pay such excess to the Company forthwith, and the Company
shall have the right of setoff provided in Section 2.9 with respect thereto.
Furthermore, in the event that any additional amount is properly distributable
to such Participant pursuant to a later updated interim or final schedule, the
Company shall pay such additional amount to the Participant forthwith.
2.6 Forfeitures. In the event of termination of a Participant's
-----------
employment relationship with CMG@Ventures, Inc. and its Affiliates for any
reason or for no reason
-3-
<PAGE>
whatsoever, any balance or balances then remaining in said Participant's
deferred compensation account or accounts which is vested on the date of
termination (as the same may be adjusted) shall be paid to the Participant and
the unvested balance or balances of such account or accounts shall be forfeited
and redistributed to other Participants with respect to the particular Schedule
of Deferred Compensation Accounts (as the same may be adjusted) to which said
forfeiture relates pro rata in proportion to the balances remaining in the
accounts of said Participants who continue to comply with the vesting conditions
set forth in Section 2.3, or as the Compensation Committee of the Board of
Directors of CMG@Ventures, Inc. shall otherwise decide in its sole discretion.
2.7 Hardship Distributions from Deferred Compensation Accounts. The
----------------------------------------------------------
Compensation Committee of the Board of Directors of CMG@Ventures, Inc. may, in
its sole discretion, distribute a portion or all of a Participant's deferred
compensation account in case of the Participant's financial hardship.
2.8 Withholding. CMG@Ventures, Inc. may withhold any amounts it deems
-----------
appropriate with respect to the payment of any distribution pursuant to this
Plan for the purpose of satisfying the obligations of CMG@Ventures, Inc. and its
Affiliates with respect to the payment of any amounts due appropriate
authorities with respect to said distributions.
2.9 Right of Setoff. CMG@Ventures, Inc. shall have the right to setoff
---------------
against any distributions made to any Participant pursuant to this Plan any
amounts owed to CMG@Ventures, Inc. or any of its Affiliates by any Participant.
III. AMENDMENT AND TERMINATION
-------------------------
3.1 Amendment. The Compensation Committee of the Board of Directors of
---------
CMG@Ventures, Inc. may, without the consent of any Participant or any other
person, amend the Plan, including the Participant List, at any time and from
time to time; provided, however, that no amendment will reduce the amount
credited to the deferred compensation account of any Participant as set forth in
a final Schedule of Deferred Compensation Accounts except as provided herein.
3.2 Termination. The Compensation Committee of the Board of Directors of
-----------
CMG@Ventures, Inc. may terminate this Plan at any time in its sole discretion.
Upon termination of the Plan, a payment from a Participant's deferred
compensation account shall be made in a lump sum to each Participant as soon as
practicable after the date the Plan is terminated.
-4-
<PAGE>
IN WITNESS WHEREOF, this CMG@Ventures, Inc. Deferred Compensation Plan has
been executed to take effect on April 1, 1997.
CMG@VENTURES, INC.
By: /s/ Andrew J. Hajducky III
------------------------------------
Andrew J. Hajducky III
Chief Financial Officer
-5-
<PAGE>
EXHIBIT 11
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
----------------------------- ----------------------------
1997 1996 1997 1996
--------------- ------------ -------------- ------------
Primary:
- --------
<S> <C> <C> <C> <C>
Net income (loss) $(10,276) $7,414 $(17,007) $22,947
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Shares outstanding at the beginning of the period 9,605 9,154 9,167 8,839
Weighted average shares issued during the period 17 1 195 122
Weighted average treasury stock acquired during
the period -- -- (35) --
Weighted average common stock equivalents -- 814 -- 946
-------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding 9,622 9,969 9,327 9,907
======== ======== ======== ========
Primary net income (loss) per share $ (1.07) $ 0.74 $ (1.82) $ 2.32
======== ======== ======== ========
Fully Diluted:
- -------------
Net income (loss) $(10,276) $7,414 $(17,007) $22,947
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Shares outstanding at the beginning of the period 9,605 9,154 9,167 8,839
Weighted average shares issued during the period 17 1 195 122
Weighted average treasury stock acquired during
the period -- -- (35) --
Weighted average common stock equivalents -- 814 -- 958
-------- -------- -------- --------
Weighted average common and common equivalent shares
outstanding 9,622 9,969 9,327 9,919
======== ======== ======== ========
Fully diluted net income (loss) per share $ (1.07) $ 0.74 $ (1.82) $ 2.31
======== ======== ======== ========
</TABLE>
All share information has been restated 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 THE
CONSOLIDATED FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF CMG
INFORMATION SERVICES, INC. FOR THE QUARTER ENDED APRIL 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 61,742
<SECURITIES> 7,435
<RECEIVABLES> 17,842
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104,435
<PP&E> 10,455
<DEPRECIATION> 0
<TOTAL-ASSETS> 141,495
<CURRENT-LIABILITIES> 49,426
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 44,841
<TOTAL-LIABILITY-AND-EQUITY> 141,495
<SALES> 48,547
<TOTAL-REVENUES> 48,547
<CGS> 31,675
<TOTAL-COSTS> 87,561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,512)
<INCOME-PRETAX> (18,849)
<INCOME-TAX> (1,842)
<INCOME-CONTINUING> (17,007)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,007)
<EPS-PRIMARY> (1.82)
<EPS-DILUTED> (1.82)
</TABLE>
