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 January 31, 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 March 10, 1997
Common Stock, par value $.01 per share 9,620,568
- -------------------------------------- ------------------------------
Class Number of shares outstanding
CMG INFORMATION SERVICES, INC.
FORM 10-Q
INDEX
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
January 31, 1997 and July 31, 1996 3
Consolidated Statements of Operations
Three and six months ended January 31, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six months ended January 31, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Part II. OTHER INFORMATION 15-16
SIGNATURE 17
Exhibit 11 18
Page 2
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
January 31, July 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 73,614 $ 63,387
Available-for-sale securities 6,582 13,069
Accounts receivable, trade, less allowance for doubtful accounts 16,925 10,666
License fees receivable 4,766 1,032
Prepaid expenses and other current assets 4,865 2,199
Deferred income taxes 553 213
--------- ---------
Total current assets 107,305 90,566
Long term license fees receivable 2,787 952
Property and equipment, net 9,322 8,461
Investments in affiliates 6,469 4,073
Cost in excess of net assets of subsidiaries acquired, net of accumulated amortization 17,093 2,299
Other assets 3,332 3,152
--------- ---------
$ 146,308 $ 109,503
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 11,694 $ --
Current installments of long term debt 2,986 245
Accounts payable 6,613 7,251
Accrued expenses 14,810 6,245
Deferred revenues 6,460 4,620
Other current liabilities 139 196
--------- ---------
Total current liabilities 42,702 18,557
Long term debt, less current installments 12,939 208
Long term deferred revenues 2,400 --
Deferred income taxes 9,099 9,122
Other long term liabilities 166 347
Minority interest 24,976 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 9,604,979 shares at January 31, 1997 and 9,166,747 shares at
July 31, 1996 96 92
Additional paid-in capital 16,004 9,243
Retained earnings 37,926 44,657
--------- ---------
Total stockholders' equity 54,026 53,992
--------- ---------
$ 146,308 $ 109,503
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
Page 3
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended January 31, Six months ended January 31,
------------------------------ ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 18,897 $ 6,105 $ 29,537 $ 11,940
Operating expenses:
Cost of sales 12,536 3,827 19,152 7,420
Research and development 6,732 1,449 11,697 1,951
In-process research and development -- 452 1,312 452
Selling 7,864 1,767 15,820 2,862
General and administrative 4,574 1,876 8,814 3,555
--------- --------- --------- ---------
Total operating expenses 31,706 9,371 56,795 16,240
--------- --------- --------- ---------
Operating loss (12,809) (3,266) (27,258) (4,300)
Other income (deductions):
Gain on sale of available-for-sale securities -- -- -- 30,049
Gain on sale of investment in affiliate -- -- 3,616 --
Gain on sale of subsidiary 15,111 -- 15,111 --
Minority interest 1,025 257 3,447 300
Equity in losses of affiliates (1,081) (751) (2,089) (1,021)
Interest income, net 260 829 1,184 1,068
--------- --------- --------- ---------
15,315 335 21,269 30,396
--------- --------- --------- ---------
Income (loss) before income taxes 2,506 (2,931) (5,989) 26,096
Income tax benefit (expense) (1,840) 286 (742) (10,563)
--------- --------- --------- ---------
Net income (loss) $ 666 $ (2,645) $ (6,731) $ 15,533
========= ========= ========= =========
Primary earnings (loss) per share $ 0.07 $ (0.27) $ (0.74) $ 1.61
========= ========= ========= =========
Weighted average shares outstanding 9,771 9,762 9,140 9,676
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
Page 4
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended January 31,
----------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ (6,731) $ 15,533
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization 2,513 1,002
Gain on sale of available-for-sale securities -- (30,049)
Gain on sale of investment in affiliate (3,616) --
Gain on sale of subsidiary (15,111) --
Equity in losses of affiliates 2,089 1,021
Minority interest (3,447) (300)
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 (7,691) (2,250)
Prepaid expenses and other assets (2,015) (445)
Accounts payable and accrued expenses 4,284 2,056
Deferred revenues 4,355 1,410
Refundable and accrued income taxes 160 10,813
--------- ---------
Net cash used for operating activities (23,898) (757)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (3,428) (4,623)
Proceeds from sale or maturities of available-for-sale securities 10,568 57,462
Income taxes paid related to sale of available-for-sale securities -- (10,277)
Purchase of available-for-sale securities -- (25,526)
Investments in affiliates and acquisitions of subsidiaries (25,826) (2,750)
Proceeds from sale of investment in affiliate 550 --
Proceeds from sale of subsidiary 18,468 --
Other (600) (1,718)
--------- ---------
Net cash provided by (used for) investing activities (268) 12,568
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable and long term debt 27,665 1,735
Sale of common and treasury stock 7,470 254
Purchase of treasury stock (984) --
Other 242 (32)
--------- ---------
Net cash provided by financing activities 34,393 1,957
--------- ---------
Net increase in cash and cash equivalents 10,227 13,768
Cash and cash equivalents at beginning of period 63,387 9,423
--------- ---------
Cash and cash equivalents at end of period $ 73,614 $ 23,191
========= =========
Supplemental disclosure information:
Cash paid during the period for:
Interest $ 253 $ 9
========= =========
Income taxes $ 675 $ 10,038
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
Page 5
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 six month periods ended January 31, 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 year 1997 the Company, through its subsidiary
limited partnership, CMG@Ventures, 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.
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%) subsequent to January 31, 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.
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
============
Page 6
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Acquisitions and Investments (continued)
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 year 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 TeleT 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 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 January 31, 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.
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.
Page 7
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Notes Payable
Notes payable at January 31, 1997 consisted of $10,000,000 in collateralized
corporate borrowings and $1,694,000 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, 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 January 31, 1997, available-for-sale securities consist of equity and debt
securities, carried at fair value. The estimated fair value of these securities
consists of $4,080,000 of Premiere Technologies common stock and $2,502,000 of
U.S. Government agency obligations which the Company does not intend to hold to
maturity. Since the estimated fair value of each investment approximates its
carrying value or amortized cost, there are no unrealized gains or losses
reflected as of January 31, 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 during the first
six months of fiscal 1997, common equivalent shares have not been included in
the calculation of weighted average shares outstanding for the six month period
ending January 31, 1997. 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.
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:
Three months ended January 31, Six months ended January 31,
-------------------------------- ------------------------------
1997 1996 1997 1996
---------------- -------------- --------------- -------------
Net sales:
Investment and development $ 5,443,000 $ 815,000 $ 9,439,000 $ 1,042,000
Fulfillment services 10,615,000 2,603,000 14,159,000 5,076,000
Lists and database services 2,839,000 2,687,000 5,939,000 5,822,000
------------ ----------- ------------ -----------
$ 18,897,000 $ 6,105,000 $ 29,537,000 $11,940,000
============ =========== ============ ===========
Operating income (loss):
Investment and development $(11,735,000) $(3,183,000) $(25,346,000) $(4,830,000)
Fulfillment services 1,512,000 281,000 2,097,000 453,000
Lists and database services (2,586,000) (364,000) (4,009,000) 77,000
------------ ----------- ------------ -----------
$(12,809,000) $(3,266,000) $(27,258,000) $(4,300,000)
============ =========== ============ ===========
Page 8
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 January 31, 1997 compared to three months ended January 31,
1996
Net sales for the quarter ended January 31, 1997 increased $12,792,000,
or 210%, to $18,897,000 from $6,105,000 for the quarter ended January 31, 1996.
The increase was largely attributable to an increase of $8,012,000 in net sales
for the Company's fulfillment services segment, reflecting 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. Additionally, investment
and development segment net sales increased $4,628,000 primarily reflecting
increased sales by the Company's subsidiary, Lycos, Inc. (Lycos), and lists and
database services segment net sales increased by $152,000. As the portfolio
companies of the investment and development and lists and database services
segments continue to develop and introduce their products commercially, the
Company expects to report future revenue growth.
Cost of sales increased $8,709,000, or 228%, to $12,536,000 in the second
quarter of fiscal 1997 from $3,827,000 for the corresponding period in fiscal
1996, comprised of increases of $5,928,000, $2,678,000 and $103,000 related to
the fulfillment services, investment and development, and lists and database
services segments, respectively, resulting from higher sales. In the fulfillment
services segment, cost of sales as a percentage of net sales increased to 72% in
the second quarter of fiscal 1997 from 65% in the second quarter of fiscal 1996
due to the mix of services associated with the acquisition of Pacific Link.
Research and development expenses increased $5,283,000, or 365%, to
$6,732,000 in the quarter ended January 31, 1997 from $1,449,000 in the prior
year's second quarter. The increase consists primarily of an increase of
$3,866,000 in research and development expenses for the investment and
development segment as product development activities continued at all of the
Company's Internet investments. Also, research and development expenses
increased $1,457,000 in the lists and database services segment reflecting the
continued development of Engage Technologies' (formerly CMG Direct Interactive)
data mining, querying, analysis and targeting products and services. In
addition, during the second quarter of fiscal 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
Communications Corp. The Company anticipates it will continue to devote
substantial resources to product development and that these costs may
substantially increase in future periods.
Selling expenses increased $7,864,000, or 345% to $7,864,000 in the
second quarter ended January 31, 1997 from $1,767,000 for the corresponding
period in fiscal 1996. This increase was primarily attributable to a $5,317,000
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. Selling expenses in
the fulfillment services segment increased by $449,000 in comparison with the
second quarter of fiscal 1996 due to the acquisition of Pacific Link, and
selling expenses in the lists and database services segment increased by
$331,000 versus last year's second quarter due to the continued building of
sales and marketing infrastructure for Engage Technologies. Selling expenses
increased as a percentage of net sales to 42% in the second quarter of fiscal
1997 from 29% for the corresponding period in fiscal 1996. As the Company's
subsidiaries continue to introduce new products and expand sales, the Company
expects to incur significant promotional expenses, as well as expenses related
to the hiring of additional sales and marketing personnel and increased
advertising expenses, and anticipates that these costs will substantially
increase in absolute dollar amounts in future periods.
Page 9
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
General and administrative expenses increased $2,698,000, or 143.8%, to
$4,574,000 in the second quarter of fiscal 1997 from $1,876,000 for the
corresponding period in fiscal 1996. The investment and development segment and
lists and database services segment experienced increases of $1,771,000 and
$483,000, 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 $444,000 in comparison with the second quarter of fiscal
1996 due to the acquisition of Pacific Link, including approximately $267,000
goodwill amortization charges for the quarter. General and administrative
expenses decreased as a percentage of net sales to 24% in the second quarter of
fiscal 1997 from 31% in the second 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 grow and
expand their administrative staffs and infrastructures.
Gain on sale of subsidiary reflects the Company's pre-tax gain of
$15,111,000 on the sale of NetCarta on January 31, 1997. Interest income, net,
decreased $569,000 compared with the second quarter of fiscal 1996, primarily
due to lower average corporate cash balances in the second quarter of fiscal
1997 compared to prior year, combined with $275,000 interest expense related to
borrowings incurred to finance the Company's acquisition of Pacific Link,
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 January 31,
1996 primarily reflect two investments, FreeMark Communications (FreeMark) and
Ikonic Interactive, Inc. (Ikonic). 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. Equity in losses of affiliates for the quarter ended January 31,
1997 include the results from the Company's minority ownership in Ikonic,
Vicinity Corporation (Vicinity), Parable LLC (Parable) and Silknet Software,
Inc. (Silknet). Also, 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, 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 $1,025,000 in the second quarter of fiscal
1997 from $257,000 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 expense in the second quarter of fiscal 1997 was $1,840,000.
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 10
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Six months ended January 31, 1997 compared to six months ended January 31, 1996
Net sales increased $17,597,000, or 147% to $29,537,000 for the six
months ended January 31, 1997 from $11,940,000 for the corresponding period in
fiscal 1996. The increase was largely attributable to increases of $9,083,000
and $8,397,000 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. As the portfolio companies of the investment and development
and lists and database services segments continue to develop and introduce their
products commercially, the Company expects to report future revenue growth.
Cost of sales increased $11,732,000, or 158%, to $19,152,000 for the six
months ended January 31, 1997 from $7,420,000 for the corresponding period in
fiscal 1996, primarily comprised of increases of $6,401,000 and $5,162,000
related to the fulfillment services and investment and development segments,
respectively, resulting from higher sales. In the fulfillment services segment,
cost of sales as a percentage of net sales increased to 69% in the first six
months of fiscal 1997 from 67% in the first half 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 $9,746,000, or 500%, to
$11,697,000 in the first six months of fiscal 1997 from $1,951,000 for the
corresponding period in fiscal 1996. The increase consists primarily of an
increase of $7,111,000 in research and development expenses for the investment
and development segment as product development activities continued at all of
the Company's Internet investments. Also, research and development expenses
increased $2,657,000 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 half of fiscal 1997,
compared with $452,000 of in-process research and development expenses incurred
by its consolidated subsidiary, Lycos, in the first half 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 future periods.
Selling expenses increased $12,958,000, or 453% to $15,820,000 for the
six months ended January 31, 1997 from $2,862,000 for the corresponding period
in fiscal 1996. This increase was primarily attributable to a $11,851,000
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. Selling expenses in
the fulfillment services segment increased by $513,000 in comparison with the
first half of fiscal 1996 due to the acquisition of Pacific Link, and selling
expenses in the lists and database services segment increased by $594,000 versus
the first six months of last year due to the continued building of sales and
marketing infrastructure for Engage Technologies. Selling expenses increased as
a percentage of net sales to 54% in the first six months of fiscal 1997 from 24%
for the corresponding period in fiscal 1996. As the Company's subsidiaries
continue to introduce new products and expand sales, the Company expects to
incur significant promotional expenses, as well as expenses related to the
hiring of additional sales and marketing personnel and increased advertising
expenses, and anticipates that these costs will substantially increase in
absolute dollar amounts in future periods.
Page 11
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
General and administrative expenses increased $5,259,000, or 148%, to
$8,814,000 for the first six months of fiscal 1997 from $3,555,000 for the
corresponding period in fiscal 1996. The investment and development segment and
lists and database services segment experienced increases of $3,929,000 and
$783,000, 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 $547,000 in comparison with the first half of fiscal 1996
due to the acquisition of Pacific Link, including approximately $267,000 of
goodwill amortization charges. General and administrative expenses remained
constant as a percentage of net sales at 30% compared with the first six months
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 grow and expand their administrative staffs and
infrastructures.
Gain on sale of subsidiary reflects the Company's pretax gain of
$15,111,000 on the sale of NetCarta on January 31, 1997. Gain on sale of
investment in affiliate resulted when the Company sold its equity interest in
TeleT Communications, LLC (TeleT) to Premiere Technologies, Inc. (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 year 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. Interest income, net, increased
$116,000 compared with the first six months of fiscal 1996, primarily due to
income earned by Lycos from the investment of the proceeds of their initial
public offering which occurred in April 1996, partially offset by lower average
corporate cash balances in the first half of fiscal 1997 compared to prior year,
combined with $275,000 interest expense related to borrowings incurred to
finance the Company's acquisition of Pacific Link.
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 six months ended January 31,
1996 primarily reflect two investments, FreeMark and Ikonic. 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. Equity in losses of affiliates for the six months
ended January 31, 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
$2,000,000. 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, 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 $3,447,000 in the first six months of
fiscal 1997 from $300,000 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 expense in the first six months of fiscal 1997 was $742,000.
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 12
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
Working capital at January 31, 1997 decreased to $64.6 million compared
to $72 million at July 31, 1996. The Company's principal uses of capital during
the first six 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 six 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 subsequent to January 31, 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 January 31, 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 six months ended January 31, 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 year 1997, the Company, through its
subsidiary limited partnership, CMG@Ventures, 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 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 year 1997, 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%.
Page 13
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, Silknet, Vicinity and GeoCities
during the first six months of fiscal 1997 (as well as its previous investments
in Lycos, NetCarta, FreeMark, Black Sun, GeoCities, Ikonic, TeleT and Vicinity)
were made through its majority-owned limited partnership, CMG@Ventures. The
Company owns 100% of the capital interest and has all voting rights, and is
entitled to 77.5% of the net capital gains, as defined, of these investments.
The remaining 22.5% interest in the net capital gains on these investments are
attributed to profit partners, including the President and Chief Executive
Officer of the Company. Subsequent to January 31, 1997, the sharing of the net
gains will be changed to 80% to the Company and 20% to the profit partners for
investments made after July 31, 1996. The Company is responsible for all
operating expenses of CMG@Ventures.
The Company believes that existing working capital 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 CMG@Ventures investment and
development business model and expects to seek to secure additional financing
commitments for a second @Ventures fund in the near future.
Page 14
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on December 10, 1996.
Proposal 1 submitted to a vote of security holders at the meeting was the
election of one Class III Director. David S. Wetherell was elected at the
meeting to serve as a Class III Director until the 1999 Annual Meeting of
Stockholders with 6,043,472 shares voted for his election and 74,989 shares
withheld with respect to his election.
No abstentions or broker non-votes were recorded.
Proposal 2 submitted to a vote of security holders at the meeting was a
proposal to amend the Company's 1986 Stock Option Plan to permit any individual
to be eligible to receive options under such Plan. Votes cast were as follows:
FOR AGAINST ABSTAINED
--- ------- ---------
4,809,093 613,253 15,435
No broker non-votes were recorded.
The proposal was approved.
Proposal 3 submitted to a vote of security holders at the meeting was
a proposal to ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent accountants for the current fiscal year. Votes cast were as
follows:
FOR AGAINST ABSTAINED
--- ------- ---------
6,043,640 63,100 11,721
No broker non-votes were recorded.
The proposal was approved.
15
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:
Exhibit No. Title Method of Filing
- ----------- ----- ----------------
3 (i) (1) Amendment to the Incorporated by
Restated Certificate of reference to Exhibit 3
Incorporation (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 Incorporated by
Incorporation 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 Incorporated by
Stockholders reference to Article
FOURTH of the
Registrant's Restated
Certificate of
Incorporation and
ARTICLE II of the
Registrant's Restated
By-Laws.
10.1 Supplement #1 to Filed herewith.
Sublease, dated
September 26, 1996
between the Registrant
and FTP Software, Inc.
10.2 CMG Stock Purchase Incorporated by
Agreement, dated as of reference to Exhibit
December 10, 1996 by and 99.1 to the
between the Registrant Registrant's current
and Microsoft Corporation report on Form 8-K
dated January 31, 1997,
filed on February 14,
1997.
11 Statement re computation Filed herewith.
of per share earnings
27 Financial data schedule Filed herewith.
(b) Reports on Form 8-K.
On November 8, 1996, the Company filed a report on Form 8-K dated
October 24, 1996 in conjunction with the acquisition of Pacific Direct Marketing
Corp., d/b/a Pacific Link, through the Company's wholly-owned subsidiary,
SalesLink Corporation.
16
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: March 14, 1997 Andrew J. Hajducky III, CPA
Chief Financial Officer
17
EXHIBIT 10.1
------------
Supplement to #1
to
SUBLEASE
Dated: September 26, 1996
("SUBLEASE")
By and Between
FTP Software, Inc. ("SUBLANDLORD")
and
CMG Information Services, Inc. ("SUBTENANT")
This Supplement #1, hereby amends and supplements the SUBLEASE. Except as
specifically stated herein, the remaining terms and conditions of the SUBLEASE
shall continue to have full force and effect.
PREMISES: In addition to the definition of Premises as described in the
SUBLEASE, and subject to the Landlord's consent, the Premises are hereby
expanded to include approximately 19,436 additional sq. ft. on the 1st Floor of
Brickstone Square, Andover, MA as seen on CSS Architects drawing dated, 1-8-97,
attached as Exhibit A "1/st/ Floor Plan West Pages 1 and 2, (the "Additional
Space").
TERM: The sublease Term for the Additional Space shall commence upon the
execution, by both parties, of this Supplement #1 and shall thereafter by
coterminous with the SUBLEASE.
RENT TERM FOR ADDITIONAL SPACE: The Rent Term for the Additional Space shall
commence on ("Rent Commencement Date") thirty (30) days after the date that both
the Landlord consent to this Supplement #1 has been received, and the
SUBLANDLORD completes its obligation under this Supplement #1.
RENT: The additional rent ("Additional Rent") for the Additional Space which
shall be paid in accordance with terms of the SUBLEASE shall be:
From Rent Commencement Date
through September 30, 1999 $26,724.50 per month
October 1, 1999 through
July 31, 2002 $28,020.23 per month
SECURITY DEPOSIT: The Security Deposit for the Additional Space shall be
$53,449.00
PARKING: In addition to the parking spaces provided for in the SUBLEASE,
SUBTENANT shall have the use of parking spots A74, A80-A90 and B34-B41 as shown
on Exhibit B.
CONDITION: SUBTENANT, subject to the following, agrees to accept the Additional
Space in an "AS IS" condition. SUBLESSOR makes no warranty with regard to any
building laws, codes or regulations.
SUBLANDLORD, at its expense shall build a demising wall and all necessary common
area corridors and doors. In addition, if allowed by local building codes and
regulations, SUBLANDLORD shall add glass panels to the two walls behind the
reception area. SUBLANDLORD shall deliver the Additional Space with mechanical,
HVAC, lighting and electrical systems in good working order. SUBLANDLORD shall
deliver furnished premises for all offices, workstations, conference rooms and
kitchens. A final inventory shall be attached to this Supplement #1. If
SUBTENANT cancels the SUBLEASE before the termination date in the SUBLEASE, the
furniture/appliances would remain the property of SUBLANDLORD and at
SUBLANDLORD's option SUBTENANT would restore any and all construction completed
during the sublease term. If SUBTENANT remains until the end of the SUBLEASE
term and is not in default under the terms of the SUBLEASE, the
furniture/appliances would become the property of SUBTENANT and no construction
restoration would be required unless required by the prime lease.
Notwithstanding Section 3.04 of the SUBLEASE, and other than for default,
SUBTENANT shall have the sole right of Early Termination with regard to the
Additional Space, such termination being in accordance with the SUBLEASE; both
parties retain the Early Termination rights granted in the SUBLEASE for the
remainder of the space that is subject to the SUBLEASE.
BACK-UP GENERATOR: Subject to the LANDLORD's prior written consent, SUBTENANT
is hereby granted the right to install a back-up generator at a location to by
mutually agreed to by the LANDLORD, SUBLANDLORD and SUBTENANT.
REAL ESTATE AGENT: SUBLANDLORD is exclusively represented by CRF Partners, Inc.
of Massachusetts through the Broker, John C. Cissel, SUBTENANT is represented by
Lynch Murphy Walsh & Partners. It is agreed that all fees due and payable are
to be paid by SUBLANDLORD to CRF Partners, Inc. Upon receipt of said fees, CRF
Partners will pay the proportionate fees to Lynch Murphy Walsh & Partners.
EXECUTED as a sealed instrument as of 1-23-97 .
----------------------
SUBLANDLORD SUBTENANT
FTP SOFTWARE, INC. CMG INFORMATION SERVICE, INC.
By: /s/ John J. Warnock, Jr. By: /s/ Andrew J. Hajducky
---------------------------- ----------------------------
Its Duly Authorized Officer Its Duly Authorized Officer
Name: Name:
------------------------- -------------------------
Title: Title: CFO
------------------------- -------------------------
Date: Date: 1-23-97
------------------------- -------------------------
Exhibit 11
CMG INFORMATION SERVICES, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
Six months ended January 31,
-----------------------------
1997 1996
-------------- -------------
Primary:
- --------
Net income (loss) $(6,731) $15,533
======= =======
Weighted average common and common
equivalent shares outstanding:
Shares outstanding at the beginning of
the period 9,167 8,839
Weighted average shares issued during
the period 24 41
Weighted average treasury stock
acquired during the period (51) --
Weighted average common stock
equivalents -- 796
------- -------
Weighted average common and common
equivalent shares outstanding 9,140 9,676
------- -------
Primary net income (loss) per share $ (0.74) $ 1.61
======= =======
Fully Diluted:
- --------------
Net income (loss) $(6,731) $15,533
======= =======
Weighted average common and common
equivalent shares outstanding:
Shares outstanding at the beginning of
the period 9,167 8,839
Weighted average shares issued during
the period 24 41
Weighted average treasury stock
acquired during the period (51) --
Weighted average common stock
equivalents -- 1,045
Weighted average common and common ------- -------
equivalent shares outstanding 9,140 9,925
======= =======
Fully diluted net income (loss) per
share $ (0.74) $ 1.57
======= =======
All share information has been restated to reflect a 2-for-1 Common Stock split
effected as a stock dividend on February 2, 1996.
1
5
1,000
6-MOS
JUL-31-1997
AUG-01-1996
JAN-31-1997
73,614
6,582
15,041
0
0
107,305
9,322
0
146,308
42,702
0
0
0
96
53,930
146,308
29,537
29,537
19,152
56,795
0
0
(1,184)
(5,989)
742
(6,731)
0
0
0
(6,731)
(0.74)
(0.74)
