SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year Ended July 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File 0-22846
CMG Information Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 01810
Brickstone Square Andover, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (508) 684-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class) (Name of each exchange on which registered)
Common Stock, $0.01 par value NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting Common Stock held by non-affiliates of
the Registrant was $175,099,287 as of October 20, 1997. The Registrant does
not have any outstanding non-voting equity.
On October 20, 1997, the Registrant had outstanding 9,716,508 shares of voting
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders are incorporated by reference
into Parts I, II and IV of this Report. Portions of the definitive proxy
statement (the "Definitive Proxy Statement") to be filed with the Securities and
Exchange Commission relative to the Company's 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1997
CMG INFORMATION SERVICES, INC.
PART I
ITEM PAGE
- ------ ----
1. Business
General.............................................. 2
Direct Marketing Industry........................... 3
The Internet and World Wide Web..................... 3
Interactive Marketing Industry...................... 4
Products and Services............................... 4
Business Strategy................................... 10
Sales and Marketing................................. 11
Competition......................................... 12
Research and Development............................ 12
Intellectual Property and Proprietary Rights........ 12
Employees........................................... 13
Segment Information................................. 13
Significant Customers............................... 13
2. Properties................................................. 13
3. Legal Proceedings.......................................... 14
4. Submission of Matters to Vote of Security Holders.......... 14
PART II
5. Market for Registrant's Common Equity and Related
Stockholders Matters...................................... 14
6. Selected Consolidated Financial Data....................... 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
8. Financial Statements and Supplementary Data................ 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 15
PART III
10. Directors and Executive Officers of the Registrant......... 15
11. Executive Compensation..................................... 15
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 15
13. Certain Relationships and Related Transactions............. 15
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 15
1
This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties, including without limitation those discussed
in "Risk Factors that May Affect Future Results" section of Item 7 of this
Report. Such forward-looking statements speak only as of the date on which they
are made, and the Company cautions readers not to place undue reliance on such
statements.
PART I
ITEM 1. - BUSINESS
GENERAL
CMG Information Services, Inc. and its subsidiaries ("CMG" or the "Company")
is a direct marketing service provider that invests in, develops and integrates
advanced, Internet, interactive, and database management technologies. CMG
offers its clients a wide variety of direct marketing opportunities to choose
from, including: Internet and interactive media direct marketing software
technologies, product and literature fulfillment and turnkey outsourcing, sales
lead/ inquiry management, business-to-business telemarketing services, highly
segmented and accurate mailing lists, database management, design and
development capabilities, consultative list management and brokerage services.
The Company is advancing products and services that will both create and profit
from direct marketing opportunities on the Internet.
Direct marketing is the use of electronic interactive media, mail order,
telemarketing, and other methods of direct contact of targeted customers and
prospects to promote products and services. Direct marketing, unlike other forms
of advertising which are disseminated to a broad audience through print and
broadcast media, enables businesses to reallocate marketing and advertising
dollars to more effective forms of advertising sent directly to a defined set of
consumers. This defined set is identified through analysis and segmentation of
large amounts of data on past customers and future prospects. From this
information, specific targeted marketing strategies and personalized
communications can be generated which focus on those customers and prospects
who, according to their buying habits and customer profile, are most likely to
respond.
CMG's emergence into the direct marketing products and services arena is
being driven by the distinctive yet synergistic competencies of its operating
businesses.
CMG's three wholly owned start-up Internet companies, ADSmart Corporation
(ADSmart), InfoMation Publishing Corporation (InfoMation) and Planet Direct
Corporation (Planet Direct) are being developed to benefit from direct marketing
opportunities on the Internet by providing advertising services, personal
electronic newspapers and comprehensive Internet service content offerings.
The focus of CMG@Ventures, L.P. (which is being reorganized into
CMG@Ventures I LLC), CMG@Ventures, Inc. and CMG @Ventures II, LLC, (collectively
CMG@Ventures) is on strategic investment and development opportunities. Their
mission is to assist the commercialization of electronic content, products and
services via the Internet and interactive media. Drawing upon significant
investment resources, strong technical talent, and a management team steeped in
the Internet, CMG@Ventures currently holds thirteen strategic investments. In
addition, CMG recently formed NaviSite Internet Services Corporation (NaviSite)
to provide Web hosting and Internet server management.
As of July 31, 1997, CMG@Ventures had investments in three consolidated
subsidiaries: 53% owned Lycos, Inc. (Lycos), 92% owned Blaxxun Interactive, Inc.
(Blaxxun, formerly Black Sun Interactive, Inc.), and 53% owned Vicinity
Corporation (Vicinity). At July 31, 1997, CMG@Ventures also had minority
ownership positions in eight affiliates: 46% owned Parable, LLC (Parable), 41%
owned GeoCities, 37% owned Ikonic, Inc. (Ikonic), 31% owned Reel.com, LLC, 23%
owned Silknet Software, Inc. (Silknet), 15% owned KOZ, Inc., 15% owned Sage
Enterprises, and 9% owned Softway Systems, Inc. Subsequent to July 31, 1997 CMG
@Ventures acquired an additional minority ownership position in Speech Machines
plc. The Company is entitled to 77.5% of the net capital gains of CMG@Ventures,
L.P., and 80% of the net capital gains of CMG@Ventures II, LLC, and the
remaining 22.5% and 20% of the net capital gains, respectively, are attributable
to CMG@Ventures partners. Most of CMG@Ventures' investments are early stage
companies and there can be no assurance that their products or services will be
commercially successful.
CMG's subsidiary, SalesLink Corporation (SalesLink), along with its newly
acquired subsidiary, Pacific Direct Marketing Corporation (Pacific Link),
provides product and literature fulfillment and turnkey outsourcing, inventory
management, data warehouse management, sales lead/inquiry management, closed-
loop telemarketing, print-on-demand, and customized software solutions for
client's marketing or manufacturing programs, and Web fulfillment, primarily to
high-tech, financial-services, and health-care markets.
CMG's subsidiary, CMG Direct Corporation (CMG Direct) provides educational
and business-to-business publishers with comprehensive, highly segmented, and
accurate lists for direct marketing to millions of customers nationwide. CMG
Direct's services
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help publishers develop and implement effective direct marketing programs using
both conventional and on-line media. CMG believes that its databases of
university faculty and information-buyers make it a leading supplier of mailing
lists and related services to educational and professional publishers. The
Company's twenty years of experience supplying lists to the direct marketing
industry, together with its expertise in the use of computer technology to
develop, segment, enhance, maintain and market customer and prospect list
databases, permit the Company to offer its publisher clients a full range of
list services.
CMG's subsidiary, Engage Technologies, Inc. (Engage, formerly CMG Direct
Interactive Inc.) is at the forefront of leveraging its expertise in direct
marketing, database design/development and project management to invest in the
creation of new database management products and a suite of product and service
offerings that will enable sophisticated direct interactive marketing
environments. These new products will enable Engage to take advantage of the
demand for data management services created from the Internet and interactive
media, while continuing to grow and invest in its computer list services,
including list order fulfillment, merge/purge and other direct mail cost saving
services.
The Company has adopted a strategy of seeking opportunities to realize
significant gains through the selective sale of investments or having separate
subsidiaries or affiliates sell minority interests to outside investors. The
Company believes that this strategy provides the ability to significantly
increase shareholder value as well as provide capital to support the growth in
the Company's subsidiaries and investments. Additionally, in fiscal year 1998,
the Company plans to continue to develop and refine the products and services of
its businesses, with the goal of significantly increasing revenue as new
products are commercially introduced, and will continue to pursue a strong pace
of investing in new Internet opportunities.
DIRECT MARKETING INDUSTRY
The use of direct marketing by businesses to target and communicate with
potential customers has increased due in part to the relative cost efficiency of
direct marketing as compared to other advertising methods, as well as the rapid
development of affordable computer technology. Prior to and during much of the
1970's, the costs associated with selling products and services either through
mass marketing or through personal sales calls were relatively low, while the
costs of database development were prohibitive for all but the largest
businesses. In the 1980's, the costs of developing and implementing computer
technologies to analyze and target potential customers declined while the costs
of traditional marketing increased significantly. In addition, concerns have
been raised about the efficacy of traditional forms of marketing. Direct
marketing remains one of the few advertising media allowing an accurate measure
of results through a review of response rates thereby increasing the
effectiveness of the selling effort.
The increasing popularity of direct marketing has created a substantial need
for comprehensive, current and accurate information to identify high probability
purchasers from the millions of consumers in North America. This information, if
properly packaged in a database with the appropriate software, can be used in
all aspects of direct marketing: market sizing, distribution channel selection
and balancing, sales lead generation, territorial resource allocation and
customer prioritization and qualification. In the absence of this information,
the selling process results in higher expense per sales contact and lost revenue
from unidentified customers. These factors have created increasing demand for
lower cost information regarding the identity, location and purchasing history
of potential customers. For many businesses, this information can be crucial to
their marketing success.
Direct marketers of information products, including book and magazine
publishers, financial institutions, seminar coordinators and professional
associations, generate significant demand for affordable, current, highly-
segmented mailing list databases, and mailing list database services. In
addition, these information product vendors have sought new ways to obtain value
from their customer databases by more effectively analyzing and/or selling their
customer and prospect lists.
THE INTERNET AND WORLD WIDE WEB
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information and conduct business. While the Internet was historically used
by a limited number of academic institutions, defense contractors and government
agencies primarily for remote access to host computers and for sending and
receiving electronic mail, commercial organizations and individuals are
increasingly dominating the use of the Internet. Recent technological advances,
including increases in microprocessor speed and the development of easy-to-use
graphical user interfaces, combined with cultural and business changes, have led
to the Internet being integrated into the operations and strategies of
commercial organizations and the activities of individuals.
The rapid deployment of the World Wide Web (the Web) has introduced
fundamental and structural changes in the way information can be produced,
distributed and consumed, lowering the cost of publishing information and
extending its potential reach. Companies from many industries are publishing
product and company information or advertising materials, collecting customer
feedback and demographic information interactively, and offering their products
for sale on the Web. The structure of Web
3
documents allows an organization to publish significant quantities of product
information while simultaneously allowing each user to view selectively only
those elements of the information which are of particular interest. This
feature makes possible the dynamic tailoring of information delivery to each
user's interests in a cost effective and timely fashion. The Web, by
facilitating the publishing and exchange of information, is dramatically
increasing the amount of information available to users.
INTERACTIVE MARKETING INDUSTRY
Direct marketing is undergoing rapid, fundamental change, as customers'
needs evolve and technology advances. Marketing channels and media outlets are
expanding in number and diversifying in scope, and powerful database
technologies are able to target both broad markets and individual customers with
ever-greater precision.
The emergence of the Internet into homes and offices has provided direct
marketers with a powerful new distribution mechanism -interactive media.
Interactive marketing is a subset of direct marketing. It differentiates itself
from traditional direct marketing channels in that the consumer has flexibility
and control over what is being presented, when they view the products or
services and which types of products or services they are viewing.
In contrast to conventional media, the Internet offers capabilities to
target advertising to specific audiences, to measure the popularity of content,
to reach worldwide audiences cost-effectively and to create innovative and
interactive advertisements. By collecting customer feedback and demographic
information, advertisers can direct highly customized marketing campaigns at
defined targets. In addition, the Internet enables advertisers to transact with
prospective customers much more rapidly than with conventional media.
The Company believes that advertisers will seek to advertise on Web sites
that offer a high volume of traffic and feature flexible advertisement programs
capable of reaching targeted audiences. Likewise, the Company believes that as
advertisers increasingly embrace the Internet as an advertising vehicle, their
participation will subsidize in part the creation and expansion of the
information and resources available on the Web which in turn is expected to
stimulate further traffic flow. However, the Internet as an advertising medium
is still evolving and, consequently, advertisers seek demonstration of its
effectiveness as a media purchase. Due to the limited information and experience
on Web advertising and a general unfamiliarity with the concept of interactive
advertising, advertisers require assistance with the design and placement of
advertisements on the Internet.
Interactive marketing provides direct marketers with the ability to create
electronic databases of customer information. Using this information will enable
direct marketers to develop more effective advertising, make better decisions
about distribution methods and media selection and target customers more
effectively. The dialogue created between the marketer and the consumer through
interactive marketing creates advertising accountability, enabling marketers to
track advertisement interaction, anticipate consumer needs and make changes
immediately. It is expected that across scores of industries, the relationship
between marketers and consumers will soon be direct, and one-to-one. When that
day arrives, marketers will benefit from this newfound ability to establish
deep, intimate relationships with their customers.
PRODUCTS AND SERVICES
Internet Investments
Lycos, Inc.
Lycos, CMG's publicly traded subsidiary, is a free, global Internet
navigation and community network dedicated to helping on-line users locate,
retrieve and manage information tailored to their individual interests by
providing easy-to-use information tools. Lycos' comprehensive suite of products
and services enable users of the Internet to quickly, easily and accurately
identify, select and access the resources and information of interest to them.
Since its inception in June 1995, Lycos has rapidly expanded into a global
Internet resource with over 120 employees operating a service used daily by
millions of people throughout the world.
In connection with its incorporation in June 1995, Lycos entered into a
license agreement pursuant to which Carnegie Mellon University granted to Lycos
a perpetual, worldwide right to use and sub-license the Lycos search and
indexing technology and other intellectual property. Lycos features this
technology as the cornerstone of a suite of products that has transformed the
Lycos website into one of the Internet's premier destinations. Lycos, "Your
Personal Internet Guide", provides a variety of visually appealing products and
services free of charge to users, including: Web Search, Web Guides, Top 5%
Sites, Pictures & Sounds Search, Classifieds, Companies On-line, PeopleFind,
RoadMaps, News, StockFind, Chat, Email, CityGuides, Yellow Pages and Personal
Guide.
4
Lycos generates revenues primarily through three activities: (1) selling
advertisements and sponsorships on its services, (2) licensing its products and
technology to businesses to enhance their products and services on the Internet
and (3) leveraging Lycos' high volume of traffic into a electronic commerce
platform on which advertisers and on-line merchants reach their targeted
audiences. During fiscal 1997, advertising revenues represented approximately
78% of Lycos' total revenues. Advertising revenue is primarily generated by
placing advertisements on any of the Web pages that are displayed on Lycos'
multiple product offerings. Lycos' websites have become a widely accepted
advertising medium for the world's most prominent companies, including such
brands as: Disney, Dun & Bradstreet, Hilton, IBM, JC Penny and Visa.
For fiscal 1997, revenues from licensing arrangements represented 22% of
Lycos' total revenues. In most licensing arrangements, Lycos receives a license
fee, maintenance fees for product updates and, where applicable, a share of the
advertising revenues, subscription fees or product sales received by licensees.
Lycos' license agreements generally have terms of one to three years and Lycos
often co-brands its products with the products offered by the partner in order
to preserve and enhance Lycos brand recognition. Lycos has licensed its
technology and brand to numerous of partners including: Bertelsmann, Compuserve,
GTE, Microsoft, Prodigy, and Viacom.
Lycos also believes electronic commerce to be a natural extension of Lycos'
search and navigation services. Through electronic commerce, Lycos partners with
both on-line and offline merchants to integrate their products into the Lycos
service, making them available for sale to Lycos' users. In its electronic
commerce arrangements, Lycos generally receives a fixed fee and a share of the
proceeds from on-line sales. One of Lycos' most significant electronic commerce
partnership to date is with BarnesandNoble.com, Inc. The partnership is a
three-year agreement to integrate content and technology extensively throughout
the companies respective Web sites. Lycos offers BarnesandNoble.com visibility
among millions of users worldwide and provides fast and intuitive access to
BarnesandNoble.com's comprehensive on-line ordering capabilities.
A global Internet leader, Lycos provides localized versions of its search
and navigation service to countries throughout the world including: Germany,
France, UK, Switzerland, Sweden, Spain, Netherlands, Italy and Belgium. Lycos'
strategy with respect to international expansion is to partner with powerful
local companies whose content, distribution and local presence can be leveraged
with Lycos' technology and brand to create formidable strategic alliances. For
example, in May 1997, Lycos entering into a joint venture agreement with
Bertelsmann Internet Services to create localized versions of the Lycos search
and navigation service throughout Europe. The new company, named Lycos-
Bertelsmann, is owned 50% by Lycos and 50% by Bertelsmann and is scheduled
develop local Internet navigation centers serving a total of 37 Eastern and
Western European countries. Bertelsmann Internet Services, a subsidiary of
Bertelsmann AG (the world's third-largest media company), has committed to
provide $10M in start-up capital, infrastructure and employees for the venture
while Lycos will provide the core technology and strong brand name.
Planet Direct
Planet Direct is a personal Web service that features a new approach to
providing mainstream consumers with content that is both useful and personally
relevant.
Planet Direct provides a localized experience for more than 350 cities
across the country, seamlessly integrating brand-name content, enhanced links to
popular content sites, and other services. This content gives affiliated
Internet Service Providers (ISPs) the resources needed to compete successfully
with vertically oriented commercial online services.
Planet Direct's personal Web service is free to ISPs and their subscribers,
and is also directly accessible from the Web without disks or downloads. Planet
Direct seeks to generate revenues through advertising and commerce. Its
advertisers currently include American Express, Black and Decker, and Ziff
Davis, and revenues are shared with ISP partners.
The content provided by Planet Direct is presented intuitively, allowing
quick access to personal interests, and offering the functionality consumers
have come to expect of an online service. Featured materials include news,
sports, and entertainment information, chat and discussion, national yellow and
white pages, mapping and driving directions, and local and national weather
forecasts. Planet Direct has also provided several ways to express opinions,
inviting users to post and share ideas such as restaurant and theater reviews
and other commentaries.
In fiscal year 1997, Planet Direct launched its service to the mainstream
consumer audience, backed by a print advertising campaign in USA Today. Planet
Direct has registered more than 100,000 members, and now exceeds a million hits
per day to its personal Web service. In fiscal year 1997, Planet Direct also
established strategic content relationships with ZDNet, Paramount/Viacom,
CitySearch and The Mining Company.
5
ADSmart
Web publishers are seeking to develop the means to sell, schedule,
serve and track the highly targeted advertising that is so critical to their
profitability. Advertising agencies are looking for information and results to
understand and measure the role web advertising should play in meeting their
clients' marketing goals. ADSmart seeks to bridge the gap by drawing on the
combined targeting and tracking resources of CMG's core direct marketing
business and the Web advertising expertise of CMG portfolio companies. Using
its proprietary Ad Network Enabling software, ADSmart has automated the process
of matching audience characteristics required by a given advertising campaign
with specific articles or sections in Internet sites that belong to the
ADSmart.net Internet advertising network. Advertising images are delivered
automatically to the viewer's Internet browser, and post-delivery reporting and
billing processes are also carried out automatically.
When launched on January 27, 1997, ADSmart.net consisted of 8 sites, and
has grown to 75 sites at the end of fiscal year 1997. This translates into
advertisers being able to use our member sites to reach upwards of 2.7 million
unique Internet viewers per month, or 7 percent of all users of the Internet, up
from 1 percent in January. Premier sites in ADSmart.net include Planet Direct
and Vicinity Corporation's MapBlast.
ADSmart has opened ad sales offices in New York and San Francisco, and is
planning to open a Chicago office early in fiscal year 1998. To address the
international market, ADSmart expects to seek to work with strategic partners to
apply its technologies and specialized processes.
NaviSite
NaviSite provides hosting and Internet server management to companies that
depend on the Internet as a critical business tool.
In order to save money and to get better performance, security, and
availability, companies are outsourcing the management of a significant number
of the servers on the Internet. NaviSite's customers depend on some of the most
complex and demanding of these "server farms." NaviSite strives for maximum
availability, including redundant network access, backup power, and advanced
monitoring tools. NaviSite believes its network architecture and technical
methodology result in superior performance of the systems.
NaviSite's services include systems planning, deployment, operations, and
support. In addition, the company provides high-performance Internet access
bandwidth. NaviSite monitors and supports the network and its customers'
servers around the clock, and provides detailed reports to its customers
regarding performance, availability, and activity related to their Web sites.
NaviSite seeks to generate revenues primarily from monthly per-server management
fees, installation fees, and bandwidth usage charges.
In May, 1997, NaviSite completed a new, 6,000-square-foot Internet server
management center in Andover, Massachusetts, and in September 1997 completed a
second Internet server management center in Scotts Valley, California. NaviSite
began its efforts by deploying servers for CMG affiliate companies, and
officially launched the company, including a public news release, August, 1997.
InfoMation
InfoMation Publishing Corporation seeks to solve the problem of information
overload for companies, their employees, and their partners by building best-of-
breed knowledge management applications.
Companies suffering from information overload risk losing customers,
competitive information, relationships with key suppliers and partners,
effective decision-making, and ultimately, business. InfoMation seeks to solve
these costly problems with its flagship product, Echo. Echo is a Web-based
knowledge management application built with sophisticated agents and filters
that continually monitor and deliver fresh, targeted news and information. Echo
uses standard browsers to retrieve and integrate highly focused information from
a wide variety of sources, such as the Web, Lotus(TM) Domino(TM) databases and
other internal company resources, news feeds, and Internet news groups, to
create customized corporate intranet, Internet, and extranet solutions.
InfoMation is currently targeting customers in the insurance, automotive,
and aerospace/ defense markets, by providing a knowledge management solution
through a combination of direct sales and channel partnerships with key VARs,
system integrators, and consultants. InfoMation entered into partnerships with
key content providers during fiscal year 1997, including Financial Times
Information, Reuters, Information Inc., News Alert, Phillips Publishing
International, Inc., and Telecommunications Reports International, Inc. (TRI).
6
Looking forward, InfoMation expects to deliver knowledge management
applications to target markets and address client needs through a combination of
product solutions, customer support and training, and business partnerships. As
penetration is made into current target markets, InfoMation expects to address
additional markets that leverage the customer base.
Vicinity Corporation
Vicinity Corporation is a private-label provider of geographically enhanced
(GeoEnabled/TM/) technology, content, and services for Web publishers and
corporate Web sites. Vicinity's GeoEnabling services apply a spatial filter to
business listings, maps, and other data to give end users a local and
customizable view of information.
Vicinity licenses its services to leading Web search and directory
publishers, travel services, Yellow Pages providers, newspapers, and Fortune
1000 companies. These companies then brand the Vicinity services with their own
company and service names, their own graphical wrappers, and their own look.
Included in Vicinity's package of services are interactive maps and driving
directions of the United States, business directories, and business locators.
Among Vicinity's current customers are such leading Web sites as Yahoo!,
GTE SuperPages, Cnet, Travelocity, BizTravel.com, and GeoCities. An extensive
list of Fortune 1000 customers include Federal Express, Ford Motor Company,
Hewlett-Packard, Wells Fargo Bank, PetSmart, Marriott, Honda, Taco Bell and many
more.
Vicinity launched its "Vicinity Business Locator" product for the corporate
marketplace in September 1996. Vicinity also reached a renewed agreement with
Yahoo!, which signed a multi-year contract in June 1997 to license Vicinity's
Business Directory, Maps, and Driving Directions.
Blaxxun Interactive
Blaxxun interactive provides software infrastructure for 3D online
communities.
Blaxxun seeks to make online interaction not only interesting for visitors
and members, but also commercially successful for community operators. Blaxxun
licenses its products to corporate customers who want to operate an attractive
community site. In addition, Blaxxun provides complete solutions, based on its
technology platform. Together with partner companies, Blaxxun builds
environments, achieves integration with existing systems, and creates
applications in the community.
Designing software that emphasizes scalability, openness, and
customizability, Blaxxun is very actively involved in the development of 3D
interface standards. All Blaxxun products support open standards, such as VRML,
Java, and HTML. Blaxxun's product lines currently include Blaxxun Community
Server, a product for operation of shared environments, and Blaxxun Community
Clients, a family of clients that provide access to online communities. In
fiscal year 1997, Blaxxun continued development of its third generation of
products, which are scheduled for release in the near future.
Fulfillment Services
SalesLink
SalesLink, along with its newly acquired subsidiary, Pacific Link, provides
product and literature fulfillment and turnkey outsourcing, inventory
management, data warehouse management, sales lead/inquiry management, closed-
loop telemarketing, print-on-demand, and customized software solutions for
client's marketing or manufacturing programs, and Web fulfillment, primarily to
high-tech, financial-services, and health-care markets. SalesLink's largest
customer is Cisco Systems, Inc. (Cisco), which accounted for 47% of SalesLink's
fiscal year 1997 revenues.
Turnkey Outsourcing. SalesLink's major products include supply-based
management programs. Also known as "turnkey," these are a form of outsourced
manufacturing, in which SalesLink's clients retain the company to buy their
components and manufacture bills of materials into products that are either
shipped to customers, to channels of distribution, or to the factory for final
manufacturing.
Product and Literature Fulfillment. On behalf of its fulfillment clients,
SalesLink takes orders for promotional literature and products from its clients'
customers and prospects and "fulfills" the orders by assembling and shipping the
items requested. Depending on the client, the product or literature may be sent
directly to the end-user or to a broker or distributor. SalesLink's mutual fund
product and literature fulfillment services begin with the receipt of orders by
SalesLink's inbound telemarketing staff. Telemarketers answer calls by mutual
fund company name and key order requests into computers. Some clients
electronically transmit orders received by their own telemarketing staffs
directly into SalesLink's computers. Orders are then generated and
presented to the fulfillment production floor where fulfillment packages,
including mailing labels, are assembled and shipped. As
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necessary adjuncts to fulfillment services, SalesLink provides product and
literature inventory control and warehousing. SalesLink also offers customer
support and management reports detailing orders, shipments, billings, back
orders, and returns. In addition to mutual funds, SalesLink also provides
literature and product fulfillment to high technology, biotechnology and
consumer electronics businesses and provides print-on-demand and Web fulfillment
services.
Sales Lead/Inquiry Management. In sales lead/inquiry management, SalesLink
provides prospects with information about a product or service that one of
SalesLink's clients is marketing. In response, SalesLink receives sales
inquiries and maintains central customer databases of the names and addresses of
each person inquiring about the product. SalesLink's clients use the databases
for market research, sales follow-up and management reports. Depending on the
criteria supplied by the client, SalesLink eliminates non-productive leads,
distributes sales inquiries to the client's sales force and ships fulfillment
packages containing the client's literature or products. After the disposition
of the inquiry, SalesLink is able to produce reports allowing the client to
evaluate the effectiveness of the marketing program which generated the inquiry
and evaluate the performance of the client's sales force in handling the
inquiry.
Telemarketing. SalesLink's telemarketing group offers comprehensive inbound
business-to-business telemarketing services to support its sales inquiry
management and order processing activities. Telemarketing services include lead
qualification, order processing fulfillment and marketing analysis. SalesLink
also offers outbound business telemarketing services that are tailored to an
individual client's needs. Outbound telemarketing programs can be used to update
a client's existing database, survey possible markets or pre-qualify sales
leads.
SL Flagship proprietary software. SalesLink has evolved a number of new
products and services to further its strategy to diversify into new vertical
industry markets. Most notably, the business delivered its new SL Flagship
proprietary software and the supporting data warehouse architecture. The system
enables customers and client service personnel to instantly access, manipulate
and analyze response data about customers' prospects. With SL Flagship,
customers avoid the time and costs of extensive programming by making critical
marketing decisions using PC-based tools.
SalesLink seeks to grow in the future through gaining market share in its
existing markets, through acquisition, and through developing new IT based
products and services for its client base. While the Company is actively
pursuing increasing the number of fulfillment services customers, the Company
believes that its dependence on Cisco will continue for the forseeable future.
List and Database Services
CMG Lists
CMG Direct's principle products are mailing lists derived from its
databases and sold primarily to publishers. CMG Direct has three primary
mailing list databases, the College List, the Information Buyers List and the K-
12 List (formerly known as the ElHi List). The databases are highly segmented,
permitting CMG Direct to use its application software to extract specifically
defined lists of potential customers who are most likely to purchase products
advertised by CMG Direct's clients. CMG Direct is continually working to expand
the size and comprehensiveness of its database offerings based on the needs of
its clients and the availability of new lists.
CMG Direct is aware of only one other supplier of the faculty mailing lists
and two other suppliers of college and university administrator lists. In
addition, CMG Direct believes that it has identified virtually all North
American textbook publishers and that it supplies mailing lists derived from the
College List database to a majority of them. CMG Direct also believes that most
of the largest North American publishers of books for professionals contribute
their customer lists exclusively to the Information Buyers List database and
have agreed not to contribute their customer lists to any other book buyer
databases. The publishers also purchase mailing lists and list services from CMG
Direct. Accordingly, CMG Direct believes that the Information Buyers List
database and the College List database are the dominant databases of their kind
and that these databases make CMG Direct a leading supplier of mailing lists and
related services to educational and professional publishers.
The College List Database. The College List database, which CMG Direct
believes is the dominant list of its type, includes approximately 700,000 names
and addresses of college and university deans, administrators, faculty and
librarians at every college, university and junior college in North America. CMG
Direct classifies each course taught, and the faculty teaching it, into one of
approximately 4,000 subject codes, which permits CMG Direct to identify all
faculty teaching any particular course or subject and create lists identifying
the faculty so they can be targeted. The resulting lists are valuable to
publishers, as the classification system of specific subject codes permits them
to choose the professors most likely to select a given book for a course and
then to send promotional materials and/or a sample copy of the textbook to them.
In addition, the database classification system helps publishers identify areas
of study where new titles are needed and define the size of the potential
market.
8
The College List is compiled by CMG Direct from course schedules and other
source documents published by colleges and universities and is updated
continually for new semester information. CMG Direct augments the information
available from the schedules with school catalogs, supplemental questionnaires,
telephone calls and various other source documents collected from colleges and
universities.
The Information Buyers List Database. The Information Buyers List database
includes approximately 11 million names and addresses, as well as other
pertinent information, of professionals who purchase books, periodicals,
seminars and other information products through mail order. The Information
Buyers List is assembled from over 120 proprietary lists of over 100 publishers
and other organizations. Combining these separate customer lists into a single
database permits CMG Direct to offer its clients a larger group of potential
customers across a broader range of target categories than could be obtained
from any single list. In addition to its size and diversity, the database is
also valuable because it is limited primarily to those consumers who have
actually purchased through mail order and are therefore thought to be more
likely to do so in the future. The Information Buyers List is segmented under
the same 4,000 subject codes as the College List, plus additional consumer
oriented segmentation.
When a participant's customer list is added to the database, CMG Direct
uses its software to segment the list into the subject codes and to supplement
the database with information derived from the participant's customer list, such
as recency of purchase, gender and home or office address distinctions. This
classification system permits CMG Direct to identify professionals that have
purchased information products pertaining to any given subject and to create
lists identifying the purchasers so they can be targeted.
The lists derived from the Information Buyers List database are used by
publishers and other companies in the business-to -business and consumer
publishing direct mail markets. The high degree of segmentation of the database
enables CMG Direct to extract very specific, and thus, more responsive niches of
professionals with a demonstrated interest in purchasing very specific types of
information products. This level of selectivity also enables CMG Direct to
identify and build other valuable lists that are not obvious properties of the
individual component lists used by CMG Direct to maintain the database.
The Kindergarten through Grade Twelve List Database. In 1992 CMG Direct
introduced the Kindergarten through Grade Twelve or "K-12 List" database. This
database has been formerly referred to as the Elementary/High School or "ElHi
List" database. The Kindergarten through Grade Twelve List database consists of
more than 3.3 million names of teachers and administrators associated with
public elementary through high schools. This list also includes the names of
approximately 88,000 public elementary and high schools, approximately 15,500
public school district offices, approximately 16,200 public libraries and
approximately 150,000 administrators. The K-12 List is segmented into over 30
public school district demographic categories and is used by publishers of
textbooks, supplemental educational materials and magazines and school supply
distributors, among others. The K-12 List is compiled from federal, state and
local government files and the names of school administrators and staff are
developed through state directories, mailings and telephone surveys. This
database greatly enhances CMG Direct's ability to service its educational
publishing clients and builds on CMG Direct's reputation and distinctive
competence in the educational publishing industry.
List Management and Brokerage. CMG Direct provides list management and list
brokerage to businesses that use direct marketing to promote their products. As
a list manager, CMG Direct acts as the exclusive marketing agent for the mailing
lists of its list management clients. In conjunction with performing list
management services, CMG Direct also provides list brokerage. This Service
allows CMG Direct to be a single source for virtually any brokered list
requested by a customer and provides opportunity to generate additional sales of
CMG Direct's other products.
Database Services
Engage Technologies
Engage provides standards-based, enterprise-class software system solutions
that enable companies to individually distinguish, understand, and interact with
anonymous prospects and customers in personalized marketing, sales, and service
relationships via the Web.
The Engage Suite addresses the issue of how to determine what prospects and
customers visiting a Web site want. Using Engage's software solutions,
organizations can gather sophisticated marketing information to better
understand and accommodate individual visitor needs and interests. Engage
believes its approach to this challenge is unique in that it:
. Addresses the entire process of collecting, analyzing, and utilizing
visitor Web site data for real-time personalized interaction.
. Enables understanding of both registered and anonymous Web site visitors,
providing organizations with valuable marketing insight while ensuring
complete protection of individual privacy and identity.
. Transforms a Web presence from purely informational or "brochureware" into a
measurable relationship-marketing tool.
. Works with a company's existing Web site development tools and methodology.
9
In fiscal year 1997, Engage Technologies made its formal entrance into the
interactive marketing arena. Engage launched initial product offerings with a
national press and analyst tour, and gained industry analyst recognition as a
solutions provider in the personalization market.
The five products that comprise the current Engage Solutions Suite provide
for the collection, characterization, consolidation, clarification and
customization of both Web-derived and other data sources, thus delivering a
scalable and complete relationship marketing solution for the Web. The
offerings include:
Engage.Journal Web site visitor behavior monitoring across and within a
network of Web sites
Engage.Portrait Customizable Web site visitor registration
Engage.Discover Customizable Web site analysis and iterative querying against
Web site data*
Engage.Fusion Visitor profile generation*
Engage.Link An open interface to access visitor profiles for dynamic
content generation
* Subsequent to July 31, 1997, certain rights to these two products were sold to
Red Brick Systems Inc. Engage retains exclusive rights to sell them as part of
the Engage Suite.
ListLab
Most businesses do not have the technology or expertise to build, maintain
or enhance their mailing lists or databases in-house. Engage's subsidiary,
ListLab, offers these businesses a comprehensive service set including database
design, program specification, programming, testing, debugging and ongoing
maintenance and enhancement.
For clients that want to build a customer database, ListLab provides
database analysis, design, software development, testing, debugging, and
maintenance. Once the database software is completed, ListLab collects customer
and prospect data from its clients in a variety of forms for standardization and
inclusion into each client's customized database. This involves working in depth
with clients to discern their database maintenance, fulfillment and reporting
requirements, converting these requirements to computer program specifications,
and managing the project from start to finish.
Database management involves processing customer data, segmenting the
processed information to provide the level of detail and selectivity desired,
storing the information, and updating it to make it readily accessible for the
client's promotional, analytical and list rental activities. Lists may be
combined and enhanced with additional demographic information and other lists to
form databases which can be used as the basis of additional client promotions or
marketed to other list users.
If a client's mailing list is being combined with other lists or if a client
purchases several lists for a direct marketing campaign, the lists are often
combined into one master list. Typically, these lists will contain duplicate
names. ListLab's merge/purge (duplicate elimination) software recognizes and
eliminates duplicate names, thereby preventing duplicate mailings and, thus,
lowering client mailing costs. In addition, identifying these multiple prospects
enables the direct-response client to recognize the duplicate name as a multi-
buyer. ListLab also minimizes postal costs through postal pre-sorting, bar
coding and address standardization.
ListLab also offers private database management as a service for large
volume mailers who mail to the same target lists regularly. A private database
is a targeted collection of mailing lists that is used repeatedly by a
restricted group of mailers. Ordinarily, this type of mailer would have to
contact a list broker, order lists and perform a number of processing functions
for each mailing. A private database maintained and updated by ListLab provides
the mailer or group of mailers with a pool of mailing lists which have proven
effective for their mailing needs. Using the ListLab's services, the mailer can
perform research on the private database, select the names most likely to
respond and pay only for names used for targeting. Mailing costs are reduced,
lead times are shortened and the mailer gains more precise targeting capability.
BUSINESS STRATEGY
Each CMG business unit's mission is to become the predominant services
provider within its respective market niche. The critical success factors are:
understanding, developing and applying information technology to the Internet,
interactive media markets, and data access and software tools; narrowing market
focus while consummating strategic alliances to complement product and service
offerings; investing in strategic Internet or interactive media investments or
acquisitions and, most importantly, a continued understanding of customers'
needs.
10
With respect to the businesses of CMG, the Company will seek to expand its
participation in the direct marketing products and services, Internet,
interactive media industries, and increase market share. Key elements of this
strategy include:
Continue to enhance and expand the Company's products and services. The
Company has invested significant resources in new subsidiaries or investments
which seek to capitalize on opportunities surrounding the growth of the Internet
and the interactive marketing industry. The Company intends to continue to
pursue the growth and development of its technologies and services and continue
to introduce its products commercially. Additionally, the Company intends to
continue to evaluate new opportunities to further its investment in its direct
marketing strategy and also to seek out opportunities to realize significant
shareholder value through the sale of selected investments or technologies or
having separate subsidiaries sell a minority interest to outsiders.
Pursue innovative advertising solutions. The Company is actively seeking
to develop innovative ways for advertisers to reach their target audiences
through the Internet effectively. The Company designs and offers customized
packages which include the ability to change advertisements quickly and
frequently, to link a specific search term to an advertisement, to conduct
advertising test campaigns with rapid result delivery and to track daily usage
statistics. The Company is continuing its development of software that will
provide it with the ability to target ads based on demographics and usage
patterns.
Actively seek growth in the Company's fulfillment services segment. CMG
intends to pursue a strategy of growing its fulfillment services segment through
gaining market share in its existing markets, through acquisition, and through
developing new IT based products and services for its client base.
Augment database offerings. The Company has expended significant
resources to develop the most comprehensive and accurate databases of their kind
available to publishers. The Company believes that its College List database is
the dominant list of its kind and that the Information Buyers List database is
the only list of its kind, complemented by the ElHi list database, which was
successfully compiled in fiscal 1995 and is positioned to be cross sold to gain
market share. The Company intends to maintain or improve its market position by
expanding the number, size, nature, comprehensiveness and segmentation of its
database offerings.
Maintain focus on marketers of information-based products. Publishers are
among the largest users of direct marketing services. As society becomes more
information driven, the amount and value of business and educational information
sold by publishers will increase, as will the value of the effective direct
marketing of this information. The Company will continue to focus on the
publishing industry to participate in this growth.
Expand technological capabilities and computer services. The Company
believes that technological innovation will continue to increase the
effectiveness of direct marketing and the Internet. Accordingly, the Company is
increasing its technological capabilities through the enhancement of existing
software and the reengineering of the Company's proprietary database software.
This transition will give the Company's clients greater ability to access,
analyze and eventually update their own databases through the use of the
Company's computer services and software.
Cross-sell products and services. The Company is involved in many aspects of
the direct marketing sales cycle. The Company has experienced initial success in
increasing the number of products and services purchased by its existing clients
and intends to further this expansion .
SALES AND MARKETING
The Company markets its products and services through a marketing staff
using both telemarketing and direct sales. The Company maintains separate
marketing staffs for each product and service area, enabling the marketing
personnel to develop strong customer relationships and expertise in their
respective areas. The Company has established direct sales forces experienced in
the advertising business to address the new and evolving requirements of the
Internet advertising market. The Company believes that an experienced sales
staff is critical to initiating and maintaining relationships with advertisers
and advertising agencies and therefore has hired a significant portion of its
Internet advertising sales force from the advertising industry. The Company
advertises its products and services through direct mail, space advertising,
Internet banners, directory listings, trade shows and Company sponsored user
groups. In addition, in certain instances, the Company, has complemented the
activities of its direct sales force by retaining advertising sales agencies, to
serve as a sales representatives on a commission basis.
The Company attends numerous trade shows in the Internet, high technology,
direct marketing, mutual fund, book, and library markets, while further
supplementing its sales efforts with space advertising and product and services
listings in appropriate directories. In addition, the Company sponsors user
group meetings for its mutual fund clients and major list participants in the
Information Buyers List database, where new products and services are
highlighted.
11
The Company also conducts numerous mailings of list catalogs, flyers,
newsletters and other product information throughout the year to primarily book,
magazine, journal, newsletter and software publishers and resellers, seminar
companies, professional associations, business supply catalogers, consumer
electronic, high technology and financial service organizations.
COMPETITION
CMG's Internet investments compete in the electronic technology and Internet
service arenas which are comprised of numerous small and large companies
providing different new technologies, all with varying applications. The market
for Internet products and services is highly competitive. In addition, the
Company expects the market for Internet advertising, to the extent it further
develops, to be intensely competitive. Although the Company believes that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those of the Company, it is
possible that a single supplier may dominate one or more market segments. The
Company believes the principal competitive factors in this market are name
recognition, performance, ease of use, variety of value-added services,
functionality and features and quality of support. CMG's products and services
are being developed predominantly for direct marketing applications, on the
Internet or through interactive media. Competitors would include a wide variety
of companies and organizations, including Internet software, content, service
and technology companies, telecommunication companies, cable companies and
equipment/technology suppliers. In the future, the Company may encounter
competition from providers of Web browser software and other Internet products
and services that incorporate competing features into their offerings. Many of
the Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than the Company.
The Company may also be affected by competition from licensees of its
products and technology. There can be no assurance that the Company's
competitors will not develop Internet products and services that are superior to
those of the Company or that achieve greater market acceptance than the
Company's offerings. Moreover, a number of the Company's current advertising
customers, licensees and partners have also established relationships with
certain of the Company's competitors and future advertising customers, licensees
and partners may establish similar relationships. The Company may also compete
with online services and other Web site operators as well as traditional off-
line media such as print and television for a share of advertisers' total
advertising budgets. There can be no assurance that the Company will be able to
compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
results of operations and financial condition.
SalesLink has two prominent competitors, Harte-Hanks Direct Marketing, a
division of Harte-Hanks Communications, Inc. and Output Technologies, Inc., for
the mutual fund literature fulfillment component of its business, and also
competes with the internal fulfillment and manufacturing operations of
manufacturing and mutual fund companies themselves. SalesLink competes on the
basis of pricing, geographic proximity to its clients and the speed and accuracy
with which orders are processed. There are many businesses that compete with
SalesLink's other services.
CMG Direct competes on the basis of the accuracy, size, and
comprehensiveness of its principal databases: the College List and the
Information Buyers List. The Company believes that the College List is the
dominant database of its kind and has only one competitor, while the ElHi list
is a new product offering that will compete with the same competitor as the
College List. The Information Buyers List is also the dominant list of its
kind. ListLab's products and services compete with numerous other service
bureaus and compete on the basis of their effectiveness in processing customer
and prospect list databases for publishers.
RESEARCH AND DEVELOPMENT
The Company develops and markets a variety of Internet related products and
services, as well as a number of database software technologies. These
industries are characterized by rapid technological development. The Company
believes that its future success will depend in large part on its ability to
continue to enhance its existing products and services and to develop other
products and services which complement existing ones. In order to respond to
rapidly changing competitive and technological conditions, the Company expects
to continue to incur significant research and development expenses during the
initial development phase of new products and services as well as on an on-going
basis.
During fiscal years 1997 and 1996, the Company expended $25,058,000, and
$6,971,000, respectively, or 35.5% and 24.5%, respectively, of net sales, on
research and development. In addition, during fiscal years 1997 and 1996, the
Company recorded $1,312,000 and $2,691,000, respectively, of in-process research
and development expenses in connection with acquisitions of subsidiaries and
investments in affiliates. During fiscal year 1995, no amounts were expended for
research and development.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its software technologies, databases and database
management software as proprietary. CMG's lists
12
are sold under terms and conditions which permit the Company's clients to use
the list for a single mailing only and prohibit the further use or resale of the
lists or the names included therein. The Company depends on trade secrets for
protection of its software. It has entered into confidentiality agreements with
its management and key employees with respect to this software, and limits
access to, and distribution of this, and other proprietary information.
EMPLOYEES
As of July 31, 1997, the Company employed a total of 912 persons on a full-
time basis. In addition, depending on client demand, SalesLink utilizes manpower
agencies to contract between 75 and 150 persons on a temporary, part-time basis.
None of the Company's employees are represented by a labor union. The Company
believes that its relations with its employees are good.
SEGMENT INFORMATION
Segment information is set forth in Note 3 of the Notes
to Consolidated Financial Statements referred to in Item 8(a) below and
incorporated herein by reference.
SIGNIFICANT CUSTOMERS
Significant customers information is set forth in Note 2(r) of the Notes to
Consolidated Financial Statements referred to in Item 8(a) below and
incorporated herein by reference.
ITEM 2. - PROPERTIES
FACILITIES
The location and general character of the Company's principal properties by
industry segment as of July 31, 1997 are as follows:
Lists and Database Services and Corporate Headquarters
The Company leases approximately 34,000 square feet of executive office,
engineering, sales and operations space in Wilmington, Massachusetts, under a
lease which expires in 2000.
The Company also leases approximately 50,000 square feet of executive
office, engineering, sales and operations space in Andover, Massachusetts, under
a lease which expires in 2002. The Company's Corporate headquarters are housed
here.
In addition, the Company leases approximately 22,000 square feet of
executive office and computer operations space in Andover, Massachusetts, under
a lease which expires in 2007.
Additionally, the Company leases approximately 13,000 square feet which
houses a computer data center in Scotts Valley, California, under a lease
expiring in 2002.
On July 15, 1997, NetCore Systems, Inc. entered into a sublease agreement
with the Company to lease approximately 14,000 square feet of the Wilmington
space, under a sublease arrangement that expires in 2000.
Fulfillment Services
The Company's operations are conducted from an approximately 210,000 square
foot leased facility in Boston, Massachusetts. The lease for this facility
expires in 1998. In addition, the Company's west coast operations are conducted
from a leased facility containing approximately 202,000 and 39,000 square feet
in Newark, California. The leases for these facilities expire in 2011 and 1999,
respectively. Additionally, the Company leases an approximately 51,000 square
foot operating facility in Bedford Park, Illinois under a lease which expires in
1999.
Investment and Development
The Company leases an aggregate of 70,000 square feet of office,
engineering, sales and operations space in the following locations:
Massachusetts: Burlington and Framingham
13
New Hampshire: Lebanon
Pennsylvania: Pittsburgh
Georgia: Atlanta
New York: New York City
California: Menlo Park, Palo Alto and San Francisco
Germany: Munich
Leases for the above locations expire from 1997 to 2002.
This industry segment also shares a portion of the Company's Andover,
Massachusetts Corporate facility described above.
COMPUTER OPERATIONS
The Company's computer systems are primarily maintained at its Andover,
Massachusetts, Wilmington, Massachusetts, Boston, Massachusetts, Scotts Valley,
California, and Pittsburgh, Pennsylvania locations. The Company's operations are
dependent in part upon its ability to protect its operating systems against
physical damage from fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events. The Company does have a disaster
recovery plan in place, including relying on a combination of an outsourced
solution and a mirrored Web hosting facility arrangement. Despite the
implementation of network security measures by the Company, its servers are also
vulnerable to computer viruses, break-ins and similar disruptive problems. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to users of the Company's products and services which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
ITEM 3. - LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market information is set forth in Note 19 of the Notes to
Consolidated Financial Statements referred to in Item 8 (a) below and
incorporated herein by reference.
(b) On October 20, 1997, there were 165 holders of record of common
stock.
(c) The Company has never paid cash dividends on its common stock, and
the Company has no intention to pay cash dividends in the forseeable future.
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth on page 20 of the 1997 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.1.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth on pages 21-27 of the 1997 Annual Report to
Shareholders, referred to in Item 8(a) below, is incorporated herein by
reference and is filed herewith as Exhibit 13.2.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following consolidated financial statements of the Company and
independent auditors' report set forth on pages 28-44 of the 1997 Annual Report
to Shareholders are incorporated herein by reference and are filed herewith as
Exhibit 13.3:
14
- Consolidated Balance Sheets as of July 31, 1997 and 1996
- Consolidated Statements of Operations for the three years ended
July 31, 1997
- Consolidated Statements of Stockholders' Equity for the three
years ended July 31, 1997
- Consolidated Statements of Cash Flows for the three years ended
July 31, 1997
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
(b) Selected Quarterly Financial Data (unaudited) is set forth in Note
19 of the Notes to Consolidated Financial Statements referred to in Item 8 (a)
above and incorporated herein by reference.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Proposal 1--Election of Directors," "Additional
Information," and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. - EXECUTIVE COMPENSATION
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Executive Compensation," and "Additional Information--
Compensation of Directors."
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Security Ownership by Management and Principal
Stockholders."
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Certain Relationships and Related Transactions."
PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Financial Statements, Financial Statement Schedule, and Exhibits
1. Financial Statements. The financial statements as set forth
under Item 8 of this report on Form 10-K are incorporated
herein by reference.
2. Financial Statement Schedule. Financial Statement Schedule
II of the Company and the corresponding Report of
Independent Auditors on Financial Statement Schedule are
included in this report.
All other financial statement schedules have been ommitted
since they are either not required, not applicable, or the
information is otherwise included.
3. Exhibits. The following Exhibits are required to be filed
with this Report by Item 14 and are incorporated by
reference to the source cited in the Exhibit Index below or
are filed herewith.
15
EXHIBIT INDEX
EXHIBIT NO. TITLE METHOD OF FILING
- ----------- ----- ----------------
3 (i) (1) Amendment to the Restated Certificate Incorporated by reference to Exhibit 3 (i) (1)
of Incorporation to the Registrant's quarterly report on Form
10-Q for the quarter ended April 30, 1996
3 (i) (2) Restated Certificate of Incorporation Incorporated by reference from Registration
Statement 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 Specimen Stock Certificate representing the Incorporated by reference from
Common Stock Registration Statement on Form S-1, as
amended, filed on November 10, 1993
(Registration No. 33-71518)
10.01 Form of Indemnification Agreement Incorporated by reference from
between the Registrant and its Directors Registration Statement on Form S-1, as
amended, filed on November 10, 1993
(Registration No. 33-71518)
10.02 Lease, dated November 21, 1991, Incorporated by reference from
Between the Registrant and Registration Statement on Form S-1, as
Ballardvale Park Associates II amended, filed on November 10, 1993
Limited Partnership (Registration No. 33-71518)
10.03 Lease Agreement, dated September 2, 1992, Incorporated by reference from Registration
between SalesLink Corporation, the subsidiary Statement on Form S-1, as amended, filed on
of the Registrant, and American National Bank November 10, 1993 (Registration No. 33-71518)
& Trust Company of Chicago as Trustee under
Trust No. 1001971-01
10.04 Amendment to Lease, dated May 10, 1992, Incorporated by reference from Registration
between SalesLink Corporation, the subsidiary Statement on Form S-1, as amended, filed on
of the Registrant, and Drydock Associates November 10, 1993 (Registration No. 33-71518)
Limited Partnership
10.05 CMG/SalesLink Savings and Retirement Incorporated by reference from Registration
401(k) Plan Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518)
10.06* Employment Agreement, dated August 1, 1993, Incorporated by reference from Registration
between the Registrant and David S. Wetherell Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518)
10.07 Fulfillment and Inventory Management Incorporated by reference from Registration
Agreement between SalesLink Corporation, Statement on Form S-1, as amended, filed on
the subsidiary of the Registrant, and November 10, 1993 (Registration No. 33-71518)
MFS Financial Services, Inc.
10.08 Fulfillment and Mailing Agreement, Incorporated by reference from Registration
dated January 1, 1993, between SalesLink Statement on Form S-1, as amended, filed on
16
Corporation, the subsidiary of the Registrant, November 10, 1993 (Registration No. 33-71518)
and Kemper Financial Services, Inc.
10.09 Agreement, dated January 15, 1991, between Incorporated by reference from Registration
ListLab, a division of the Registrant, and Statement on Form S-1, as amended, filed on
Prentice-Hall, Business and Professional November 10, 1993 (Registration No. 33-71518)
Publishing Division
10.10 Account Indebtedness Letter Agreement, Incorporated by reference from Registration
dated as of November 9, 1993, between the Statement on Form S-1, as amended, filed on
Registrant and David S. Wetherell November 10, 1993 (Registration No. 33-71518)
10.11 Amendment to Account Indebtedness Letter Incorporated by reference from Registration
Agreement, dated as of January 10, 1994, Statement on Form S-1, as amended, filed on
between the Registrant and David S. Wetherell November 10, 1993 (Registration No. 33-71518)
10.12* Amendment No. 1 to the Employment Incorporated by reference from Registration
Agreement, dated January 20, 1994, between Statement on Form S-1, as amended, filed on
the Registrant and David S. Wetherell November 10, 1993 (Registration No. 33-71518)
10.13 Amendment No. 2 to Account Indebtedness Incorporated by reference from Registration
Letter Agreement, dated January 25, 1994 Statement on Form S-1, as amended, filed on
between the Registrant and David S. Wetherell November 10, 1993 (Registration No. 33-71518)
10.14 Extension Agreement dated August 4, 1995 Incorporated by reference to Exhibit 10.24 to
to Fulfillment and Mailing Agreement dated the Registrant's annual report on Form 10-K
January 1, 1993, between SalesLink Corporation for the year ended July 31, 1995
and Kemper Financial Services, Inc.
10.15 Fulfillment Master Purchase Agreement dated Incorporated by reference to Exhibit 10.25 to
March 28, 1994, between SalesLink Corporation the Registrant's annual report on Form 10-K
and Fidelity Investments Institutional Service for the year ended July 31, 1995
Company, Inc.
10.16 Literature Fulfillment Agreement dated Incorporated by reference to Exhibit 10.26 to
August 1, 1995, between SalesLink Corporation the Registrant's annual report on Form 10-K
and Vista Capital Management for the year ended July 31, 1995
10.17 License Agreement dated June 16, 1995, as Incorporated by reference to Exhibit 10.27 to
amended, between the Registrant, CMG@Ventures, the Registrant's annual report on Form 10-K
L.P., Carnegie Mellon University, and Lycos, Inc. for the year ended July 31, 1995
10.18 Agreement and Plan of Reorganization dated Incorporated by reference from Report on
as of November 8, 1994, as amended, among the Form 8-K as filed with the commission
Registrant, BookLink Technologies, Inc., 01/01/95 (File No. 0-22846)
America Online, Inc. and BLT Acquisition
Corporation
10.19* 1995 Employee Stock Purchase Plan Incorporated by reference to Exhibit 10.29 to
the Registrant's annual report on Form 10-K
for the year ended July 31, 1995.
10.20* 1986 Stock Option Plan, as amended Incorporated by reference to Exhibit 10.30 to
the Registrant's annual report on Form 10-K
for the year ended July 31, 1995.
10.21 Partnership Agreement by and among CMG- Incorporated by reference to Exhibit 10.32 to
@Ventures, Inc., CMG@Ventures Capital the Registrant's quarterly report on Form 10-Q
Corp., the Registrant and various Profit for the quarter ended January 31, 1996.
Partners
17
10.22 Master Agreement dated as of February 13, Incorporated by reference to Exhibit 10.33 to
1996 between BBN Corporation and the the Registrant's quarterly report on Form 10-Q
Registrant. for the quarter ended January 31, 1996.
10.23* 1995 Stock Option Plan for Non-Employee Incorporated by reference to Exhibit 10.34 to
Directors the Registrant's quarterly report on Form 10-Q
for the quarter ended January 31, 1996.
10.24 Amendments dated February 9, 1996 and Incorporated by reference to Exhibit 10.35 to
March 4, 1996 to License Agreement dated the Registrant's quarterly report on Form 10-Q
June 16, 1995, between the Registrant, CMG- or the quarter ended January 31, 1996.
@Ventures L.P., Carnegie Mellon University
and Lycos, Inc.
10.25 Sublease, dated September 26, 1996 between Incorporated by reference to Exhibit 10.1 to the
the Registrant and FTP Software, Inc. Registrant's quarterly report on Form 10-Q for
the quarter ended October 31, 1996.
10.26* Amendment No. 2 to Employment Agreement, Incorporated by reference to Exhibit 10.2 to the
dated October 25, 1996, between the Registrant's quarterly report on Form 10-Q for
Registrant and David S. Wetherell the quarter ended October 31, 1996.
10.27 Revolving Credit and Term Loan Agreement Incorporated by reference to Exhibit 10.3 to the
dated as of October 24, 1996, among SalesLink Registrant's quarterly report on Form 10-Q for
Corporation, the Registrant, Pacific Direct the quarter ended October 31, 1996.
Marketing Corp. and the First National
Bank of Boston
10.28 Revolving Credit Note of SalesLink Corporation, Incorporated by reference to Exhibit 10.4 to the
dated as of October 24, 1996, in the principal Registrant's quarterly report on Form 10-Q for
amount of $2,500,000 the quarter ended October 31, 1996.
10.29 Term Note of SalesLink Corporation, dated as of Incorporated by reference to Exhibit 10.5 to the
October 24, 1996, in the principal amount of Registrant's quarterly report on Form 10-Q for
$5,500,000 the quarter ended October 31, 1996.
10.30 Guaranty by Pacific Direct Marketing Corp. Incorporated by reference to Exhibit 10.6 to the
dated as of October 24, 1996 Registrant's quarterly report on Form 10-Q for
the quarter ended October 31, 1996.
10.31 Guaranty by the Registrant dated as of Incorporated by reference to Exhibit 10.7 to the
October 24, 1996 Registrant's quarterly report on Form 10-Q for
the quarter ended October 31, 1996.
10.32 Supplement #1 to Sublease, dated September 26, Incorporated by reference to Exhibit 10.1
1996 between the Registrant and FTP Software, to the Registrants quarterly report or Form 10Q
Inc. for the quarter ended January 31, 1997.
10.33 CMG Stock Purchase Agreement, dated as of Incorporated by reference to Exhibit 99.1 to
December 10, 1996 by and between the the Registrant's current report on Form 8-K
Registrant and Microsoft Corporation dated January 31, 1997, filed on February 14,
1997.
10.34 CMG @Ventures, Inc. Deferred Compensation Incorporated by reference to Exhibit 10.1 to the
Plan Registrants quarterly report on Form 10Q for the
quarter ended April 30, 1997.
18
10.35 Limited Liability Company Agreement for Filed herewith
CMG @Ventures, I, LLC
10.36 Stock Purchase Agreement dated as of October Incorporated by reference to Exhibit 2 to the
24, 1996, among SalesLink Corporation, CMG Registrant's report on Form 8-K as filed with
Information Services, Inc., Pacific Direct the commission 10/24/96 (File No. 0-22846)
Marketing Corp., d/b/a Pacific Link and all the
stockholders of Pacific Link. Pursant to Item
602(b)(2) of Regulation S-K, the schedules and
certain exhibits to the Stock Purchase Agreement
are omitted. A list of such schedules and
exhibits appears in the table of contents to the
Stock Purchase Agreement. The Registrant hereby
undertakes to furnish supplementally a copy of
any omitted schedule or exhibit to the Commission
upon request.
10.37 Warrant Purchase Agreement by and among Filed herewith
SalesLink Corporation and BankBoston, N.A.,
dated as of October 24, 1996.
10.38 Common Stock Purchase Warrant issued by Filed herewith
SalesLink Corporation to BankBoston, N.A.,
dated as of October 24, 1996.
10.39 ISDA Master Swap Agreement (the "Swap Filed herewith
Agreement"), dated as of January 14, 1997, by
and between CMG Information Services, Inc.
and The First National Bank of Boston (FNBB")
10.40 Confirmation and Schedule to Swap Agreement, Filed herewith
dated as of January 14, 1997, by and between
CMG Information Services, Inc. and FNBB.
10.41 ISDA Credit Support Annex, dated as of Filed herewith
January 14, 1997, by and between FNBB and
CMG Information Services, Inc.
10.42 Repurchase Agreement, dated as of January 14, Filed herewith
1997, by and between CMG @Ventures, L.P.
and the Long Lane Master Trust.
10.43 First Amendment and Waiver to Revolving Filed herewith
Credit and Term Loan Agreement by and among
the Registrant, Pacific Direct Marketing Corporation
and FNBB, dated March 14, 1997.
10.44 Assumption, Second Amendment and Filed herewith
Confirmation Agreement by and among SalesLink
Corporation and BankBoston, N.A., dated
July 11, 1997.
10.45 Term Note, dated March 14, 1997, between Filed herewith
SalesLink Corporation and Imperial Bank.
10.46 Amended and Restated Term Note, dated March Filed herewith
14, 1997, between SalesLink Corporation and
FNBB.
19
10.47 Second Amended and Restated Revolving Credit Filed herewith
Note, dated July 11, 1997, between SalesLink
Corporation and Imperial Bank.
10.48 Second Amended and Restated Revolving Credit Filed herewith
Note, dated July 11, 1997, between SalesLink
Corporation and BankBoston, N.A.
10.49 Revolving Credit Agreement, dated May 14, Filed herewith
1997, between the Registrant and BankBoston,
N.A.
10.50 Revolving Credit Note, dated May 14, 1997, Filed herewith
between the Registrant and BankBoston, NA.
11 Statement of Computation of Earnings Per Share Filed herewith
13.1 Selected Consolidated Financial Data Filed herewith
13.2 Management's Discussion and Analysis Filed herewith
of Financial Condition and Results of
Operations
13.3 Consolidated Financial Statements, Filed herewith
Supplementary Data, and Independent
Auditors' Report
21 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Auditors Filed herewith
27 Financial Data Schedule Filed herewith
* Management contracts and compensatory plans or arrangements.
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
July 31, 1997.
20
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
CMG Information Services, Inc.:
Under date of September 19, 1997, we reported on the Consolidated Balance
Sheets of CMG Information Services, Inc. as of July 31, 1997 and 1996, and the
related Consolidated Statements of Operations, Stockholders' Equity, and Cash
Flows for each of the years in the three year period ended July 31, 1997, which
are included in the Form 10-K for the year ended July 31, 1997. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule of Valuation and
Qualifying Accounts in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 19, 1997
21
CMG INFORMATION SERVICES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1995, 1996, 1997
ADDITIONS DEDUCTIONS
CHARGED TO (CHARGED
ACCOUNTS RECEIVABLE, BALANCE AT COSTS TO AGAINST BALANCE AT
ALLOWANCE FOR DOUBTFUL BEGINNING OF EXPENSES (BAD ACCOUNTS END
ACCOUNTS PERIOD ACQUISITIONS DEBT EXPENSE) RECEIVABLE) DISPOSITION OF PERIOD
- -------- ------ ------------ ------------- ----------- ----------- ---------
1995 $137,000 $ -- $ 60,000 $ 49,000 $ -- $ 148,000
1996 $148,000 $ -- $294,000 $ -- $ -- $ 442,000
1997 $442,000 $395,000 $442,000 $186,000 $10,000 $1,083,000
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CMG INFORMATION SERVICES, INC.
(Registrant)
Date: October 29, 1997
By: /s/ David S. Wetherell
-------------------------------
David S. Wetherell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and on the date set forth above.
Signature Title
- --------- -----
/s/ David S. Wetherell Chairman of the Board,
- ----------------------------- President, Chief Executive Officer and
David S. Wetherell Director (Principal Executive Officer)
/s/ Andrew J. Hajducky, III Chief Financial Officer and
- ----------------------------- Treasurer (Principal Financial and
Andrew J. Hajducky III, CPA Accounting Officer)
/s/ John A. McMullen Director
- -----------------------------
John A. McMullen
/s/ Craig D. Goldman Director
- -----------------------------
Craig D. Goldman
23