Exhibit 13.2
MANAGEMENT'S DISCUSSION &
ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below in "Factors
that May Affect Future Results", as well as those discussed in this section and
elsewhere in this report.
OVERVIEW
CMG Information Services, Inc. (CMG or the Company) develops and operates
Internet and direct marketing companies and venture funds focused on the
Internet.
CMG's Internet strategy includes the internal development and operation of
majority owned subsidiaries within the "CMG Internet Group" as well as the
investment in Internet companies though venture capital fund arrangements. The
Company's strategy also envisions and promotes opportunities for synergistic
business relationships among the Internet companies within its portfolio. At
July 31, 1998, the CMG Internet Group included majority-owned subsidiaries
ADSmart Corporation (ADSmart), Engage Technologies, Inc. (Engage), Accipiter,
Inc. (Accipiter), InfoMation Publishing Corporation (InfoMation), NaviSite
Internet Services Corporation (NaviSite), Planet Direct Corporation (Planet
Direct) and Password Internet Publishing Corporation (The Password), along with
a minority investment in Magnitude Network, LLC (Magnitude Network). ADSmart
develops and markets online ad sales and ad serving solutions; Engage develops
and markets precision online marketing solutions; Accipiter specializes in
Internet advertising management solutions; InfoMation develops and markets a
Web-based solution for corporate knowledge management; Password provides tools
for the creation of a personalized "mini-Web;" and Planet Direct is a
personalized Web service with over 400 Internet Service Provider (ISP) partners
which tailors members' online experience to their interests and local community.
Subsequent to July 31, 1998, the Company announced that InfoMation would become
a division of Planet Direct and that NaviSite would be split into two separate
companies NaviSite will continue to provide high-end server management and
applications solutions, providing high-availability Internet outsourcing, and
NaviNet will provide low cost, high-availability dial-up network connection
through competitive local exchange carriers (CLECs).
The Company's first Internet venture fund, its limited liability company
subsidiary, CMG@Ventures I, LLC (ERROR! BOOKMARK NOT DEFINED.I, formerly
CMG@Ventures L.P.), was formed in February, 1996. CMG completed its $35 million
commitment to this fund during fiscal year 1997. The Company owns 100% of the
capital and is entitled to 77.5% of the net capital gains of ERROR! BOOKMARK NOT
DEFINED.I. At July 31, 1998, CMG@Ventures I held equity investments in five
companies, including Blaxxun Interactive, Inc. (Blaxxun, 81% legal ownership),
GeoCities (32%), Lycos, Inc. (Lycos, 25%), Parable LLC (Parable, 31%), and
Vicinity Corporation (Vicinity, 50%). Lycos and GeoCities shares are publicly
traded on the NASDAQ system under the symbols LCOS and GCTY, respectively. The
Company's second Internet venture fund, its limited liability company
subsidiary, CMG@Ventures II, LLC (CMG@Ventures II), was formed during fiscal
year 1997. The Company owns 100% of the capital and is entitled to 80% of the
net capital gains of CMG@Ventures II. At July 31, 1998, CMG@Ventures II held
equity investments in fourteen companies, including Chemdex Corporation (Chemdex
16%), Critical Path (7%), GeoCities (2%), KOZ, inc. (KOZ, 14%), Mother Nature's
General Store, Inc. (Mother Nature, 24%), Parable (11%), Reel.com Inc.
(Reel.com, 36%), Sage Enterprises, Inc. (Sage Enterprises, 29%), Silknet
Software, Inc. (Silknet, 24%), Softway Systems, Inc. (Softway Systems, 9%),
Speech Machines plc (Speech Machines, 29%), TicketsLive Corporation
(TicketsLive, 14%), Universal Learning Technology (12%), and Visto Corporation
(Visto, 6%). CMG@Ventures II's investments in Sage Enterprises and Reel.com were
converted into shares of Amazon.com, Inc. and Hollywood Entertainment
Corporation, respectively, pursuant to mergers of the respective companies
subsequent to July 31, 1998. (See note 19 of Notes to Consolidated Financial
Statements.)
CMG recently formed its third venture capital fund, CMG@Ventures III, LLC
(CMG@Ventures III), and has begun raising capital from outside investors for a
corresponding outside investment fund, @Ventures III, L.P. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures III, and will be entitled to 2% of the net capital gains of
@Ventures III, L.P. These two funds will co-invest in all investment candidates
based on a predetermined ratio. CMG has committed to funding CMG@Ventures III
up to the greater of $30 million or 19.9% of amounts committed to @Ventures III,
L.P.
The Company provides fulfillment services through three wholly-owned
subsidiaries, SalesLink Corporation (SalesLink, acquired in 1989), InSolutions
Incorporated, (InSolutions, acquired June, 1998), and On-Demand Solutions, Inc.
(acquired July, 1998). SalesLink's services are also provided through its
subsidiary, Pacific Direct Marketing Corporation (Pacific Link), which was
acquired in October, 1996. The Company's fullfilment services offerings include
product and literature fulfillment, turnkey outsourcing, telemarketing, and
sales/ lead inquiry management. Traditional mailing list services are provided
by the Company's subsidiary, CMG
Direct Corporation (CMG Direct). Recently, CMG Direct has embarked on a
strategy to also provide solutions for integrating traditional direct marketing
with Internet marketing.
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 1999,
the Company will continue to develop and refine the products and services of its
businesses, with the goal of significantly increasing revenue as new products
are commercially introduced, and will continue to pursue a strong pace of
investing in new Internet opportunities.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items from the
Company's Consolidated Statements of Operations expressed as a percentage of net
revenues.
Fiscal Year Ended July 31,
1998 1997 1996
---- ---- -----
Net revenues 100% 100% 100%
Cost of revenues 86 60 63
Research and development expenses 21 35 24
In-process research and development expenses 21 2 9
Selling, general and administrative expenses 58 78 76
---- --- ---
Operating loss (86) (75) (72)
Other income, net 137 40 181
Income tax benefit (expense) (33) 4 (59)
---- --- ---
Net income (loss) 18% (31%) 50%
==== === ===
The Company's operations have been classified into three business segments (i)
investment and development, (ii) fulfillment services, and (iii) lists and
database services. (See note 3 of Notes to Consolidated Financial Statements.)
Operating income in the fulfillment services segment was adjusted during the
fourth quarter of fiscal year 1998 to correct prior quarters' understatements of
costs of sales by SalesLink's subsidiary company, Pacific Link. The cost of
sales understatement was caused by estimates used in determining the material
content in cost of sales. As a result, previous quarterly results had
understated cost of sales and overstated inventory. Had such adjustments been
recorded in the period in which they occurred, quarterly fulfillment services
segment operating income (loss) would have been as follows:
Three Months Ended
October 31, January 31, April 30, July 31,
---------- ---------- -------- -------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
As Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated As $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
DECONSOLIDATION OF LYCOS, INC, BEGINNING NOVEMBER, 1997
During the second fiscal quarter ended January 31, 1998, the Company sold
340,000 shares of Lycos stock on the open market and distributed 216,034 Lycos
shares to the profit members of CMG@Ventures I. Through the sale and
distribution of Lycos shares, the Company's ownership percentage in Lycos was
reduced from just in excess of 50% at October 31, 1997, to below 50% beginning
in November, 1997. As such, starting in November, 1997, the Company began
accounting for its remaining investment in Lycos under the equity method of
accounting, rather than the consolidation method. Prior to these events, the
operating results of Lycos were consolidated within the operating results of the
Company's investment and development segment, and the assets and liabilities of
Lycos were consolidated with those of CMG's other majority owned subsidiaries in
the Company's Consolidated Balance Sheets. The Company's historical consolidated
operating results for the fiscal years ended July 31, 1997 and 1996 included
Lycos net revenues of $22,253,000 and $5,257,000, respectively, and Lycos
operating losses of ($8,759,000) and ($5,802,000), respectively. The
Company's consolidated operating results for the fiscal quarter ended October
31, 1997 included Lycos net revenues and operating loss of $9,303,000 and
($433,000), respectively. The Company's historical Consolidated Balance Sheets
as of July 31, 1997 and October 31, 1997 included Lycos current assets and
liabilities and total assets and liabilities as follows:
Jul. 31, 1997 Oct. 31, 1997
------------- -------------
Current assets $ 60,745,000 $ 63,935,000
============ ============
Total assets $ 65,419,000 $ 67,694,000
============ ============
Current liabilities $ 22,615,000 $ 25,822,000
============ ============
Total liabilities $ 27,772,000 $ 29,259,000
============ ============
SALE OF ENGAGE DATA WAREHOUSE PRODUCTS AND RESTRUCTURING OF ENGAGE TECHNOLOGIES
From its inception in August, 1995, through July 31, 1997, the Company's wholly-
owned subsidiary, Engage Technologies, Inc. (Engage) focused on providing
traditional mailing list maintenance and database services (through its ListLab
division), and on developing data mining, querying, analysis and targeting
software products for use in large database applications. As such, the results
of Engage's operations were classified in the Company's list and database
services segment. During the first quarter of fiscal 1998, Engage sold certain
rights to its Engage.Fusion(TM) and Engage.Discover(TM) data warehouse products
to Red Brick Systems, Inc. (Red Brick) for $9.5 million and 238,160 shares of
Red Brick common stock. These products had been developed to accelerate the
design and creation of very large data warehouses and perform high-end data
query and analysis. Engage retained certain rights to sell Engage.Fusion and
Engage.Discover to interactive media markets as part of its Engage Product
Suite. Additionally, during the first quarter of fiscal year 1998, Engage
transferred its ListLab division to the Company's recently formed subsidiary,
CMG Direct. With the sale of these rights and transfer of its ListLab division,
Engage narrowed its focus to the Internet software solutions market, where it
seeks to help companies individually distinguish, understand and interact with
anonymous prospects and customers in personalized marketing, sales, and service
relationships via the Internet. As a result of this repositioning, beginning in
fiscal year 1998, the operating results of Engage are now classified in the
Company's investment and development segment.
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenues increased $20,877,000, or 30%, to $91,484,000 in 1998 from
$70,607,000 in 1997. The net increase reflects an increase of $27,068,000 in the
Company's fulfillment services segment, partially offset by decreases of
$5,208,000 and $983,000 for the Company's investment and development and lists
and database services segments, respectively. The increase in fulfillment
services segment revenues reflects the acquisition of Pacific Link in October,
1996, the acquisition of InSolutions in June, 1998, and the subsequent addition
of new customers and new turnkey business from existing customers. The
investment and development segment results include $12,950,000 less consolidated
revenues from the three months Lycos was consolidated in fiscal 1998 compared
with the twelve months for which Lycos revenues were included in the prior year.
Largely offsetting such decreases was the impact of consolidating Vicinity's
results beginning in the fourth quarter of fiscal year 1997, the impact of the
acquisition of Accipiter, Inc. (Accipiter) in April, 1998, and commencement of
operations at the Company's NaviSite, Engage, Planet Direct and ADSmart
subsidiaries. The net revenue decrease in the Company's lists and database
services segment primarily reflects reduced sales from a significant customer.
The Company believes that its portfolio of companies will continue to develop
and introduce their products commercially, actively pursue increased revenues
from new and existing customers, and look to expand into new market
opportunities. Therefore, absent the impact of the change in accounting for
Lycos, the Company expects to report future revenue growth.
Cost of revenues increased $36,679,000, or 87%, to $78,831,000 in 1998 from
$42,152,000 in 1997, reflecting increases of $26,488,000 and $11,489,000 in the
fulfillment services and investment and development segments, respectively,
somewhat offset by a $1,298,000 decrease in the lists and database services
segment. In the fulfillment services segment, cost of revenues increased as a
result of revenue increases, and increased as a percentage of net revenues to
84% in fiscal 1998 from 74% in fiscal 1997. This percentage increase was due to
a shift in mix of services from literature fulfillment towards lower margin
turnkey business, as well as an increase in the material content percentage of
turnkey sales, and operating inefficiencies experienced during a period of high
volume growth. The increase in the investment and development segment primarily
resulted from the commencement of operations at the Company's NaviSite, Engage,
Planet Direct and ADSmart subsidiaries, and the impact of consolidating Vicinity
beginning in fourth quarter fiscal 1997, partially offset by $2,843,000 lower
cost of sales resulting from deconsolidating Lycos beginning in the second
quarter of fiscal year 1998. The start-up of Internet operations at NaviSite,
Engage, Planet Direct and ADSmart, with minimal revenues during early stages,
and the deconsolidation of Lycos are the primary reasons cost of revenues as a
percentage of revenues in the investment and development segment increased from
35% in fiscal 1997 to 106% in fiscal 1998. Lists and database services segment
cost of revenues decreased $1,298,000 as a result of the combined impact of
sales decreases and operating cost reductions.
Research and development expenses decreased $5,349,000, or 21%, to $19,709,000
in fiscal 1998 from $25,058,000 in fiscal 1997, primarily reflecting a decrease
of $6,805,000 in the Company's lists and database services segment, partially
offset by an increase of $1,488,000 in the investment and development segment.
The lists and database services segment decrease primarily reflects the removal
of Engage from the segment. Investment and development segment results include
increases associated with the inclusion of Engage, expenditures for the
development of NaviSite's NaviNet technology platform, the impact of
consolidating Vicinity's results beginning in the fourth quarter of fiscal year
1997, the impact of the acquisition of Accipiter in April, 1998, and increased
development costs for The Password. Partially offsetting such increases,
investment and development segment results include a $2,868,000 reduction from
deconsolidating Lycos, reduced development costs associated with the progression
of Planet Direct, ADSmart and Blaxxun from initial development stages towards
commercial operations, and reductions associated with NetCarta Corporation
(NetCarta), whose results were included during the first half of fiscal year
1997, but have been excluded since the sale of NetCarta to Microsoft in January,
1997. In addition, the Company recorded $19,135,000 of in-process research and
development expense during fiscal 1998 related to the Company's acquisition of
Accipiter and investments in Speech Machines, Chemdex and Silknet compared to
$1,312,000 in fiscal 1997 related to investments in Parable and Silknet. The
Company anticipates it will continue to devote substantial resources to product
development and that, absent the impact of the Company's change in accounting
for Lycos, these costs may substantially increase in future periods.
Selling expenses decreased $6,512,000, or 17% to $31,071,000 in 1998 from
$37,583,000 in 1997. The net decrease reflects decreases of $5,470,000 and
$2,166,000 in the Company's investment and development, and lists and database
services segments, respectively, partially offset by an increase of $1,124,000
for the Company's fulfillment services segment. Investment and development
segment results include a $13,651,000 reduction from deconsolidating Lycos,
reduced marketing expenses at Blaxxun, and reductions associated with NetCarta,
FreeMark Communications, Inc. (FreeMark), and GeoCities, whose results were
included during part of fiscal year 1997, but have not been included in fiscal
1998. These decreases were partially offset by increased sales and marketing
expenses related to several product launches, continued growth of sales and
marketing infrastructures, the addition of Engage to this segment, the
acquisition of Accipiter, and the impact of consolidating Vicinity's results
beginning in the fourth quarter of fiscal year 1997. The lists and database
services segment decrease primarily reflects the removal of Engage from the
segment, and the fulfillment services segment increase primarily reflects the
acquisitions of Pacific Link in October, 1996 and InSolutions in June, 1998.
Selling expenses decreased as a percentage of net revenues to 34% in fiscal 1998
from 53% in fiscal 1997, primarily reflecting the impacts of the deconsolidation
of Lycos and of increased revenues in the Company's fulfillment services
segment. 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, absent the
impact of the Company's change in accounting for Lycos, these costs will
substantially increase in future periods.
General and administrative expenses increased $4,138,000, or 24%, to $21,749,000
in 1998 from $17,611,000 in 1997. The net increase reflects increases of
$4,110,000 and $2,374,000 in the Company's investment and development, and
fulfillment services segments, respectively, partially offset by a decrease of
$2,346,000 for the Company's lists and database services segment. Investment
and development segment results include increases due to the building of
management infrastructures in several of the Company's Internet investments and
at the CMG corporate level, the addition of Engage and Accipiter to this
segment, and the impact of consolidating Vicinity's results beginning in the
fourth quarter of fiscal year 1997. Such increases were partially offset by a
$1,913,000 reduction from deconsolidating Lycos, cost reductions at Blaxxun, and
reductions associated with NetCarta, FreeMark, and GeoCities, whose results were
included during part of fiscal year 1997, but have not been included in fiscal
1998. The fulfillment services segment increase reflects the acquisitions of
Pacific Link in October, 1996 and InSolutions in June, 1998 and the addition of
management and infrastructure in support of growth in the segment. The lists and
database services segment decrease primarily reflects the removal of Engage from
the segment. General and administrative expenses decreased as a percentage of
net revenues to 24% in fiscal 1998 from 25% in fiscal 1997, primarily reflecting
the impact of increased revenues in the Company's fulfillment services segment.
Absent the impact of the Company's change in accounting for Lycos, the Company
anticipates that its general and administrative expenses will continue to
increase significantly as the Company's subsidiaries, particularly in the
investment and development segment, continue to grow and expand their
administrative staffs and infrastructures.
Interest income decreased $942,000 to $2,426,000 in 1998 from $3,368,000 in
1997, reflecting a $1,590,000 decrease from the deconsolidation of Lycos,
partially offset by increased income associated with higher average corporate
cash equivalent balances compared with prior year. Interest expense increased
$1,677,000 compared with fiscal 1997, primarily due to borrowings incurred to
finance the Company's acquisitions of Pacific Link in October, 1996, and
InSolutions in June, 1998, and the impact of higher average corporate borrowings
related to the Company's $10 million collateralized corporate note payable which
was issued in January, 1997 and increased to $20 million in January, 1998.
Gain on sale of data warehouse product rights occurred in fiscal 1998 when the
Company's subsidiary, Engage, sold certain rights to its Engage.Fusion(TM) and
Engage.Discover(TM) data warehouse products to Red Brick for $9.5 million and
238,160 shares of Red Brick common stock. Gain on sale of Lycos, Inc. common
stock reflects the Company's net gain realized on the sale of 1,955,015 shares
of
Lycos stock during fiscal 1998. Gain on stock issuance by Lycos, Inc. resulted
primarily from the issuance of stock by Lycos in a secondary offering in June,
1998, and from the issuance of stock by Lycos for the fiscal 1998 acquisitions
of Tripod and Wise Wire. Gain on sale of available-for-sale securities in fiscal
1998 reflects the Company's net gain realized on the sale of 224,795 shares of
Premiere Technologies, Inc. (Premiere) stock. Gain on sale of investment in
TeleT Communications in fiscal 1997 resulted when the Company sold its equity
interest in TeleT to Premiere in exchange for $550,000 and 320,833 shares of
Premiere stock in September 1996. Gain on sale of NetCarta Corporation in fiscal
year 1997 reflects the Company's pretax gain on sale of CMG @Ventures' NetCarta
subsidiary to Microsoft Corporation on January 31, 1997. Gain on distribution of
Lycos stock in fiscal 1997 resulted from the dividend distribution of 603,000
shares of Lycos common stock to CMG shareholders on July 31, 1997.
Equity in losses of affiliates resulted from the Company's ownership in certain
investments that 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. Equity in losses of affiliates for fiscal 1998 include the results
from the Company's minority ownership in Ikonic Interactive, Inc. (Ikonic),
Parable, Silknet, GeoCities, Reel.com, Speech Machines, Chemdex, Sage
Enterprises, and Mother Nature, and the results from Lycos beginning in
November, 1997. Equity in losses of affiliates for fiscal 1997 included the
results from the Company's minority ownership in TeleT, Vicinity, Ikonic,
Parable, Silknet, GeoCities, and Reel.com. The Company expects its portfolio
companies to continue to invest in development of their products and services,
and to recognize operating losses, which will result in future charges recorded
by the Company to reflect its proportionate share of such losses.
Minority interest decreased to ($28,000) in 1998 from $4,787,000 in 1997,
primarily reflecting the deconsolidation of Lycos results beginning in the
second quarter of fiscal year 1998, and the impact associated with FreeMark and
GeoCities, whose results were included within the Company's consolidated
statements of operations during a portion of fiscal year 1997, but excluded in
fiscal year 1998.
The Company's effective tax rates for fiscal 1998 and 1997 were 64% and 12%,
respectively. The Company's effective tax rate differs materially from the
federal statutory rate primarily due to valuation allowances provided on certain
deferred tax assets, the provision for state income taxes, and non-deductible
goodwill amortization and in-process research and development charges.
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues increased $42,122,000, or 148%, to $70,607,000 in 1997 from
$28,485,000 in 1996. The increase was attributable to increases of $24,069,000
and $18,252,000 in net revenues for the Company's fulfillment services and
investment and development segments, respectively. The fulfillment services
segment increase was primarily due to the acquisition of Pacific Link on October
24, 1996 as well as the addition of several new SalesLink accounts closed in the
second half of fiscal year 1996. The increase in net revenues for the
investment and development segment primarily reflects increased revenues by
Lycos, (which was a consolidated subsidiary in both fiscal 1997 and 1996), whose
net revenues for the 1997 fiscal year increased by $16,996,000 in comparison
with 1996. Net revenues in the lists and database services segment decreased by
$199,000 during 1997 due to consolidation in the educational publishing industry
and competitive pricing pressure.
Cost of revenues increased $24,243,000, or 135%, to $42,152,000 in 1997 from
$17,909,000 in 1996, primarily due to increases of $18,740,000 and $4,911,000 in
the fulfillment services and investment and development segments, respectively,
resulting from higher revenues. In the fulfillment services segment, cost of
revenues as a percentage of net revenues increased to 74% in 1997 from 65% in
1996 due to the mix of services associated with the acquisition of Pacific Link
at the end of the first quarter of fiscal 1997. In the investment and
development segment, cost of revenues as a percentage of net revenues decreased
to 35% in 1997 from 60% in 1996 due to the ability to spread fixed costs, such
as facilities and equipment costs, over a larger revenue base.
Research and development expenses increased $18,087,000, or 260%, to $25,058,000
in fiscal 1997 from $6,971,000 in fiscal 1996. The increase consists primarily
of an increase of $12,516,000 in research and development expenses for the
investment and development segment as product development activities continued
at all of the Company's consolidated Internet investments. Also, research and
development expenses increased $5,732,000 in the lists and database services
segment reflecting the continued development of Engage's data mining, querying,
analysis and targeting products and services. The Company recorded $1,312,000 of
in-process research and development expenses related to investments in Parable
and Silknet during 1997, compared with $2,691,000 of in-process research and
development expenses recorded in 1996 related to the acquisition of several
Internet investments during 1996.
Selling expenses increased $25,917,000, or 222% to $37,583,000 in 1997 from
$11,666,000 in 1996. This increase was primarily attributable to a $22,609,000
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 by the subsidiaries
of
this segment. Also, during 1997, Lycos launched a national television
advertising campaign which contributed to the increased selling expenses in the
investment and development segment. Selling expenses in the lists and database
services segment increased by $1,982,000 versus 1996 due to product launch
expenses and the continued building of sales and marketing infrastructure for
Engage. Selling expenses in the fulfillment services segment increased by
$1,326,000 in comparison with 1996 due to the acquisition of Pacific Link.
Selling expenses increased as a percentage of net revenues to 53% in 1997 from
41% in 1996.
General and administrative expenses increased $7,789,000, or 79%, to $17,611,000
in 1997 from $9,822,000 in 1996. The investment and development segment and
lists and database services segment experienced increases of $4,884,000 and
$1,505,000, respectively, due to the addition of management personnel and
administrative infrastructure in several of the Company's Internet investments
and Engage. General and administrative expenses in the fulfillment services
segment increased by $1,400,000 in comparison with fiscal 1996 due to the
acquisition of Pacific Link, including approximately $804,000 of goodwill
amortization charges. General and administrative expenses decreased as a
percentage of net revenues to 25% in 1997 from 35% in 1996 due to the
significant increase in net revenues in fiscal year 1997.
Gain on sale of NetCarta Corporation in fiscal 1997 reflects the Company's pre-
tax gain on the sale of this subsidiary to Microsoft Corporation on January 31,
1997. Gain on distribution of Lycos stock in fiscal 1997 resulted from the
dividend distribution of 603,000 shares of Lycos common stock to CMG
shareholders on July 31, 1997. Gain on sale of investment in TeleT
Communications in fiscal 1997 resulted when the Company sold its equity interest
in TeleT to Premiere in exchange for $550,000 and 320,833 shares of Premiere
stock in September, 1996. Gain on sale of available-for-sale securities in
fiscal 1996 occurred when the Company sold its remaining 1,020,000 shares of
America Online, Inc. common stock in October, 1995. Gain on stock issuance by
Lycos, Inc. in fiscal 1996 arose as a result of the sale of stock by Lycos in an
initial public offering in April, 1996.
Interest income increased $618,000 to $3,368,000 in 1997 from $2,750,000 in
1996. The increase in interest income primarily reflects income earned by Lycos
from the investment of the proceeds of their initial public offering, which
occurred in April 1996, partially offset by the impact of lower corporate cash
balances in fiscal 1997 as compared with fiscal 1996. Interest expense
increased $1,560,000 to $1,619,000 in 1997 from $59,000 in 1996. The increase
in interest expense was primarily due to borrowings incurred to finance the
Company's acquisition of Pacific Link and interest expense related to the
Company's $10,000,000 collateralized corporate note payable to a bank which was
issued in January, 1997.
Equity in losses of affiliates resulted from the Company's minority ownership in
certain investments that are accounted for under the equity method. The results
for fiscal 1996 reflect five minority investments: FreeMark, Ikonic, GeoCities,
Vicinity and TeleT. During the fourth quarter of fiscal 1996, the Company
increased its ownership in FreeMark and GeoCities above 50% and, accordingly,
began including their operating results in the Company's consolidated operating
results. FreeMark was consolidated through December 1996 when it suspended
operations. Equity in losses of affiliates for fiscal 1997 include the results
from the Company's minority ownership in Ikonic, Vicinity, Parable, Silknet,
Reel.com and TeleT (through the date of the sale of TeleT in September 1996).
Also, in January 1997, when GeoCities successfully completed an equity financing
round, CMG@Ventures I's ownership in GeoCities decreased from approximately 61%
to approximately 41%, and the Company began accounting for its investment in
GeoCities under the equity method of accounting, rather than the consolidation
method. In the fourth quarter of fiscal 1997, the Company began consolidating
the operating results of Vicinity when the Company's ownership in Vicinity was
increased to above 50%.
Minority interest increased to $4,787,000 in 1997 from $2,169,000 in 1996
reflecting minority interest in net losses of consolidated subsidiaries within
the Company's investment and development segment.
The Company's effective tax rates for fiscal 1997 and 1996 were 12% and 54%,
respectively. The Company's effective tax rate differed from the federal
statutory rates in fiscal years 1997 and 1996 primarily due to valuation
allowances provided on certain deferred tax assets, the provision for state
income taxes, and non-deductible goodwill amortization charges.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1998 decreased to $12.8 million compared to $38.6
million at July 31, 1997, predominately as a result of the expenditure of cash
for operations and the impact of deconsolidating Lycos, offset in large part by
proceeds from sales of Lycos stock. The Company's July 31, 1997 consolidated
working capital included Lycos working capital of $38.1 million. The Company's
principal uses of capital during fiscal 1998 were $71.7 million for funding of
operations, primarily those of start-up activities in the Company's investment
and development segment, $34.5 million for investments in affiliates and
acquisitions, largely by CMG@Ventures II in several Internet companies, and $8.2
million for purchases of property and equipment. The Company's principal
sources of capital during fiscal 1998 were $108.9 million received from the sale
of 1,955,015 shares of Lycos stock, $10.9 million received from the sale of
1,006,004 CMG common shares to Intel Corporation (Intel), $10 million received
from the sale of 625,000 CMG common shares to Sumitomo Corporation (Sumitomo),
$9.5 million from the sale of Engage's data warehouse product rights, and $7.6
million received from the sale of 224,795 shares of Premiere stock. The
Company intends to continue to fund existing and future Internet and interactive
media investment and development efforts. Additionally, at July 31, 1998, the
Company had approximately $68 million of remaining future noncancelable minimum
payments under operating leases for its facilities and certain other equipment.
During fiscal year 1998, the Company completed the acquisition of four companies
for purchase prices valued at a combined total of $53.8 million, including
Accipiter ($30.2 million purchase price in April, 1998), InSolutions ($15.2
million in June, 1998), Servercast ($1million in July, 1998), and On-Demand
Solutions ($7.4 million on July 31, 1998). The combined consideration for these
acquisitions consisted of 1,574,094 shares of the Company's common stock valued
at a total of $44.6 million, $6.7 million in cash, and $2.5 million financed
through sellers' notes. The shares issued by the Company were not registered
under the Securities Act of 1933 and were subject to restrictions on
transferability for periods ranging from six to twenty-four months. The values
of the Company's shares included in the purchase prices of these acquisitions
were recorded net of market value discounts ranging from 12% to 22%, based on
independent appraisal, to reflect the restrictions on transferability.
Additional consideration of up to $2.8 million could be paid related to the
acquisition of InSolutions if certain future performance goals are met. Of the
combined purchase prices of Accipiter and Servercast, $12.5 million was
allocated to goodwill, which will be amortized on a straight-line basis over
five years. Of the combined purchase prices of InSolutions and On-Demand
Solutions, $22.3 million was allocated to goodwill, which will be amortized on a
straight-line basis over fifteen years. Additionally, $18.0 million of the
purchase price of Accipiter was allocated to in-process research and development
which was charged to operations during fiscal 1998.
CMG @Ventures II invested a total of $27.6 million in fifteen companies during
fiscal year 1998, including $100,000 in Blaxxun, $1.8 million in GeoCities,
$200,000 in Vicinity, $3 million in Silknet, $2.1 million in Parable, $150,000
in KOZ, $3.5 million in Sage Enterprises, $4.6 million in Reel.com, $1.8 million
in Speech Machines, $2.6 million in Chemdex, $2 million in Tickets Live, $1
million in Critical Path, $2 million in Mother Nature, $1.5 million in Visto,
and $1.25 million in Universal Learning Technology. At July 31, 1998,
CMG@Ventures I held equity investments in five companies, including Blaxxun (81%
legal ownership), GeoCities (32%), Lycos (25%), Parable (31%), and Vicinity
(50%). At July 31, 1998, CMG@Ventures II held equity investments in fourteen
companies, including Chemdex (16%), Critical Path (7%), GeoCities (2%), KOZ
(14%), Mother Nature (24%), Parable (11%), Reel.com (36%), Sage Enterprises
(29%), Silknet (24%), Softway Systems (9%), Speech Machines (29%), TicketsLive
(14%), Universal Learning Technology (12%), and Visto (6%). The Company owns
100% of the capital interest and has all voting rights with respect to
CMG@Ventures I and CMG@Ventures II investments. The Company is entitled to
77.5% and 80% of the net capital gains, as defined, on investments made by
CMG@Ventures I and CMG@Ventures II, respectively. The remaining interest in the
net capital gains on these investments are attributed to profit partners,
including the President and Chief Executive Officer and the Chief Financial
Officer of the Company. The Company is responsible for all operating expenses
of CMG @Ventures I and CMG @Ventures II. CMG @Ventures I's interest in Lycos is
subject to further reduction because CMG @Ventures I is obligated to sell to
Lycos a portion of its shares of common stock of Lycos, as necessary, to provide
for shares issuable upon exercise of options granted by Lycos under its 1995
stock option plan. As of July 31, 1998, (retroactively adjusted to reflect
Lycos' two-for-one stock split affected in August, 1998), CMG@Ventures I was
obligated to sell up to 391,296 shares to Lycos at a price of $0.01 per share
and up to 458,048 shares at prices ranging from $0.14 to $4.80 per share.
After accounting for Lycos shares subject to option funding and shares
attributable to profit partners, approximately 6.5 million Lycos shares, (also
on a post-split basis), were attributable to CMG as of July 31, 1998.
CMG@Ventures II's investments in Sage Enterprises and Reel.com were converted
into shares of Amazon.com, Inc. and Hollywood Entertainment Corporation,
respectively, pursuant to mergers of the respective companies subsequent to July
31, 1998. (See note 19 of Notes to Consolidated Financial Statements.)
On January 20, 1998, the Company renewed its collateralized corporate borrowing
for an additional term of one year and increased the outstanding principal
amount under this facility from $10 million to $20 million. This borrowing is
secured by 2,511,578 of the Company's shares of Lycos common stock and is
payable in full on January 20, 1999. Under this agreement, the Company could
become subject to additional collateral requirements under certain
circumstances. The Company is considering either seeking the renewal of this
note, or repaying it using future proceeds from the sale of stock of certain
investee companies. SalesLink had an
outstanding balance of $6.2 million at July 31, 1998 and an additional $800,000
reserved in support of outstanding letters of credit for operating leases.
SalesLink also has a $15.5 million bank term note outstanding as of July 31,
1998, which provides for repayment in quarterly installments beginning January,
1999 through November, 2002. The Company's bank borrowing arrangements are
subject to normal banking terms and conditions, including financial covenants
requiring the Company or SalesLink to maintain certain levels of net worth and
income, certain financial position ratios, as well as limitations on
indebtedness and capital expenditures. As of July 31, 1998, SalesLink did not
comply with certain covenants of their borrowing arrangements. SalesLink is
working with the bank to cure the non-compliance, as of July 31, 1998 and
prospectively, through waivers or amendments to the covenant terms. SalesLink
has not yet received such waivers or amendments and, accordingly, all of
SalesLink's bank borrowings have been classified as current liabilities in the
July 31, 1998 Consolidated Balance Sheet.
The Company's consolidated capital expenditures were $8.2 million in fiscal
1998. Concurrent with its growth and the commencement of start-up operations,
the Company has experienced a substantial increase in its capital expenditures
and operating lease arrangements in fiscal year 1998 and anticipates that this
will continue in the future. The Company's accounts receivable, current
deferred revenues, long-term deferred revenues, and minority interest decreased
$5 million, $8.7 million, $5.1 million, and $14.5 million, respectively,
primarily as a result of the change in the Company's method of accounting for
Lycos. Investments in affiliates increased $57 million, primarily as a result
of the change in the Company's method of accounting for Lycos, the impact of
gains recorded on stock issuances by Lycos, and the investment in new affiliates
during fiscal 1998, partially offset by the impact of the sales of Lycos stock
and the recording of equity in losses of affiliates during the year. Costs in
excess of net assets of subsidiaries acquired, net of accumulated amortization,
in the Company's July 31, 1998 Consolidated Balance Sheet increased $32.6
million in comparison with July 31, 1997, primarily due to $34.8 million of
goodwill recorded relating to the acquisitions of Accipiter, InSolutions,
Servercast and On-Demand Solutions during fiscal 1998, offset by amounts
amortized during fiscal 1998. Accrued income tax liabilities of $10.1 million
at July 31, 1998 reflect current tax payments due, largely as a result of income
earned in fiscal year 1998. Additional paid-in capital increased $74.5 million,
primarily as a result of the issuance of stock for acquisitions and the sales of
stock to Intel and Sumitomo.
Subsequent to fiscal 1998 year-end, in August, 1998, CMG@Ventures II's holdings
in Sage Enterprises were converted into 225,558 shares of restricted Amazon.com,
Inc. common stock as part of a merger wherein Amazon.com, Inc. acquired Sage
Enterprises. CMG@Ventures II had invested $4.5 million in Sage Enterprises
beginning in June, 1997. In October, 1998, CMG@Ventures II's holdings in
Reel.com were converted into 1,943,783 restricted common and 485,946 restricted,
convertible preferred shares of Hollywood Entertainment Corporation (Hollywood
Entertainment) as part of a merger wherein Hollywood Entertainment acquired
Reel.com. The Hollywood Entertainment preferred shares are convertible into
common shares on a 1-for-1 basis, subject to approval by Hollywood Entertainment
shareholders. CMG@Ventures II had invested $6.9 million in Reel.com beginning
in July, 1997. Also in October, 1998, in a separate transaction, the Company
purchased 1,524,644 restricted common and 803,290 restricted, convertible
preferred shares of Hollywood Entertainment for a total purchase price of $31.1
million. The preferred shares are convertible into common shares on a 1-for-1
basis, subject to approval by Hollywood Entertainment shareholders.
In August, 1998, the Company's affiliate, GeoCities, completed its initial
public offering of common stock, issuing approximately 5 million shares at a
price of $17.00 per share. The Company, through its subsidiaries, CMG@Ventures
I and II, has invested a total of $5.9 million in GeoCities beginning in
January, 1996. CMG@Ventures I and II own a combined 8.8 million shares of
GeoCities common stock and options to purchase an additional 1 million shares at
a price of $0.89 per share. The Company expects to record a gain on the
issuance of stock by GeoCities during its fiscal quarter ended October 31, 1998,
representing the increase in the book value of the Company's net equity in
GeoCities as a result of the initial public offering. The gain will be recorded
net of the interests attributable to CMG@Ventures I's and II's profit members.
The Company recently formed its third venture capital fund, CMG@Ventures III,
LLC (CMG@Ventures III), and has begun raising capital from outside investors for
a corresponding outside investment fund, @Ventures III, L.P. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures III, and will be entitled to 2% of the net capital gains of
@Ventures III, L.P. These two funds will invest side by side in all investment
candidates. CMG has committed to fund CMG@Ventures III the greater of $30
million or 19.9% of amounts committed to @Ventures III, L.P.
The Company intends to continue to fund existing and future Internet and
interactive media investment and development efforts, and to actively seek new
CMG@Ventures investment opportunities. The Company believes that existing
working capital and the availability of additional Lycos, GeoCities, Amazon.com
and Hollywood Entertainment shares which could be sold or posted as collateral
for additional loans, will be sufficient to fund its operations, investments and
capital expenditures for the foreseeable future. Additionally, the Company is
currently attempting to raise additional equity capital through a private
placements. Should further capital be needed to fund future investment and
acquisition activity, the Company may seek to raise capital through additional
public or private offerings of the Company's or its subsidiaries' stock, or
through debt financings.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. CMG is in the process of evaluating and correcting the Year 2000
compliance of its proprietary products and services and third party equipment
and software that it uses, as well as its non-information technology systems,
such as building security, voice mail and other systems. The Company's Year
2000 compliance efforts will consist of the following phases: (i) identification
of all software products, information technology systems and non-information
technology systems; (ii) assessment of repair or replacement requirements; (iii)
repair or replacement; (iv) testing; (v) implementation; and (vi) creation of
contingency plans in the event of Year 2000 failures. The Company has
substantially completed phase (i) and has begun phases (ii) and (iii) of its
Year 2000 efforts. The Company expects to complete its Year 2000 compliance
efforts by the end of June, 1999.
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. Preliminary
estimates regarding expected costs to CMG for evaluating and correcting Year
2000 issues are in the range of $3 million to $5 million, but there can be no
assurance that the costs will not exceed such amounts. The Company's
expectations regarding Year 2000 remediation efforts will evolve as it continues
to analyze and correct its systems. The Company has not yet developed a formal
Year 2000-specific contingency plan. The Company expects that a formal Year
2000 contingency plan will evolve as it completes its Year 2000 compliance
efforts. Failure by the Company to resolve Year 2000 issues with respect to its
proprietary products and services could have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
failure of third-party equipment or software to operate properly with regard to
the year 2000 and thereafter could require CMG to incur significant
unanticipated expenses to remedy any problems.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. Forward-looking
statements in this document and those made from time to time by the Company
through its senior management are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking
statements concerning the expected future revenues or earnings or concerning
projected plans, performance, product development, product release or product
shipment, as well as other estimates related to future operations are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations. The Company
undertakes no obligation to publicly release the results of any revisions to
forward-looking statements which may be made to reflect events or circumstances
occurring after the date such statements were made or to reflect the occurrence
of unanticipated events.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to the
following:
FUTURE CAPITAL NEEDS - In recent years CMG has generated significant operating
losses which have been partially funded by gains on sales of its interests in
other companies. In the future, CMG may need to access outside sources of
financing. There can be no assurance that any such financing will be available.
If such financing is available, furthermore, it may involve issuing securities
senior to the Common Stock or equity financings which are dilutive to holders of
the Common Stock.
DEPENDENCE ON A SINGLE CUSTOMER - During fiscal year 1998 a significant portion
of the Company's revenues were derived from a limited number of customers,
including Cisco Systems, Inc. (Cisco), which accounted for 42% of total revenues
and 61% of fulfillment services segment fiscal year 1998 revenues. While the
Company is actively pursuing increasing the number of fulfillment services
customers, the Company believes that its dependence on Cisco will continue.
This concentration of customers may cause net sales and operating results to
fluctuate from quarter to quarter based on Cisco's requirements and the timing
of their orders and shipments. The Company does not have agreements in place
with Cisco to ensure minimum purchase commitments or exclusivity for purchase of
a particular product or service. The Company's operating results could be
materially affected if Cisco were to choose to reduce its level of orders, were
to change to another vendor, were to experience financial, operational, or other
difficulties, or were to delay paying or fail to pay amounts due to the Company.
DEPENDENCE ON CONTINUED GROWTH OF THE INTERNET AND INTERNET INFRASTRUCTURE -
CMG's future success is highly dependent upon continued growth in the use of the
Internet generally and, in particular, as a medium for advertising, marketing,
services and commerce. Commercial use of the Internet is at an early stage of
development, and market acceptance of the Internet as a medium for advertising,
information services and commerce is subject to a high level of uncertainty.
The relative effectiveness of the Internet as an advertising medium as compared
to traditional advertising media, for example, has not been determined.
Further, there can be no assurance that the required infrastructure to support
future Internet user and traffic growth or complementary products or services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if they are developed, that the Internet will become a viable
commercial marketplace for products and services such as those offered by CMG.
If commercial use of the Internet fails to continue to expand, CMG's business,
results of operations and financial condition would be adversely affected.
DEPENDENCE ON KEY PERSONNEL - CMG's performance is substantially dependent on
the performance of its executive officers and other key employees and its
ability to attract, train, retain and motivate high quality personnel,
especially highly qualified technical and managerial personnel. The loss of the
services of any of its executive officers or key employees could have a material
adverse effect on its business, results of operations or financial condition.
Competition for talented personnel is intense, and there can be no assurance
that CMG will be able to continue to attract, train, retain or motivate other
highly qualified technical and managerial personnel in the future.
PRIVACY ISSUES WITH COOKIES - CMG's Internet services use "cookies" to deliver
targeted advertising and marketing initiatives, help compile demographic
information about users and limit the frequency with which an ad is shown to a
user. Cookies are bits of information keyed to a specific computer hard drive
and passed to an Internet site server automatically without the user's knowledge
or consent, but can be removed by the user at any time through the modification
of the user's browser settings. Due to privacy concerns, Germany has imposed
laws restricting the use of cookies, and several Internet commentators,
advocates and governmental bodies have suggested that the use of cookies be
restricted or eliminated. In addition, certain currently available Internet
browsers readily allow a user to delete cookies or prevent cookies from being
stored on the user's drive. Any reduction or limitation in the use of cookies
could limit the effectiveness of CMG's ad targeting and marketing initiatives
which could result not only in reduced marketplace demand for products and
services offered by CMG to operators of Web sites, but also in CMG experiencing
lower rates for its advertisements which could have a material adverse effect on
CMG's business, results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES - CMG is not currently subject to
direct regulation by any government agency, other than regulations applicable to
businesses generally. However, governmental regulators may apply such
regulations to Internet activities. There are currently few laws or regulations
directly applicable to access to or commerce on the Internet. Due to increasing
popularity and use of the Internet, however, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing, characteristics and quality of products
and services. The adoption of any additional laws or regulations may also
decrease the growth of the Internet, which could in turn decrease the demand for
CMG's products and services or could increase CMG's cost of doing business.
Moreover, the applicability to the Internet of a range of existing laws in
domestic and international jurisdictions governing issues such as commerce,
taxation, property ownership, defamation and personal privacy is uncertain and
will likely evolve over the course of many years. Any such new legislation or
regulation or application or interpretation of existing laws, including tax
laws, could have an adverse effect on CMG's business, results of operations and
financial condition.
RAPID CHANGE IN TECHNOLOGY AND DISTRIBUTION CHANNELS - Because the use of the
Internet as a commercial medium is relatively recent and continues to evolve,
the market for CMG's products and services is characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
introductions, shifting distribution channels, and changing customer demands.
Accordingly, CMG's future success will depend on its ability to adapt to this
rapidly evolving marketplace. There can be no assurance that CMG will be able
to adequately adapt its products and services or to acquire new products and
services that can compete successfully or that CMG will be able to establish and
maintain effective distribution channels. Failure to maintain competitive
product and service offerings and distribution channels would have an adverse
affect on CMG's business, results of operations and financial condition. In
addition, responding to these rapid technological changes could require
substantial expenditures by CMG, and there can be no assurance that such
expenditures will yield a positive investment return.
INTENSE COMPETITION - The market for Internet products and services is highly
competitive and lacks significant barriers to entry. CMG expects competition to
intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with CMG's products and
services. There can be no assurance that CMG will be able to compete
successfully or that competitive pressures, including possible downward pressure
on the prices it charges for its products and services, will not adversely
affect its business, results of operations and financial condition.
RISKS INHERENT TO CMG'S ACQUISITION STRATEGY - CMG has in the past, and intends
in the future, to expand though the acquisition of businesses, technologies,
products and services, such as the recent acquisitions of Accipiter, InSolutions
and On-Demand Solutions. Acquisitions may result in the potentially dilutive
issuance of equity securities, the incurrence of additional debt, the write-off
of in-process research and development of software acquisition and development
costs, and the amortization of goodwill and other intangible assets. For
example, for the year ended July 31, 1998, the Company recorded in-process
research and development expense of approximately $19.1 million, primarily in
connection with the acquisition of Accipiter. In September, 1998, a
representative of the Securities and Exchange Commission (the SEC) advised the
American Institute of Certified Public Accountants with respect to factors to be
considered in the valuation of in-process research and development. Although the
release of this new guidance presents the potential risk of adjustments to
reported amounts, if the Company's valuation methodology were to be challenged
by the SEC, the Company believes that its recorded in-process research and
development expenses were determined in compliance with such guidance. Any such
adjustment could result in an increase in the amount of goodwill recorded, which
would result in higher amortization expenses and, therefore, adversely affect
the Company's operating results. Further, acquisitions involve a number of
special problems, including difficulty integrating technologies, operations and
personnel and diversion of management attention in connection with both
negotiating the acquisitions and integrating the assets. There can be no
assurance that CMG will be successful in addressing such problems. In addition,
growth associated with numerous acquisitions places significant strain on CMG's
managerial and operational resources. CMG's future operating results will depend
to a significant degree on its ability to successfully manage growth and
integrate acquisitions. Furthermore, many of CMG's investments are in early-
stage companies, with limited operating histories and limited or no revenues;
there can be no assurance that CMG will be successful in developing such
companies.
UNCERTAINTIES ASSOCIATED WITH SELLING ASSETS - A significant element of CMG's
business plan involves selling, in public or private offerings, portions of the
companies it has acquired and developed. CMG's ability to engage in any such
transactions, the timing of such transactions and the amount of proceeds from
such transactions are dependant on market and other conditions largely beyond
CMG's control. Accordingly, there can be no assurance that CMG will be able to
engage in such transactions in the future or that when CMG is able to engage in
such transactions they will be at favorable prices. If CMG were unable to
liquidate portions of its portfolio companies at favorable prices, CMG's
business, financial condition and results of operations would be adversely
affected.
FLUCTUATING VALUE OF CERTAIN STOCK ASSETS - A portion of the Company's assets
includes the equity securities of both publicly traded and non-publicly traded
companies. Such assets include a large number of shares of common stock of
Lycos and GeoCities, both publicly traded companies. Fluctuations in the market
price and valuations of the Company's holdings in such other companies, which
are partially dependent on market and other conditions that are beyond the
Company's control, may result in fluctuations of the market price of the
Company's Common Stock.
MANAGEMENT OF GROWTH - CMG's growth has placed, and is expected to continue to
place, a significant strain on CMG's managerial, operational and financial
resources. Further, as the number of CMG's users, advertisers and other
business partners grows, CMG is required to manage multiple relationships with
various customers, strategic partners and other third parties. These
requirements will be exacerbated in the event of further growth of CMG or in the
number of its strategic relationships or sponsorship arrangements. There can be
no assurance that CMG's systems, procedures or controls will be adequate to
support CMG's operations or that CMG management will be able to achieve the
rapid execution necessary to successfully offer its services and implement its
business plan. CMG's future operating results will also depend on its ability
to expand its sales and marketing organization and expand its support
organization commensurate with the growth of its business and the Internet. If
CMG is unable to manage growth effectively, CMG's business, results of
operations and financial condition will be adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT - The Company believes that establishing
and maintaining its brand names is a crucial aspect of its effort to continue to
expand and attract Internet business and that the importance of brand
recognition will increase in the future due to the growing number of Internet
companies. Promotion and enhancement of the Company's brand names will depend
largely on the Company's ability to provide consistently high-quality products
and services, which cannot be assured. If consumers do not perceive the
Company's existing products and services to be of high quality, or if the
Company introduces new products and services or enters into new business
ventures that are not favorably received by consumers, the value of the
Company's brand names could be diminished.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS - CMG is currently, and expects to be in
the future, dependent on a number of third-party relationships. These
relationships include arrangements relating to the creation of traffic on CMG-
affiliated Web sites and resulting generation of advertising and commerce-
related revenue. The termination of, or the failure of such CMG-affiliated Web
sites to renew on reasonable terms, such relationships could have an adverse
effect on CMG's business, results of operations and financial condition. CMG
also is generally dependent on other third-party relationships with advertisers,
sponsors and partners. Most of these arrangements do not require future minimum
commitments to use CMG's services, are often not exclusive and are often short-
term or may be terminated at the convenience of the other party. There can be
no assurance that these third parties will not reassess their commitment to CMG
at any time in the future, or that they will not develop their own competitive
services or products. Further, there can be no assurance that the services of
these companies will achieve market acceptance or commercial success and
therefore there can be no assurance that CMG's existing relationships will
result in sustained or successful business partnerships or significant revenues
for CMG.
FLUCTUATIONS IN QUARTERLY RESULTS - CMG's operating results have fluctuated
widely on a quarterly basis during the last several years, and the Company
expects to experience significant fluctuations in future quarterly operating
results. Such fluctuations have been, and may in the future be, caused by
numerous factors, many of which are outside CMG's control, including demand for
CMG's products and services, incurrence of costs associated with acquisitions,
divestitures and investments, the timing of divestitures, market acceptance of
new products and services, specific economic conditions in the Internet and
direct marketing industries, and general economic conditions. The emerging
nature of commercial use of the Internet makes predictions concerning future
revenues difficult. CMG believes that period-to-period comparisons of its
results of operations will not necessarily be meaningful and should not be
relied upon as indicative of future performance.
COMPUTER OPERATIONS - The Company's operations are dependent in part upon its
ability to protect its computer operating systems against physical damage from
fire, floods, earthquakes, power loss, telecommunications failures, break-ins
and similar events. The Company's data centers are equipped with generator back
up equipment, multiple fiber lines and other liquid and fire protection systems
for protection in case of disaster. Despite the implementation of physical and
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.
DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT - CMG's success depends
in part on its proprietary technology and its ability to protect such technology
under applicable patent, trademark, copyright and trade secret laws.
Accordingly, CMG seeks to protect the intellectual property rights underlying
its products and services by filing applications and registrations, as
appropriate, and through its agreements with employees, suppliers, customers and
partners. However, there can be no assurance that measures adopted by CMG to
protect its proprietary technology will prevent infringement or misappropriation
of such technology. Further, legal standards relating to the validity,
enforceability and scope of protection of certain proprietary rights in the
context of the Internet industry currently are not resolved. CMG licenses
certain components of its products and services from third parties. The failure
by CMG to maintain such licenses, or to find replacement components in a timely
and cost effective manner, could have a material adverse effect on CMG's
business, results of operation and financial condition. From time to time CMG
has been, and expects to continue to be, subject to claims in the ordinary
course of its business, including claims of alleged infringement of intellectual
property rights of third parties by CMG. Any such claim could subject CMG to
significant liability for damages and could result in invalidation of CMG's
proprietary rights and, even if not meritorious, could be time-consuming and
expensive to defend, and could result in the diversion of management time and
attention, any of which could have an adverse effect on CMG's business, results
of operations or financial condition.