Exhibit 13.3
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
July 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 61,537 $ 59,762
Available-for-sale securities 5,764 5,945
Accounts receivable, trade, less allowance for doubtful accounts of $1,055 and $1,083 in 1998 and 1997 23,960 28,935
Inventories 8,250 3,077
Prepaid expenses 3,210 6,174
Other current assets 2,364 2,798
-------- --------
Total current assets 105,085 106,691
-------- --------
Property and equipment 24,397 20,091
Less accumulated depreciation and amortization 10,424 8,947
-------- --------
Net property and equipment 13,973 11,144
-------- --------
Investments in affiliates 66,187 9,160
Costs in excess of net assets of subsidiaries acquired, net of accumulated
amortization of $3,508 in 1998 and $1,420 in 1997 49,682 17,109
Other assets 2,533 4,250
-------- --------
$237,460 $148,354
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 27,656 $ 22,494
Current installments of long-term debt 16,594 3,221
Accounts payable 11,261 9,959
Accrued income taxes 10,085 --
Accrued expenses 20,534 18,341
Deferred revenues 4,932 13,680
Other current liabilities 1,239 442
-------- --------
Total current liabilities 92,301 68,137
-------- --------
Long-term debt, less current installments 1,373 9,550
Long-term deferred revenues -- 5,100
Deferred income taxes 10,528 8,481
Other long-term liabilities 4,428 2,119
Minority interest 11,045 25,519
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share. Authorized 5,000,000 shares; none issued -- --
Common stock, $0.01 par value per share. Authorized 40,000,000 shares; issued and
outstanding 23,033,943 shares at July 31, 1998 and 19,319,086 shares at July 31, 1997 230 193
Additional paid-in capital 91,260 16,783
Net unrealized gain (loss) on available-for-sale securities (436) 852
Deferred compensation (1,442) --
Retained earnings 28,173 11,620
-------- --------
Total stockholders' equity 117,785 29,448
-------- --------
$237,460 $148,354
======== ========
see accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended July 31,
1998 1997 1996
--------- ---------- ---------
Net revenues $ 91,484 $ 70,607 $ 28,485
Operating expenses:
Cost of revenues 78,831 42,152 17,909
Research and development 19,709 25,058 6,971
In-process research and development 19,135 1,312 2,691
Selling 31,071 37,583 11,666
General and administrative 21,749 17,611 9,822
-------- -------- --------
Total operating expenses 170,495 123,716 49,059
-------- -------- --------
Operating loss (79,011) (53,109) (20,574)
-------- -------- --------
Other income (deductions):
Interest income 2,426 3,368 2,750
Interest expense (3,296) (1,619) (59)
Gain on sale of data warehouse product rights 8,437 -- --
Gain on sale of Lycos, Inc. common stock 97,158 -- --
Gain on stock issuance by Lycos, Inc. 28,301 -- 19,575
Gain on sale of available-for-sale securities 4,174 -- 30,049
Gain on sale of investment in TeleT Communications -- 3,616 --
Gain on sale of NetCarta Corporation -- 15,111 --
Gain on dividend distribution of Lycos, Inc. common stock -- 8,413 --
Equity in losses of affiliates (11,821) (5,556) (2,915)
Minority interest (28) 4,787 2,169
-------- -------- --------
125,351 28,120 51,569
Income (loss) before income taxes 46,340 (24,989) 30,995
Income tax expense (benefit) 29,787 (2,962) 16,673
-------- -------- --------
Net income (loss) $ 16,553 $(22,027) $ 14,322
======== ======== ========
Earnings (loss) per share:
Basic $ 0.79 $ (1.17) $ 0.80
======== ======== ========
Diluted $ 0.74 $ (1.17) $ 0.74
======== ======== ========
Weighted average shares outstanding:
Basic 20,833 18,858 18,008
======== ======== ========
Diluted 22,515 18,858 19,364
======== ======== ========
see accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON TOTAL
COMMON PAID-IN AVAILABLE-FOR- DEFERRED RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL SALE SECURITY COMPENSATION EARNINGS STOCK EQUITY
----- ------- ------------- ------------ -------- ----- ------
Balance at July 31, 1995
(17,677,440 shares) $177 $ 6,973 $ 18,005 $ -- $ 30,335 $ -- $ 55,490
Net income -- -- -- -- 14,322 -- 14,322
Issuance of common stock
(656,054 shares) 6 365 -- -- -- -- 371
Tax benefit of stock option exercises -- 695 -- -- -- -- 695
Effect of subsidiaries' equity
transactions -- 1,119 -- -- -- -- 1,119
Sale of available-for-sale securities -- -- (18,005) -- -- -- (18,005)
------ ------- --------- --------- -------- ----- --------
Balance at July 31, 1996
(18,333,494 shares) 183 9,152 -- -- 44,657 -- 53,992
Net loss -- -- -- -- (22,027) -- (22,027)
Dividend of Lycos, Inc. common
stock -- -- -- -- (11,010) -- (11,010)
Net unrealized gain on
available-for-sale securities -- -- 852 -- -- -- 852
Purchase of treasury stock
(200,000 shares) -- -- -- -- -- (984) (984)
Issuance of common stock
(1,185,592 shares) 10 7,176 -- -- -- 984 8,170
Tax benefit of stock option exercises -- 277 -- -- -- -- 277
Effect of subsidiaries' equity
transactions -- 178 -- -- -- -- 178
------ ------- --------- --------- -------- ----- --------
Balance at July 31, 1997
(19,319,086 shares) 193 16,783 852 -- 11,620 -- 29,448
Net income -- -- -- -- 16,553 -- 16,553
Issuance of common stock
(3,714,857 shares) 37 67,763 -- -- -- -- 67,800
Deferred compensation related to
acquisition of Accipiter, Inc. -- 1,731 -- (1,731) -- -- --
Amortization of deferred compensation -- -- -- 289 -- -- 289
Sale of available-for-sale securities -- -- (852) -- -- -- (852)
Net unrealized loss on
available-for-sale securities -- -- (436) -- -- -- (436)
Tax benefit of stock option exercises -- 3,114 -- -- -- -- 3,114
Effect of subsidiaries' equity
transactions -- 1,869 -- -- -- -- 1,869
------ ------- --------- --------- -------- ----- --------
Balance at July 31, 1998
(23,033,943 shares) $230 $91,260 $ (436) $(1,442) $ 28,173 $ -- $117,785
====== ======= ========= ========= ======== ===== ========
see accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended July 31,
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $ 16,553 $(22,027) $ 14,322
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization 6,793 5,307 2,823
Deferred income taxes (802) (871) 8,283
Non-operating gains (138,070) (27,140) (49,624)
Equity in losses of affiliates 11,821 5,556 2,915
Minority interest 28 (4,787) (2,169)
In-process research and development 19,135 1,312 2,691
Changes in operating assets and liabilities, excluding effects from acquisitions and
divestitures of subsidiaries:
Trade accounts receivable (8,656) (11,963) (7,269)
Inventories (3,873) (2,390) --
Prepaid expenses (1,269) (4,046) (1,762)
Accounts payable and accrued expenses 8,600 10,039 8,232
Deferred revenues 3,618 12,866 4,595
Refundable and accrued income taxes, net 15,031 (3,157) (7,678)
Other assets and liabilities (634) (352) (685)
--------- -------- --------
Net cash used for operating activities (71,725) (41,653) (25,326)
--------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (8,189) (6,939) (7,068)
Investments in affiliates and acquisitions of subsidiaries, net of cash acquired (34,512) (23,566) (6,010)
Proceeds from sale of data warehouse product rights 9,543 -- --
Proceeds from sales of Lycos, Inc. common stock 108,876 -- --
Proceeds from sale or maturities of available-for-sale securities 7,555 13,069 69,918
Purchases of available-for-sale securities (5,000) -- (25,526)
Proceeds from sales of NetCarta Corporation and investment in TeleT Communications -- 19,018 --
Reduction in cash due to deconsolidation of Lycos, Inc. (41,017) -- --
Other, net (338) (734) (67)
--------- -------- --------
Net cash provided by investing activities 36,918 848 31,247
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable, net of repayments 4,456 22,630 --
Proceeds from issuance of long-term debt 10,250 6,500 --
Repayments of long-term debt (7,521) (1,230) --
Sale of common and treasury stock 23,206 8,170 371
Purchase of treasury stock -- (984) --
Net proceeds from issuance of stock by subsidiaries 3,526 -- 48,058
Other 2,665 2,094 (386)
--------- -------- --------
Net cash provided by financing activities 36,582 37,180 48,043
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,775 (3,625) 53,964
Cash and cash equivalents at beginning of year 59,762 63,387 9,423
--------- -------- --------
Cash and cash equivalents at end of year $ 61,537 $ 59,762 $ 63,387
========= ======== ========
see accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) Nature of Operations
CMG Information Services, Inc. (the Company) is a direct marketing service
provider that invests in, develops and integrates advanced, Internet,
interactive, and database management technologies. CMG and its subsidiaries
offer their 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.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Presentation
The consolidated financial statements of the Company include its wholly-owned
and majority-owned subsidiaries which at July 31, 1998 include, Engage
Technologies, Inc. (Engage), Accipiter, Inc. (Accipiter), CMG Direct Corporation
(CMG Direct), SalesLink Corporation (SalesLink), InSolutions, Inc.
(InSolutions), On-Demand Solutions, Inc. (On-Demand Solutions), CMG@Ventures,
Inc., CMG@Ventures I, LLC (CMG@Ventures I, formerly CMG@Ventures, L.P.),
CMG@Ventures Capital Corporation, CMG Securities Corporation, CMG@Ventures II,
LLC (CMG@Ventures II), Blaxxun Interactive, Inc. (Blaxxun), ADSmart Corporation
(ADSmart), InfoMation Publishing Corporation (Infomation), Planet Direct
Corporation (Planet Direct), Navisite Internet Services Corporation (NaviSite),
Password Internet Publishing Corporation (Password) and Vicinity Corporation
(Vicinity). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for investments in businesses
in which it owns between 20% and 50% using the equity method and accounts for
investments in which it owns less than 20% at original cost. Certain amounts
for prior periods have been reclassified to conform with current year
presentations.
(b) Revenue Recognition
Revenue from the sale of mailing lists is recognized when the mailing labels are
shipped. Revenue for services is recognized upon completion of the service.
The Company's advertising revenues are derived principally from short-term
Internet advertising contracts in which the Company guarantees a minimum number
of impressions for a fixed fee or on a per-impression basis with an established
minimum fee. Revenues from advertising are recognized as the services are
performed.
The Company's license and product revenues are derived principally from product
licensing fees and fees from maintenance and support of its products. License
and product revenues are generally recognized upon delivery provided that no
significant Company obligations remain and collection of the receivable is
probable. In cases where there are significant remaining obligations, the
Company defers such revenue until those obligations are satisfied. Fees from
maintenance and support of the Company's products, including those fees bundled
with the initial licensing fees, are deferred and recognized ratably over the
service period.
(c) Gain on Issuances of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time, the subsidiary is an operating entity and not
engaged principally in research and development, the Company records the
increase as a gain in its Consolidated Statements of Operations. Otherwise, the
increase is reflected in "effect of subsidiaries' equity transactions" in the
Company's Consolidated Statements of Stockholders' Equity.
If gains have been recognized on issuances of a subsidiary's stock and shares of
the subsidiary are subsequently repurchased by the subsidiary or by the Company,
gain recognition does not occur on issuances subsequent to the date of a
repurchase until such time as shares have been issued in an amount equivalent to
the number of repurchased shares. Such transactions are reflected as equity
transactions, and the net effect of these transactions is reflected in the
Consolidated Statements of Stockholders' Equity.
(d) Cash Equivalents and Statement of Cash Flows Supplemental Information
Highly liquid investments with maturities of three months or less at the time of
acquisition are considered cash equivalents.
Net cash used for operating activities reflect cash payments for interest and
income taxes, net of income tax refunds received, as follows:
Year ended July 31,
1998 1997 1986
----- ----- -----
Interest $ 2,856,00 $1,429,000 $ 26,000
=========== =========== ===========
Income taxes $15,720,000 $1,856,000 $16,069,000
=========== =========== ===========
During fiscal year 1998, significant non-cash investing activities included the
sale of data warehouse product rights by the Company's subsidiary, Engage, in
exchange for available-for-sale securities in addition to $9.5 million in cash
(see note 3). Also, portions of the consideration for acquisitions of
businesses by the Company, or its subsidiary, during fiscal 1998 included the
issuance of shares of the Company's common stock and the issuance of seller's
notes (see note 7).
During fiscal year 1997, significant non-cash investing activities included the
sale of the Company's equity interest in TeleT Communications, LLC (TeleT) in
exchange for available-for-sale securities in addition to $550,000 in cash (see
note 10) and the acquisition of one subsidiary, Pacific Direct
Marketing Corporation (Pacific Link), for consideration which included $7.5
million financed through a seller's note (see note 7). Significant non-cash
financing activities in fiscal 1997 consisted of the dividend distribution of
603,000 shares of Lycos stock to CMG shareholders (see note 14).
During fiscal year 1996, in a non-cash investing transaction, the Company's then
consolidated subsidiary, Lycos, Inc. (Lycos), acquired Point Communications
Corporation in exchange for 526,316 shares of Lycos stock.
(e) Fair Value of Financial Instruments
The carrying value for cash and cash equivalents, accounts receivable, accounts
payable and notes payable, approximates fair value because of the short maturity
of these instruments. The carrying value of long-term debt approximates its fair
value, as estimated by using discounted future cash flows based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
(f) Marketable Securities
The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designation at each balance sheet
date. Marketable securities have been classified as available-for-sale and are
carried at fair value, based on quoted market prices, net of market value
discount to reflect any restrictions on transferability, with unrealized gains
and losses reported as a separate component of stockholders' equity.
(g) Inventories
Inventories consist primarily of raw materials used in the Company's fulfillment
services segment and are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
(h) Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived assets
used in operations when indicators of impairment are present. On an on-going
basis, management reviews the value and period of amortization or depreciation
of long-lived assets, including costs in excess of net assets of subsidiaries
acquired. During this review, the Company reevaluates the significant
assumptions used in determining the original cost of long-lived assets. Although
the assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets based upon events or circumstances which have
occurred since acquisition.
(i) Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is
provided on the straight-line basis over the estimated useful lives of the
respective assets (three to seven years). Leasehold improvements are amortized
on a straight-line basis over the lesser of the estimated useful life of the
asset or the lease term.
Maintenance and repairs are charged to operating expenses as incurred. Major
renewals and betterments are added to property and equipment accounts at cost.
(j) Investments in Affiliates
The Company's investments in affiliated companies for which its ownership
exceeds 20%, but which are not majority-owned or controlled, are accounted for
using the equity method. Under the equity method, the Company's proportionate
share of each affiliate's net income or loss 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". Amortization is recorded on a straight-line
basis over periods ranging from five to ten years.
At the time an affiliate sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that affiliate
increases. If at that time, the affiliate is an operating entity and not
engaged principally in research and development, the Company records the
increase as a gain in its Consolidated Statements of Operations.
(k) Costs in Excess of Net Assets of Subsidiaries Acquired
The costs in excess of net assets of subsidiaries acquired (goodwill) are
principally being amortized over periods expected to be benefited, ranging from
five to twenty years.
(l) Deferred Revenues
Deferred revenues are comprised of license fees to be earned in the future on
license agreements existing at the balance sheet date and billings in excess of
earnings on both license and advertising contracts.
(m) Research and Development Costs and Software Costs
Expenditures related to the development of new products and processes, including
significant improvements and refinements to existing products and the
development of software, are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
detailed program design or working model of the product, and ending when a
product is available for general release to customers. To date, the
establishment of technological feasibility and general release have
substantially coincided. As a result, capitalized software development costs
have not been significant. Additionally, at the date of acquisition or
investment, the Company evaluates the components of the purchase price of each
acquisition or investment to identify amounts allocated to in-process research
and development. Upon completion of acquisition accounting and valuation, such
amounts are charged to expense if technological feasibility had not been reached
at the acquisition date. 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. Based on a review of the valuation
methodologies applied, the Company believes it has taken these factors into
consideration in determining amounts recorded in the current fiscal year ended
July 31, 1998.
(n) Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(o) Earnings (Loss) Per Share
During the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No.
128 required the Company to change the method formerly used to compute earnings
per share and to restate all prior periods presented. Basic earnings per share
is computed based on the weighted average number of common shares outstanding
during the period. Weighted average common equivalent shares outstanding during
the period, using the "treasury stock method", are included in the calculation
of diluted earnings per share only when the effect of their inclusion would be
dilutive. Accordingly, since the Company reported a net loss for the year ended
July 31, 1997, common equivalent shares have not been included in the
calculation of diluted earnings per share for that period.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss), the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial during the years ended July 31,
1998, 1997 and 1996.
The reconciliation of the denominators of the basic and diluted earnings (loss)
per share computations for the Company's reported net income (loss) is as
follows:
Years Ended July 31,
1998 1997 1996
---------- ---------- ----------
Weighted average number of common shares outstanding -- basic 20,833,000 18,858,000 18,008,000
Weighted average number of dilutive common stock equivalents outstanding 1,682,000 -- 1,356,000
---------- ---------- ----------
Weighted average number of common shares outstanding -- diluted 22,515,000 18,858,000 19,364,000
========== ========== ==========
(p) Stock-Based Compensation Plans
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
As permitted by SFAS No. 123, the Company measures compensation cost in
accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity. Therefore, the adoption of SFAS No. 123 was
not material to the Company's financial condition or results of operations;
however, the pro forma impact on earnings per share has been disclosed in the
Notes to Consolidated Financial Statements as required by SFAS No. 123 (see note
15).
(q) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(r) Diversification of Risk
Sales to one customer, Cisco Systems, Inc. (Cisco), accounted for 42% and 24% of
net revenues and 61% and 47% of fulfillment services segment net revenues for
fiscal year 1998 and 1997, respectively. Accounts receivable from this customer
amounted to approximately 26% and 14% of total trade accounts receivable at July
31, 1998 and July 31, 1997, respectively. The Company's products and services
are provided to customers primarily in North America.
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash equivalents, available-for-sale securities, and accounts
receivable. The Company's cash equivalent investment portfolio is diversified
and consists primarily of short-term investment grade securities. To reduce
risk, the Company performs ongoing credit evaluations of its customers'
financial conditions and generally does not require collateral on accounts
receivable. The Company has not incurred any material write-offs related to its
accounts receivable.
The Company enters into interest rate swap and cap agreements to reduce the
impact of changes in interest rates on its floating rate debt. The swap
agreements are contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of interest rate agreements
are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The differential paid or
received on interest rate agreements is recognized as an adjustment to interest
expense.
(s) New Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is a measure
of all changes in stockholders' equity that result from recognized transactions
and other economic events of a period, other than transactions with owners in
their capacity as owners. SFAS No. 131 establishes standards for the way that
public business enterprises report selected information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 requires the use of the "management approach" in
disclosing segment information, based largely on how senior management generally
analyzes the business operations. SFAS No. 130 and 131 become effective for the
Company in fiscal 1999. The Company is in the process of determining the impact
of these standards, if any, on its consolidated financial statements and related
disclosures.
In December, 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP 97-2
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2 is effective for transactions entered into beginning in the
Company's fiscal year 1999 and may require the Company to modify certain aspects
of its revenue recognition policies. The Company does not expect the adoption
of SOP 97-2 to have a material impact on the Company's consolidated results of
operations.
In March, 1998, the Accounting Standards Executive Committee of the American
institute of Certified Public Accountants, issued SOP 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use," which
requires the capitalization of certain internal costs related to the
implementation of computer software obtained for internal use. The Company is
required to adopt this standard in the first quarter of fiscal year 2000. The
Company expects that the adoption of SOP 98-1 will not have a material impact on
the Company's financial position or its results of operations.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2000. The Company expects that the adoption of SFAS No.
133 will not have a material impact on the Company's financial position or its
results of operations.
(3) Segment Information
The Company's continuing operations have been classified in three primary
business segments, (i) investment and development, (ii) fulfillment services,
and (iii) lists and database services. Investment and development is a business
segment formed during the third quarter of fiscal year 1995 to focus on
strategic investment and development opportunities afforded by the Internet and
interactive media markets. Fulfillment services include product and literature
fulfillment and turnkey outsourcing, telemarketing, and sales/lead inquiry
management. Lists and database services consists of marketing of traditional
customer and prospect list databases and services as well as providing solutions
for integrating traditional direct marketing with Internet marketing. Corporate
and other includes available-for-sale securities, certain cash equivalents and
certain other assets which are not identifiable to the operations of the
Company's primary business segments.
From its inception in August, 1995, through July 31, 1997, the Company's
subsidiary, 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 through July 31,
1997. 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, and recorded a pretax gain of $8,437,000 on the sale. 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 has 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.
During fiscal 1998, Cisco accounted for approximately 61% of net revenues in the
fulfillment services segment. Previously, Cisco accounted for 47% of fulfillment
services segment net revenues in fiscal 1997 and three customers individually
accounted for 15%, 15% and 13% of segment net revenues in fiscal 1996. During
the fiscal years ended July 31, 1997 and 1996, one significant customer
accounted for approximately 12% and 13%, respectively, of net revenues in the
lists and database services segment. Summarized financial information by
business segment for the fiscal years ended July 31, 1998, 1997 and 1996 is as
follows:
Years Ended July 31,
1998 1997 1996
---- ---- ----
Net revenues:
Investment and development $ 18,709,000 $ 23,917,000 $ 5,665,000
Fulfillment services 63,207,000 36,139,000 12,070,000
Lists and database services 9,568,000 10,551,000 10,750,000
------------ ------------ ------------
$ 91,484,000 $ 70,607,000 $ 28,485,000
============ ============ ============
Operating income (loss):
Investment and development $(79,898,000) $(45,250,000) $(19,961,000)
Fulfillment services 1,444,000 4,330,000 1,566,000
Lists and database services (557,000) (12,189,000) (2,179,000)
------------ ------------ ------------
$(79,011,000) $(53,109,000) $(20,574,000)
============ ============ ============
Total assets:
Investment and development $ 96,135,000 $ 87,626,000 $ 68,256,000
Fulfillment services 67,356,000 32,734,000 6,366,000
Lists and database services 4,005,000 10,317,000 8,338,000
Corporate and other 69,964,000 17,677,000 26,543,000
------------ ------------ ------------
$237,460,000 $148,354,000 $109,503,000
============ ============ ============
Capital expenditures:
Investment and development $ 3,710,000 $ 3,745,000 $ 3,128,000
Fulfillment services 4,333,000 1,064,000 800,000
Lists and database services 146,000 2,130,000 3,140,000
------------ ------------ ------------
$ 8,189,000 $ 6,939,000 $ 7,068,000
============ ============ ============
Depreciation and amortization:
Investment and development $ 3,782,000 $ 2,410,000 $ 1,546,000
Fulfillment services 2,556,000 1,634,000 460,000
Lists and database services 455,000 1,263,000 817,000
------------ ------------ ------------
$ 6,793,000 $ 5,307,000 $ 2,823,000
============ ============ ============
The fulfillment services segment operating income was adjusted during the fourth
quarter of fiscal year 1998 to correct prior quarters' understatements of cost
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 would have been as follows:
Three Months Ended
October 31, January 31, April 30, July 31,
----------- ----------- --------- --------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
As Previously Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
(4) Deconsolidation of Lycos, Inc.
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 amounts 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
=========== ===========
The following table contains the summarized financial information for Lycos
subsequent to deconsolidation in November, 1997:
Condensed Statement of Operations:
Nine Months Ended
July 31, 1998
-------------
Net revenues $ 46,757,000
============
Operating loss $(99,536,000)
============
Net loss $(97,024,000)
============
Note: Lycos' operating and net loss for the nine months ended July 31, 1998
includes in-process research and development and other one-time merger
related charges of $92,479,000.
Condensed Balance Sheet:
July 31, 1998
-------------
Current assets $209,671,000
Noncurrent assets 39,087,000
------------
Total assets $248,758,000
============
Current liabilities $ 53,734,000
Noncurrent liabilities 26,337,000
Stockholders' equity 168,687,000
------------
Total liabilities and stockholders' equity $248,758,000
============
(5) Available-for-Sale Securities
At July 31, 1998, available-for-sale securities consist of 334,728 shares of
Open Market, Inc. common stock and 238,160 shares of Red Brick common stock,
carried at fair value and based on quoted market prices, net of a market value
discount to reflect the remaining restriction on transferability for the Red
Brick common shares. A $314,000 unrealized holding gain and a $750,000
unrealized holding loss was recorded on the Open Market, Inc. and Red Brick
shares, respectively, based on the change in market value of the respective
stocks from dates of acquisition to July 31, 1998. The net $436,000 unrealized
holding loss is presented in the equity section of the July 31, 1998
Consolidated Balance Sheet.
During the first quarter of fiscal year 1998, CMG@Ventures I distributed 224,795
of its shares of Premiere Technologies, Inc. (Premiere) common stock to the
Company, and allocated 58,538 Premiere shares to CMG@Ventures I's profit
members. The Company sold its 224,795 shares during fiscal 1998 for proceeds of
$7,555,000, realizing a net gain of $4,174,000 on the sale.
At July 31, 1997, available-for-sale securities consist of 283,333 shares of
Premiere common stock carried at fair value, based on quoted market price, net
of a market value discount to reflect restrictions on transferability through
September 19, 1997. An $852,000 unrealized gain, based on the change in market
value of the stock from date of acquisition to July 31, 1997, is presented in
the equity section of the July 31, 1997 Consolidated Balance Sheet, net of
deferred income taxes.
(6) Property and Equipment
Property and equipment consists of the following:
July 31,
1998 1997
---- ----
Machinery and equipment $13,873,000 $10,609,000
Software 4,188,000 3,693,000
Leasehold improvements 2,928,000 2,646,000
Office furniture and equipment 2,750,000 2,485,000
Other equipment 658,000 658,000
----------- -----------
$24,397,000 $20,091,000
=========== ===========
(7) Business Combinations
On October 24, 1996, the Company's subsidiary, SalesLink, acquired Pacific Link,
a company specializing in high technology product and literature fulfillment and
turnkey outsourcing. The consideration for the acquisition was $17,000,000,
$8,500,000 of which was paid in cash at the date of acquisition, $1,000,000 of
which SalesLink paid (along with interest at the annual rate of 7%) in February
1997, and the remaining $7,500,000 of which was financed through a seller's note
(see note 12). The sources of the cash portion of the purchase price were
$3,000,000 from corporate funds provided by the Company to SalesLink for the
acquisition and $5,500,000 from a bank loan.
On April 9, 1998, the Company acquired Accipiter, a company specializing in
Internet advertising management solutions, in exchange for 1,263,692 shares of
the Company's common stock. The shares issued by the Company in the acquisition
of Accipiter are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for periods ranging from six to twenty-four
months from the date of issuance. The total purchase price for Accipiter was
valued at $30,178,000, including costs of acquisition of $198,000. The value of
the Company's shares included in the purchase price was recorded net of a
weighted average 15% market value discount to reflect the restrictions on
transferability. Of the purchase price, $18,010,000 was allocated to in-process
research and development which has been charged to operations during fiscal
1998.
Approximately $1.7 million of deferred compensation was recorded during fiscal
1998 relating to approximately 43,000 of the Company's common shares issued to
employee stockholders of Accipiter which are being held in escrow. These shares
are subject to forfeiture upon termination of employment over a two-year period.
Deferred compensation expense will be recognized over the two-year service
period.
Also during fiscal 1998, the Company, or its subsidiaries, completed the
acquisition of three other companies for purchase prices valued at a combined
total of $23,630,000, including InSolutions ($15,218,000 purchase price in June,
1998), Servercast Communications, LLC (Servercast, $1,020,000 in July, 1998) and
On-Demand Solutions ($7,392,000 on July 31, 1998). The combined consideration
for these acquisitions consisted of 310,402 shares of the Company's common stock
valued at $14,585,000, $6,578,000 in cash and $2,467,000 financed through
seller's 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 twelve to twenty-four months. The value 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% to reflect the restrictions on
transferability. $5,000,000 of the cash consideration was provided through
additional bank borrowings by the Company's subsidiary, SalesLink. Additional
consideration of up to $2,783,000 could be paid related to the acquisition of
InSolutions if certain future performance goals are met.
The acquisitions during fiscal 1997 and 1998 have been accounted for using the
purchase method, and, accordingly, the purchase prices have been allocated to
the assets purchased and liabilities assumed based upon their fair values at the
dates of acquisition. The portion of the purchase prices allocated to goodwill
will be amortized on a straight line basis over five years for Accipiter and
Servercast and over 15 years for Pacific Link, InSolutions and On-Demand
Solutions. The acquired companies are included in the Company's consolidated
financial statements from the dates of acquisition.
The purchase prices of the acquisitions during fiscal 1998 and 1997 were
allocated as follows:
1998 1997
------------------------------ ------------------
Accipiter All Others Pacific Link
--------- ---------- ------------
Working capital, including cash acquired $ 441,000 $ (989,000) $(1,204,000)
Property, plant and equipment 262,000 1,484,000 713,000
Other assets 2,000 173,000 385,000
In-process research and development 18,010,000 -- --
Goodwill 11,463,000 23,357,000 17,229,000
Other long-term liabilities -- (395,000) (123,000)
----------- ----------- -----------
Purchase price $30,178,000 $23,630,000 $17,000,000
=========== =========== ===========
The following unaudited pro forma financial information presents the
consolidated operations of the Company and the acquired companies as if the
acquisitions had occurred as of the beginning of fiscal 1997, after giving
effect to certain adjustments including increased amortization of goodwill
related to the acquisitions, increased interest expense related to long-term
debt issued in conjunction with the acquisitions and decreased compensation for
certain officers to reflect contractual post-acquisition compensation. The one-
time in-process research and development charge of $18,010,000 which was
recorded in fiscal 1998 related to the acquisition of Accipiter is not included
in the proforma results as it is unusual and not indicative of normal operating
results. The unaudited proforma information excludes the impact of the
acquisition of Servercast since it is not material to the Company's consolidated
financial statements. The unaudited pro forma financial information is provided
for informational purposes only and should not be construed to be indicative of
the Company's consolidated results of operations had the acquisitions been
consummated on the dates assumed and do not project the Company's results of
operations for any future period:
Year ended July 31,
1998 1997
---- ----
Net revenues $117,384,000 $ 98,209,000
============ ============
Net income (loss) $ 29,101,000 $(27,775,000)
============ ============
Basic earnings (loss) per share $ 1.32 $ (1.39)
============ ============
Diluted earnings (loss) per share $ 1.23 $ (1.39)
============ ============
(8) CMG @Ventures Investments
During fiscal year 1996, the Company, through CMG@Ventures I, invested $19.2
million in eight companies, including $2 million in Vicinity, $750,000 in TeleT,
$2 million in GeoCities, $4 million in Blaxxun, $4.5 million in NetCarta
Corporation (NetCarta), $1 million in Lycos, $1.75 million in Ikonic
Interactive, Inc., and $3.2 million in FreeMark Communications, Inc. (FreeMark).
CMG@Ventures I invested a total of $10.8 million in five companies during fiscal
year 1997, including $2 million in Parable LLC (Parable), $1.2 million in Lycos,
$3.8 million in NetCarta, $1.8 million in Vicinity and $2 million in GeoCities.
During fiscal 1997, the Company completed its minimum funding commitment of $35
million to CMG@Ventures I, and formed a new limited liability company
subsidiary, CMG@Ventures II, to continue the Company's Internet venture capital
investment model. CMG@Ventures II invested a total of $8.3 million in five
companies during fiscal year 1997, including $2 million in Silknet Software,
Inc. (Silknet), $2 million in KOZ, inc. (KOZ) $1 million in Softway Systems,
Inc. (Softway Systems), $1 million in Sage Enterprises, Inc. (Sage Enterprises),
and $2.3 million in Reel.com LLC (Reel.com). 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 plc
(Speech Machines), $2.6 million in Chemdex Corporation (Chemdex), $2 million in
TicketsLive Corporation (TicketsLive), $1 million in Critical Path, $2 million
in Mother Nature's General Store, Inc. (Mother Nature), $1.5 million in Visto
Corporation (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).
The acquisition accounting and valuation for the Company's or its subsidiaries'
investments in Speech Machines, Chemdex and Silknet in fiscal 1998, Parable and
Silknet in fiscal year 1997, and FreeMark, NetCarta, GeoCities, Point
Communications Corporation, and Vicinity in fiscal 1996, resulted in totals of
$1,125,000, $1,312,000 and $2,691,000 in fiscal years 1998, 1997 and 1996,
respectively, being identified as in-process research and development, which
were expensed because technological feasibility had not been reached at the
dates the investments were made.
(9) Gain on Stock Issuance by Lycos, Inc. and Effect of Subsidiaries' Equity
Transactions
Gain on stock issuance by Lycos, Inc. represents the net increase in the
Company's proportionate share of the dollar amount of Lycos' equity resulting
from stock issuances by Lycos, a developer and provider of online guides to the
Internet. The Company recorded a pretax gain of $19,575,000 in fiscal 1996
relating to Lycos' initial public offering of 3,135,000 shares of common stock
at $16 per share, which raised $46,021,000 in net proceeds for Lycos. With this
transaction, the Company's ownership in Lycos was reduced from approximately 76%
to approximately 58%. The Company provided $8,026,000 in deferred income taxes
resulting from the gain.
The Company recorded net pretax gains totaling $28,301,000 in fiscal 1998
resulting from stock issuances by Lycos. In June, 1998, the Company recorded a
pre-tax gain of $25,336,000 relating to Lycos' secondary public offering of
2,337,500 shares of common stock at $50 per share, which raised net proceeds of
$111,191,000 for Lycos. With this transaction, the Company's ownership in Lycos
was reduced from approximately 35% to approximately 31%. The Company also
recorded net pretax gains totaling $2,965,000 on other issuances of stock by
Lycos during fiscal 1998, which included stock issued by Lycos in its
acquisitions of Tripod, Inc., WiseWire Corporation and GuestWorld, Inc., net of
the impact of in-process research and development charges recorded by Lycos
related to these acquisitions; stock issued by Lycos for its minority
investments in GlobeComm, Inc. and Sage Enterprises; and shares issued by Lycos
as a result of employee stock option exercises. The Company provided
$11,603,000 in deferred income taxes resulting from the gains on stock issuances
by Lycos during fiscal 1998.
On July 31, 1996, the Company's subsidiary, Blaxxun, a developer of three
dimensional interactive software, successfully completed an equity financing,
issuing 400,000 shares of preferred stock to an outside party in exchange for
$2,000,000. With this transaction, the Company's ownership in Blaxxun was
reduced from 100% to 92% and its net equity in Blaxxun increased by $1,302,000.
During fiscal 1998, Blaxxun issued 166,000 shares of common stock for net
proceeds of $41,000 and 649,000 shares of preferred stock for net proceeds of
$3,478,000. Included in the fiscal 1998 amounts were 93,000 shares of preferred
stock purchased by the Company for $500,000. As a result of the fiscal 1998
transactions, the Company's ownership in Blaxxun was reduced from 92% to 81% and
its net equity in Blaxxun increased by $3,054,000. Since at the time of the
transactions Blaxxun was engaged principally in research and development, the
fiscal 1996 and fiscal 1998 increases in the Company's proportionate share of
the dollar amount of Blaxxun's equity of $768,000 and $1,757,000, net of
$534,000 and $1,297,000 of deferred income taxes, respectively, have been
reflected as an equity transaction included in "Effect of subsidiaries' equity
transactions" in the accompanying Consolidated Statements of Stockholders'
Equity.
The above gains on stock issuances by Lycos and effects of subsidiaries' equity
transactions are reported net of the interest, if any, attributed to
CMG@Ventures I's profit members.
(10) Sale of CMG@Ventures Investments
On September 19, 1996, the Company sold its equity interest in TeleT to Premiere
for $550,000 in cash and 320,833 shares of Premiere stock. The Company, through
CMG@Ventures I, acquired its 46% equity interest in TeleT for $750,000 during
April 1996. As a result of the sale, the Company recognized a pre-tax gain of
$3,616,000, reported net of the 22.5% interest attributed to CMG@Ventures I's
profit members, reflected as "Gain on sale of investment in TeleT
Communications" in the accompanying Consolidated Statements of Operations. Of
the Premiere shares received, 37,500 are to be held in escrow for a six-year
period, subject to certain customary conditions, and have been classified in
other assets with a carrying value of $450,000. The remaining shares received
were subject to an average one-year restriction on transferability, and were
classified in available-for-sale securities, with a carrying value at the time
of acquisition of $4,080,000, net of market value discount to reflect the
restriction on transferability.
On December 9, 1996, Microsoft Corporation (Microsoft) entered into a definitive
agreement to acquire one of the Company's subsidiaries, NetCarta, for
$20,000,000 in cash, subject to certain conditions. On January 31, 1997, the
sale of NetCarta was finalized, with the Company receiving proceeds of
$18,468,000, net of proceeds to former NetCarta employees who exercised employee
stock options. As a result of the sale, the Company recognized a pretax gain of
$15,111,000, reported net of the 22.5% interest attributed to CMG@Ventures I's
profit members, reflected as "Gain on sale of NetCarta Corporation" in the
accompanying Consolidated Statements of Operations.
During fiscal 1998, CMG@Ventures I distributed 3,333,334 of its shares of Lycos
common stock to the Company, and 593,164 shares to CMG@Ventures I's profit
members. The Company sold 1,955,015 of its Lycos shares during fiscal 1998,
including 1,705,015 sold on the open market throughout the year and 250,000
shares sold as part of Lycos' secondary public offering in June, 1998. The
Company received net proceeds of $108,876,000 from its sales of Lycos shares in
fiscal 1998 and recorded pre-tax gains on the sales totaling $97,158,000. The
gains on the Company's sales of Lycos shares are reported net of the associated
interest attributed to CMG@Ventures I's profit members.
(11) Accrued Expenses
Accrued expenses consist of the following:
July 31,
1998 1997
---- ----
Accrued compensation and benefits $ 3,548,000 $ 2,455,000
Accrued professional services 3,219,000 2,121,000
Accrued customer deposits 2,084,000 2,204,000
Accrued list owners' commissions 1,281,000 1,342,000
Accrued promotional expenses 87,000 4,178,000
Other 10,315,000 6,041,000
----------- -----------
$20,534,000 $18,341,000
=========== ===========
(12) Borrowing Arrangements
Notes payable at July 31, 1998 consisted of $20 million in collateralized
corporate borrowings, $6.2 million owed by SalesLink under its revolving line of
credit facility and $1.5 million owed by other subsidiaries of the Company under
line of credit facilities. Notes payable at July 31, 1997 consisted of $10
million in collateralized corporate borrowings, $10 million borrowed under the
Company's corporate line of credit, and $2,494,000 owed by SalesLink under its
line of credit.
The Company's collateralized corporate borrowings were secured by 1,255,789 and
784,314 of the Company's shares of Lycos stock at July 31, 1998 and 1997,
respectively. Under this agreement, the Company could become subject to
additional collateral requirements under certain circumstances. The $10 million
in borrowings outstanding at July 31, 1997 were payable in full in January,
1998. On January 20, 1998, the Company renewed this agreement for an additional
term of one year and increased the outstanding principal amount to $20 million.
Interest under this facility is payable quarterly at the London Interbank
Offered Rate (LIBOR) plus 1.75% (7.44% and 7.52% effective rates at July 31,
1998 and 1997, respectively). The Company has entered into an interest rate
swap agreement with the lender that effectively fixed the interest rate on this
$20 million debt at a rate of 7.40% beginning April 20, 1998 through January 20,
1999. During fiscal 1997, the Company had entered into an interest rate swap
agreement with the lender that had effectively fixed the interest rate on the
$10 million principal at 7.52% through January 17, 1998.
SalesLink's borrowings were made under a revolving credit agreement with a bank.
The revolving credit agreement provided for the option of interest at LIBOR or
the higher of 1) the rate announced by BankBoston, N.A. as its base rate
(Prime), or 2) 0.5% above the Federal Funds Effective Rate plus, in any case, an
applicable margin based on SalesLink's leverage ratio (7.65% and 7.66% effective
rates at July 31, 1998 and 1997, respectively).
The $10 million balance outstanding at July 31, 1997 under the Company's
corporate line of credit agreement with a bank was repaid during fiscal 1998 and
there are no outstanding borrowings under this facility as of July 31, 1998.
Long-term debt consists of the following:
July 31,
1998 1997
---- ----
Term notes payable to a bank issued by SalesLink $15,500,000 $ 5,500,000
Note payable to former shareholder of InSolutions 1,467,000 --
Notes payable to former members of Servercast issued by NaviSite 1,000,000 --
Note payable to former shareholder of Pacific Link issued by SalesLink -- 7,271,000
----------- -----------
17,967,000 12,771,000
Less: Current portion 16,594,000 3,221,000
----------- -----------
$ 1,373,000 $ 9,550,000
=========== ===========
SalesLink's term notes payable to a bank provide for the option of interest at
LIBOR or the higher of 1) Prime, or 2) 0.5% above the Federal Funds Effective
Rate plus, in any case, an applicable margin based on SalesLink's leverage ratio
(7.65% and 7.66% effective rates at July 31, 1998 and 1997, respectively).
During fiscal 1998, SalesLink repaid $250,000 of principal under its $5.5
million bank term note and refinanced the remaining portion into an amended term
note which included an increased principal amount of $10.25 million. Of the
additional principal amounts borrowed, $5 million was used as consideration for
the Company's acquisition of InSolutions and $4.9 million was used to prepay the
remaining balance on SalesLink's note payable to a former shareholder of Pacific
Link. The bank term note outstanding at July 31, 1998 provides for repayment in
quarterly installments beginning January 31, 1999 through October 31, 2002, with
the remaining balance to be repaid on November 11, 2002.
The Company's note payable to a former shareholder of InSolutions was issued in
June, 1998 as consideration for the Company's acquisition of InSolutions. This
note bears interest at 5.71% and is repayable in twelve monthly installments
beginning November 30, 1998. Additional principal amounts totaling $2.8 million
could become due under this note if InSolutions meets certain future performance
goals (see note 7). The contingent principal amounts owed, if any, would bear
interest at 5.71% and would be payable in twenty-four monthly installments
beginning November 30, 1999. The Company's subsidiary, NaviSite, issued $1
million in notes payable to former members of Servercast as consideration for
the acquisition of Servercast in July, 1998. These notes bear interest at 5.50%
and are repayable on January 2, 2000.
Maturities of long-term debt for the next five fiscal years are as follows:
1999, $16,594,000; 2000, $1,373,000; Thereafter, none.
As of February 24, 1997, the Company had entered into an interest rate swap
agreement with the lender providing SalesLink's bank borrowing arrangements.
The agreement effectively set a maximum LIBOR interest rate base on debt for a
notional principal amount of $8 million at a rate of 8.5% through February 26,
2002. This swap was purchased to provide protection to the Company from
exposure to higher interest rates in the future (above 8.5%), and requires
additional payments by the Company should LIBOR fall below 5% or should LIBOR be
above 6%, but below 8.5%. At July 31, 1998, based on prices quoted from the
bank, interest rate hedge agreement values would indicate an obligation of
$78,000 to terminate this contract.
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. Further, as
a result of such non-compliance, beginning August 1, 1998 until the non-
compliance is cured, SalesLink's $15.5 million bank term note payable and its
outstanding line of credit borrowings are subject to interest at Prime plus 3.5%
and 4.5%, respectively.
(13) Commitments
The Company leases facilities and certain other machinery and equipment under
various noncancelable operating leases expiring through June 2013. Future
minimum lease payments as of July 31, 1998 are as follows:
Year ending July 31:
1999 $16,752,000
2000 11,969,000
2001 7,454,000
2002 5,037,000
2003 4,107,000
Thereafter 22,841,000
-----------
$68,160,000
===========
Total rent and equipment lease expense charged to continuing operations was
$10,745,000, $8,184,000 and $2,112,000 for the years ended July 31, 1998, 1997
and 1996, respectively.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
(14) Stockholders' Equity
On May 11, 1998, February 2, 1996 and March 17, 1995, the Company effected 2-
for-1, 2-for-1 and 3-for-2 common stock splits, respectively, in the form of
stock dividends. Accordingly, all data shown in the accompanying consolidated
financial statements has been retroactively adjusted to reflect these events.
During the first quarter of fiscal 1997, the Company's Board of Directors
authorized the Company to buy back up to 1,000,000 shares of its common stock.
During the first and second quarters of fiscal 1997, 200,000 shares were
repurchased at an average cost of $4.92 per share, for a total of $984,000.
Pursuant to a stock purchase agreement entered into as of December 10, 1996, the
Company sold 940,954 shares of its common stock (the "CMG Shares"), including
the 200,000 treasury shares acquired in fiscal 1997, to Microsoft on January 31,
1997, representing 4.9% of CMG's total outstanding shares of common stock
following the sale. The CMG Shares purchased by Microsoft were priced at $7.25
per share, with proceeds to CMG totaling $6,821,917. The CMG Shares purchased
by Microsoft are not registered under the Securities Act of 1933 and carried a
one year prohibition on transfer or sale. Under the terms of the agreement and
following the one-year period, Microsoft is entitled to two demand registration
rights as well as piggy back registration rights. Additionally, Microsoft is
subject to "stand still" provisions, whereby it is prohibited for a period of
three years, without the consent of CMG, (i) from increasing its ownership in
CMG above ten percent of CMG's outstanding shares, (ii) from exercising any
control or influence over CMG, and (iii) from entering into any voting agreement
with respect to its CMG Shares.
On May 28, 1997, the Company announced a new venture dividend program in
connection with the Company's CMG@Ventures Internet investments. Subject to
restrictions on transfer, the program envisions that it may distribute up to 10%
of the stock held by CMG@Ventures following an initial public offering by any
one of the companies in which it holds an investment. The Company may also
announce from time to time other stock dividends in connection with its Internet
investments. Such dividends are subject to approval of the Company's Board of
Directors and subject to holding requirements by regulatory agencies such as the
Securities and Exchange Commission. The program may be altered or discontinued
at the discretion of the Company. The Company also announced its first dividend
under the new program, distributing 603,000 shares of Lycos common stock, with a
market value of $11,008,000 at the date of distribution, to the Company's
stockholders on July 31, 1997. The distribution resulted in a pre-tax gain of
$8,413,000 in fiscal 1997 reflected as "Gain on dividend distribution of Lycos,
Inc. common stock" in the accompanying Consolidated Statements of Operations.
Pursuant to a stock purchase agreement entered into as of December 19, 1997, the
Company sold 1,006,004 shares of its common stock to Intel Corporation (Intel),
representing 4.9% of CMG's total outstanding shares of common stock following
the sale. The CMG shares sold to Intel were priced at $10.87 per share, with
proceeds to CMG totaling $10,937,000. The CMG shares purchased by Intel are not
registered under the Securities Act of 1933. Under the terms of the agreement,
Intel is entitled to two demand registration rights as well as piggyback
registration rights. Additionally, Intel is subject to "stand still"
provisions, whereby it is prohibited for a period of three years, without the
consent of CMG, (i) from increasing its ownership in CMG above ten percent of
CMG's outstanding shares, (ii) from exercising any control or influence over
CMG, and (iii) from entering into any voting agreement with respect to its CMG
shares.
Pursuant to a stock purchase agreement entered into as of February 15, 1998, the
Company sold 625,000 shares of its common stock to Sumitomo Corporation
("Sumitomo") on February 27, 1998. The CMG shares sold to Sumitomo were priced
at $16.00 per share, with proceeds to CMG totaling $10,000,000. The CMG shares
purchased by Sumitomo are not registered under the Securities Act of 1933 and
carry a one year restriction on transfer or sale. Under the terms of the
agreement and following the one-year period, Sumitomo is entitled to two demand
registration rights as well as piggyback registration rights. Additionally,
Sumitomo is subject to "stand still" provisions, whereby it is prohibited for a
period of three years, without the consent of CMG, from (i) increasing its
ownership in CMG above ten percent of CMG's outstanding shares, (ii) proposing
or soliciting any person to propose a business combination with, or change of
control of, CMG, (iii) making, proposing or soliciting any person to propose a
tender offer for CMG stock, and (iv) entering into any voting agreement with
respect to its CMG shares.
(15) Stock Option Plans
The Company has two stock option plans currently in effect: the 1986 Stock
Option Plan (the "1986 Plan") and the 1995 Stock Option Plan For Non-Employee
Directors (the "Directors' Plan"). Options under both plans are granted at fair
market value on the date of the grant. Options granted under the 1986 Plan are
generally exercisable in equal cumulative installments over a four-to-ten year
period beginning one year after the date of
grant. Options under the Directors' Plan become exercisable in five equal annual
installments beginning immediately after each Annual Stockholders Meeting
following grant. Outstanding options under both Plans at July 31, 1998 expire
through 2008.
Under the 1986 Plan, non-qualified stock options or incentive stock options may
be granted to the Company's or its subsidiaries' employees, as defined. The
Board of Directors administers this plan, selects the individuals to whom
options will be granted, and determines the number of shares and exercise price
of each option. The Company has reserved 4,500,000 shares of common stock for
issuance under the 1986 Plan. The number of shares reserved for issuance
pursuant to the 1986 Plan is reduced by the number of shares issued under the
Company's 1995 Employee Stock Purchase Plan (see note 16).
Pursuant to the Directors' Plan, 564,000 shares of the Company's common stock
were initially reserved. Options for 94,000 shares are to be granted to each
Director who is neither an officer or full time employee of the Company, nor an
affiliate of an institutional investor which owns shares of common stock of the
Company. Options were granted to existing Directors with five years of
continuous service at the date the Plan was adopted, and are granted to
subsequent Directors at the time of election to the Board.
The status of the plans during the three fiscal years ended July 31, 1998, was
as follows:
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Number of average Number of average Number of average
shares exercise price shares exercise price shares exercise price
------ -------------- ------ -------------- ------ --------------
Options outstanding, beginning of year 1,935,380 $ 3.80 2,043,716 $ 3.87 2,406,148 $ 1.64
Granted 881,250 17.35 338,100 7.93 456,912 9.87
Exercised (476,563) 4.87 (217,254) 4.17 (641,684) 0.39
Canceled (112,688) 5.82 (229,182) 10.15 (177,660) 1.66
--------- --------- ---------
Options outstanding, end of year 2,227,379 $ 8.83 1,935,380 $ 3.80 2,043,716 $ 3.87
========= ======== ========= ======== ========= =======
Options exercisable, end of year 646,235 $ 2.48 739,772 $ 2.98 285,792 $ 2.48
========= ======== ========= ======== ========= =======
Options available for grant, end of year 979,522 1,781,280 1,913,236
========= ========= =========
The following table summarizes information about the Company's stock options
outstanding at July 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted average Weighted Weighted
Number of remaining average exercise Number of average exercise
Range of exercise prices shares contractual life price shares price
------------------------ ------ ---------------- ----- ------ -----
$ 0.77 - $ 1.83 920,974 3.8 years $ 1.50 533,259 $ 1.60
$ 3.06 - $ 5.06 137,334 3.7 3.81 51,397 3.49
$ 6.44 - $10.88 875,202 4.6 9.39 49,023 7.10
$12.25 - $17.81 89,119 3.4 14.34 12,556 17.58
$40.00 - $50.88 204,750 9.2 40.34 -- --
--------- -------
$ 0.77 - $50.88 2,227,379 4.6 years $ 8.83 646,235 $ 2.48
================ ========= ========= ====== ======= =======
SFAS No. 123, "Accounting for Stock-Based Compensation", sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards in
fiscal 1998, 1997 and 1996 under the Company's stock-based compensation plans
been determined based on the fair value method set forth under SFAS No. 123, the
pro forma effect on the Company's net income (loss) and earnings (loss) per
share would have been as follows:
Years Ended July 31,
1998 1997 1996
---- ---- ----
Pro forma net income (loss) $13,253,000 $(23,907,000) $13,666,000
=========== ============ ===========
Pro forma net income (loss) per share:
Basic $ 0.64 $ (1.27) $ 0.76
=========== ============ ===========
Diluted $ 0.59 $ (1.27) $ 0.71
=========== ============ ===========
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for fiscal 1998, 1997 and 1996, respectively: volatility of
90.07%, 66.69% and 80.30%; risk-free interest rate of 5.50%, 6.19% and 5.81%;
expected life of options of 4.2, 6.2 and 4.0 years; and 0% dividend yield for
all years. The weighted average fair value per share of options granted during
fiscal 1998, 1997 and 1996 was $11.71, $10.55 and $10.11, respectively.
The effect of applying SFAS No. 123 as shown in the above pro forma disclosure
is not likely to be representative of the pro forma effect on reported income or
loss for future years. SFAS No. 123 does not apply to awards made prior to
fiscal 1996 and additional awards in future years are anticipated.
(16) Employee Stock Purchase Plan
On October 4, 1994, the Board of Directors of the Company adopted the 1995
Employee Stock Purchase Plan (the Plan). The purpose of the Plan is to provide
a method whereby all eligible employees of the Company and its subsidiaries may
acquire a proprietary interest in the Company through the purchase of shares of
common stock. Under the Plan, employees may purchase the Company's common stock
through payroll deductions.
At the beginning of each of the Company's fiscal quarters, commencing with
February 1, 1995, employees are granted an option to purchase shares of the
Company's common stock at an option price equal to 85% of the fair market value
of the Company's common stock on either the first business day or last business
day of the applicable quarterly period, whichever is lower.
Employees purchased 33,196, 23,038 and 16,648 shares of common stock of the
Company under the Plan during fiscal 1998, 1997 and 1996, respectively.
(17) Income Taxes
The provision (benefit) for income taxes from continuing operations for the
years ended July 31, consists of the following:
Current Deferred Total
------- -------- -----
July 31, 1996:
Federal $ 7,758,000 $ 6,448,000 $ 14,206,000
State 632,000 1,835,000 2,467,000
------------ ------------ ------------
$ 8,390,000 $ 8,283,000 $ 16,673,000
============ ============ ============
July 31, 1997:
Federal $ (3,114,000) $ (849,000) $ (3,963,000)
State 1,023,000 (22,000) 1,001,000
------------ ------------ ------------
$ (2,091,000) $ (871,000) $ (2,962,000)
============ ============ ============
July 31, 1998:
Federal $19,720,000 $ 3,571,000 $23,291,000
State 10,869,000 (4,373,000) 6,496,000
----------- ------------ -----------
$30,589,000 $ (802,000) $29,787,000
=========== ============ ===========
Excluded from the tax provision in fiscal 1998 are deferred tax assets and
liabilities of $187,000 (net of valuation allowance of $1,704,000) and $130,000,
respectively, which were acquired through the acquisitions of certain
subsidiaries during fiscal 1998. Also excluded from the tax provision in fiscal
1998, but included in deferred tax liabilities are $1,297,000 provided for the
effect of subsidiaries' equity transactions. In addition, during fiscal 1998,
the Company sold available-for-sale securities for which $593,000 of deferred
taxes were provided in fiscal 1997 relating to the unrealized holding gain
recorded on these securities at July 31, 1997.
Included in deferred tax assets at July 31, 1998 is approximately $950,000,
which has been fully offset by a valuation allowance, related to the acquisition
of net operating loss carryforwards of certain subsidiaries acquired during
fiscal 1998. If utilized, the tax benefit of the acquired net operating loss
carryforwards will result in a reduction of recorded goodwill in lieu of an
income tax benefit in the Consolidated Statement of Operations.
Excluded from the tax benefit in fiscal 1997 but included in deferred income tax
liabilities and assets are $593,000 provided for unrealized holding gains from
the increase in the market value of available-for-sale securities and $260,000
related to deferred tax assets acquired with the acquisition of Pacific Link,
respectively. Excluded from the tax provision in fiscal 1996 but included in
deferred income tax liabilities are $666,000 provided for the effect of
subsidiaries' equity transactions and $78,000 related to the difference in bases
of assets acquired.
Deferred income tax assets and liabilities have been classified on the
accompanying Consolidated Balance Sheets in accordance with the nature of the
item giving rise to the temporary differences. The components of deferred tax
assets and liabilities are as follows:
July 31, 1998 July 31, 1997
------------- -------------
Current Non-current Total Current Non-current Total
------- ----------- ----- ------- ----------- -----
Deferred tax assets:
Accruals and reserves $ 3,322,000 $ -- $ 3,322,000 $1,630,000 $ -- $ 1,630,000
Tax basis in excess of financial basis
of investments in subsidiaries and
affiliates -- 9,731,000 9,731,000 -- 6,990,000 6,990,000
Tax basis in excess of financial basis
of available-for-sale securities 740,000 -- 740,000 -- -- --
Net operating loss carryforward of
acquired subsidiary -- 957,000 957,000 -- -- --
Other 22,000 1,361,000 1,383,000 -- 866,000 866,000
----------- ------------ ------------ ---------- ----------- -----------
Total gross deferred tax assets 4,084,000 12,049,000 16,133,000 1,630,000 7,856,000 9,486,000
Less valuation allowance (1,617,000) (11,253,000) (12,870,000) (985,000) (7,716,000) (8,701,000)
----------- ------------ ------------ ---------- ----------- -----------
Net deferred tax assets 2,467,000 796,000 3,263,000 645,000 140,000 785,000
----------- ------------ ------------ ---------- ----------- -----------
Deferred tax liabilities:
Financial basis in excess of tax basis
of investments in subsidiaries and
affiliates -- (10,889,000) (10,889,000) -- (7,994,000) (7,994,000)
Differences in tax depreciation and
amortization -- (293,000) (293,000) -- (570,000) (570,000)
Financial basis in excess of tax basis of
available-for-sale securities -- -- -- (534,000) -- (534,000)
Other (102,000) (142,000) (244,000) -- (57,000) (57,000)
----------- ------------ ------------ ---------- ----------- -----------
Total gross deferred tax liabilities (102,000) (11,324,000) (11,426,000) (534,000) (8,621,000) (9,155,000)
----------- ------------ ------------ ---------- ----------- -----------
Net deferred tax asset (liability) $ 2,365,000 $(10,528,000) $ (8,163,000) $ 111,000 $(8,481,000) $(8,370,000)
=========== ============ ============ ========== =========== ===========
The net change in the total valuation allowance for the year ended July 31, 1998
was an increase of $2,465,000, net of the impact of acquired valuation
allowances. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences,
net of the existing valuation allowance at July 31, 1998.
The following table reconciles the income tax expense (benefit) based on the
federal statutory income tax rate to the Company's actual income tax expense
(benefit):
Years Ended July 31,
1998 1997 1996
---- ---- ----
Provision (benefit) for income taxes at federal statutory rate $16,219,000 $(8,746,000) $10,848,000
Difference in income tax expense (benefit) resulting from:
Non-deductible goodwill amortization 715,000 311,000 129,000
Valuation allowance, net of impact of acquisitions 2,465,000 4,903,000 3,798,000
Non-deductible in-process research and development charge
related to acquisition of subsidiary 6,304,000 -- --
Utilization of research and development credits (612,000) -- --
State income taxes, net of federal benefit 4,223,000 651,000 1,604,000
Other 473,000 (81,000) 294,000
----------- ----------- -----------
Actual income tax expense (benefit) $29,787,000 $(2,962,000) $16,673,000
=========== =========== ===========
(18) Selected Quarterly Financial Information (unaudited)
The following table sets forth selected quarterly financial and stock price
information for the years ended July 31, 1998 and 1997. The operating results
for any given quarter are not necessarily indicative of results for any future
period. The Company's common stock is traded on the NASDAQ National Market
System ("NASDAQ/NMS") under the symbol CMGI. Included below are the high and
low sales prices (adjusted for a 2-for-1 stock split effected on May 11, 1998)
during each quarterly period for the shares of common stock as reported by
NASDAQ/NMS.
(in thousands, except per share data)
Fiscal 1998 Quarter ended
-------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31
------- ------- ------- -------
Net revenues $ 25,135 $ 17,818 $ 20,428 $ 28,103
Cost of revenues 15,259 15,692 18,704 29,176
Research and development expenses 6,174 4,639 3,968 4,928
In-process research and development expenses -- 875 18,060 200
Selling, general and administrative expenses 15,941 10,076 12,103 14,700
-------- -------- -------- --------
Operating loss (12,239) (13,464) (32,407) (20,901)
Interest income (expense), net 73 (420) (202) (321)
Gain on sale of data warehouse product rights 8,437 -- -- --
Gain on sale of Lycos, Inc. common stock 6,324 10,764 26,092 53,978
Gain on issuance of stock by Lycos, Inc. (94) 8 4,082 24,305
Gain on sale of available-for-sale securities 4,174 -- -- --
Gain on sale of investment in TeleT -- -- -- --
Gain on sale of NetCarta Corporation -- -- -- --
Gain on distribution of Lycos, Inc. common stock -- -- -- --
Equity in losses of affiliates (1,529) (2,987) (3,908) (3,397)
Minority interest (28) -- -- --
Income tax benefit (expense) (2,433) 265 (5,351) (22,268)
-------- -------- -------- --------
Net income (loss) $ 2,685 $ (5,834) $(11,694) $ 31,396
======== ======== ======== ========
Market Price
High $ 14.25 $ 18.50 $ 53.75 $ 91.75
======== ======== ======== ========
Low $ 7.38 $ 9.56 $ 18.28 $ 33.25
======== ======== ======== ========
Fiscal 1997 Quarter ended
-------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31
------- ------- ------- -------
Net revenues $ 10,640 $ 18,897 $ 19,010 $ 22,060
Cost of revenues 5,366 11,286 11,551 13,949
Research and development expenses 4,965 6,732 6,466 6,895
In-process research and development expenses 1,312 -- -- --
Selling, general and administrative expenses 13,446 13,688 12,749 15,311
-------- -------- -------- --------
Operating loss (14,449) (12,809) (11,756) (14,095)
Interest income (expense), net 924 260 328 237
Gain on sale of data warehouse product rights -- -- -- --
Gain on sale of Lycos, Inc. common stock -- -- -- --
Gain on issuance of stock by Lycos, Inc. -- -- -- --
Gain on sale of available-for-sale securities -- -- -- --
Gain on sale of investment in TeleT 3,616 -- -- --
Gain on sale of NetCarta Corporation -- 15,111 -- --
Gain on distribution of Lycos, Inc. common stock -- -- -- 8,413
Equity in losses of affiliates (1,008) (1,081) (1,924) (1,543)
Minority interest 2,422 1,025 492 848
Income tax benefit (expense) 1,098 (1,840) 2,584 1,120
-------- -------- -------- --------
Net income (loss) $ (7,397) $ 666 $(10,276) $ (5,020)
======== ======== ======== ========
Market Price
High $ 9.13 $ 10.19 $ 8.81 $ 9.31
======== ======== ======== ========
Low $ 4.56 $ 4.78 $ 5.50 $ 6.19
======== ======== ======== ========
(19) Subsequent Events
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. The Company
expects to record a gain on the conversion of its investment in Sage Enterprises
during its fiscal quarter ended October 31, 1998. Such gain will be recorded net
of the 20% interest attributable to CMG@Ventures II's profit members.
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.
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 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. The Company expects to record a gain on the
conversion of its investment in Reel.com during its fiscal quarter ended October
31, 1998. The gain will be reported net of the 20% interest attributable to
CMG@Ventures II's profit members.
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.
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 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.
Independent Auditors' Report
The Board of Directors and Stockholders
CMG Information Services, Inc.:
We have audited the accompanying Consolidated Balance Sheets of CMG Information
Services, Inc. and subsidiaries as of July 31, 1998 and 1997, 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, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated financial position of CMG
Information Services, Inc. and subsidiaries as of July 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended July 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 22, 1998, except for Note 19 which is as of October 27, 1998.