<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended April 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22846
CMGI, INC.
----------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2921333
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Brickstone Square, First Floor 01810
Andover, Massachusetts (Zip Code)
(Address of principal executive offices)
(978) 684-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
--------- ---------
Number of shares outstanding of the issuer's common stock, as of June 10, 1999
Common Stock, par value $0.01 per share 95,313,810
- --------------------------------------- ----------
Class Number of shares outstanding
<PAGE>
CMGI, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
April 30,1999 and July 31, 1998 3
Consolidated Statements of Operations
Three and nine months ended April 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Nine months ended April 30, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-30
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURE 35
</TABLE>
Page 2
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,758 $ 61,537
Available-for-sale securities 886,242 5,764
Accounts receivable, trade, less allowance for doubtful accounts 30,216 21,431
Inventories 9,028 8,250
Prepaid expenses 5,757 2,991
Net current assets of discontinued operations 289 482
Other current assets 22,545 2,364
---------- --------
Total current assets 995,835 102,819
Property and equipment, net 17,885 13,403
Investments in affiliates 58,688 82,616
Goodwill and other intangible assets, net of accumulated amortization 148,348 57,496
Net non-current assets of discontinued operations 975 1,246
Other assets 24,851 2,238
---------- --------
$1,246,582 $259,818
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 20,000 $ 27,656
Current installments of long-term debt 4,849 16,594
Accounts payable 19,068 10,809
Accrued income taxes -- 10,085
Accrued expenses 31,509 18,731
Deferred revenues 5,084 4,932
Deferred income taxes 317,691 --
Other current liabilities 2,354 1,228
---------- --------
Total current liabilities 400,555 90,035
Long-term debt, less current installments 16,878 1,373
Long-term deferred revenues 1,856 --
Deferred income taxes 10,407 15,536
Other long-term liabilities 7,020 4,428
Minority interest 83,868 15,310
Commitments and contingencies
Preferred stock, $.01 par value. Authorized 5,000,000 shares; issued 35,000 shares Series B
convertible, redeemable preferred stock at April 30, 1999, interest at 4% per annum 35,305 --
Stockholders' equity:
Common stock, $.01 par value. Authorized 400,000,000 shares; issued 95,302,396 shares at
April 30, 1999 and 92,135,772 shares at July 31, 1998 953 921
Additional paid-in capital 205,676 90,569
Net unrealized gain (loss) on available-for-sale securities 418,432 (436)
Unearned compensation (717) (1,442)
Retained earnings 66,349 43,524
---------- --------
Total stockholders' equity 690,693 133,136
---------- --------
$1,246,582 $259,818
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
------------------------------ -----------------------------
1999 1998 1999 1998
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 43,655 $ 18,145 $120,032 $ 55,970
Operating expenses:
Cost of revenues 42,169 17,230 114,917 45,180
Research and development 5,053 3,849 15,645 14,409
In-process research and development 4,500 9,250 4,500 10,125
Selling 11,282 6,203 26,452 21,951
General and administrative 14,718 5,114 33,782 13,641
-------- -------- -------- --------
Total operating expenses 77,722 41,646 195,296 105,306
-------- -------- -------- --------
Operating loss (34,067) (23,501) (75,264) (49,336)
-------- -------- -------- --------
Other income (deductions):
Interest income 852 573 2,159 1,712
Interest expense (1,062) (775) (3,295) (2,261)
Gain on sale of Lycos, Inc. common stock -- 24,850 45,475 41,938
Gain on sale of Premiere Technologies, Inc. common stock -- -- -- 4,174
Gain on sale of Amazon.com, Inc. common stock -- -- 7,002 --
Gain on stock issuance by Lycos, Inc. -- 24,294 20,253 24,208
Gain on stock issuance by GeoCities 859 -- 29,373 --
Gain on sale of investment in Sage Enterprises, Inc. -- -- 19,057 --
Gain on sale of investment in Reel.com, Inc. -- -- 23,158 --
Equity in losses of affiliates (3,553) (4,247) (13,101) (8,763)
Minority interest 275 -- 479 (28)
-------- -------- -------- --------
(2,629) 44,695 130,560 60,980
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes (36,696) 21,194 55,296 11,644
Income tax expense (benefit) (9,473) 13,125 30,981 11,770
-------- -------- -------- --------
Income (loss) from continuing operations (27,223) 8,069 24,315 (126)
Discontinued operations, net of income taxes:
Loss from operations of lists and database services
segment (527) (147) (806) (79)
Gain on sale of data warehouse product rights -- -- -- 4,978
-------- -------- -------- --------
Net income (loss) $(27,750) $ 7,922 $ 23,509 $ 4,773
======== ======== ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.29) $ 0.09 $ 0.26 $ --
Loss from discontinued operations of lists and database
services segment (0.01) -- (0.01) --
Gain on sale of data warehouse product rights -- -- -- 0.06
-------- -------- -------- --------
Net income (loss) $ (0.30) $ 0.09 $ 0.25 $0.06
======== ======== ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.29) $ 0.09 $ 0.23 $ --
Loss from discontinued operations of lists and database
services segment (0.01) -- (0.01) --
Gain on sale of data warehouse product rights -- -- -- 0.06
-------- -------- -------- --------
Net income (loss) $ (0.30) $ 0.09 $ 0.22 $0.06
======== ======== ======== ========
Shares used in computing earnings (loss) per share:
Basic 93,904 85,672 92,727 80,852
======== ======== ======== ========
Diluted 93,904 92,688 101,525 80,852
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
<PAGE>
CMGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended April 30,
------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 24,315 $ (126)
Adjustments to reconcile income (loss) from continuing operations to net cash
used for continuing operations:
Depreciation and amortization 12,047 4,481
Deferred income taxes 18,810 6,680
Non-operating gains, net (144,318) (70,320)
Equity in losses of affiliates 13,101 8,763
Minority interest (479) 28
In-process research and development 4,500 10,125
Changes in operating assets and liabilities, excluding effects from
acquisition and deconsolidation of subsidiaries:
Trade accounts receivable (6,016) (4,256)
Inventories (778) (4,947)
Prepaid expenses (2,470) (2,263)
Accounts payable and accrued expenses 13,834 3,387
Deferred revenues 4,947 2,619
Refundable and accrued income taxes, net 1,042 8,539
Other assets and liabilities (704) (235)
--------- --------
Net cash used for operating activities of continuing operations (62,169) (37,525)
Net cash used for operating activities of discontinued operations (280) (2,675)
--------- --------
Net cash used for operating activities (62,449) (40,200)
--------- --------
Cash flows from investing activities:
Additions to property and equipment continuing operations (7,760) (4,103)
Additions to property and equipment discontinued operations (63) (114)
Purchase of available-for-sale securities (31,123) --
Proceeds from sale of Lycos, Inc. common stock 53,106 46,344
Proceeds from sale of Amazon.com, Inc. common stock 27,177 --
Proceeds from sale of Premiere Technologies, Inc. common stock -- 7,555
Proceeds from sale of data warehouse product rights discontinued operations -- 9,543
Investments in affiliates and acquisitions of subsidiaries, net of cash acquired (49,383) (13,913)
Reduction in cash due to deconsolidation of Lycos, Inc. -- (41,017)
Other 1,600 217
--------- --------
Net cash provided by (used for) investing activities (6,446) 4,512
--------- --------
Cash flows from financing activities:
Net proceeds from (repayments of) notes payable (6,656) 706
Repayments of long-term debt (4,904) (2,377)
Net proceeds from issuance of Series B convertible preferred stock 49,805 --
Net proceeds from issuance of common stock 5,655 23,095
Net proceeds from issuance of stock by subsidiaries 5,925 477
Other (709) 2,695
--------- --------
Net cash provided by financing activities 49,116 24,596
--------- --------
Net increase (decrease) in cash and cash equivalents (19,779) (11,092)
Cash and cash equivalents at beginning of period 61,537 59,762
--------- --------
Cash and cash equivalents at end of period $ 41,758 $ 48,670
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Basis of Presentation
The accompanying consolidated financial statements have been prepared by CMGI,
Inc. ("CMGI" or "the Company") in accordance with generally accepted accounting
principles. In the opinion of management, the accompanying consolidated
financial statements contain all adjustments, consisting only of those of a
normal recurring nature, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows at the dates and for
the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended July 31, 1998 which
are contained in the Company's Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission ("the SEC") on May 26, 1999. The results for
the three and nine month periods ended April 30, 1999 are not necessarily
indicative of the results to be expected for the full fiscal year. Certain
prior year amounts in the consolidated financial statements have been
reclassified in accordance with generally accepted accounting principles to
conform with current year presentation.
Financial information related to the Company's former lists and database
services segment has been presented as discontinued operations (see Note B).
Certain prior period amounts in the consolidated financial statements have been
reclassified in accordance with generally accepted accounting principles to
reflect the Company's lists and database services segment as discontinued
operations.
B. Discontinued Operations
On March 11, 1999, the Company announced the signing of a binding agreement to
sell its wholly owned subsidiary, CMG Direct Corporation (CMG Direct) to
Marketing Services Group, Inc. (MSGI). At the time, CMG Direct comprised the
Company's entire lists and database services segment. As a result, the
operations of the Company's lists and database services segment have been
reflected as income (loss) from discontinued operations. The gain on sale of
certain data warehouse product rights by the Company's subsidiary, Engage
Technologies, Inc. (Engage) in the first quarter of fiscal 1998 has also been
reflected as discontinued operations. These data warehouse products were
developed by Engage during fiscal 1996 and 1997, when Engage was included in the
Company's lists and database services segment. CMG Direct's net assets, which
included accounts receivable, prepaid expenses, net property and equipment, net
goodwill, other assets, accounts payable, accrued expenses and other liabilities
are reported as net current and non-current assets of discontinued operations at
April 30, 1999.
C. Deconsolidation of Vicinity
Beginning in November 1998, CMGI's ownership interest in Vicinity was reduced to
below 50% as a result of employee stock option exercises. As such, beginning in
November 1998, the Company began to account for its remaining investment in
Vicinity under the equity method of accounting, rather than the consolidation
method. Prior to these events, the operating results of Vicinity were
consolidated within the operating results of the Company's investment and
development segment, and the assets and liabilities of Vicinity were
consolidated with those of CMGI's other majority owned subsidiaries in the
Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1998
included Vicinity net revenues of $1,454,000 and operating losses of $621,000.
Page 6
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Deconsolidation of Lycos, Inc.
During the first quarter of fiscal year 1998, the Company owned in excess of 50%
of Lycos and accounted for its investment under the consolidation method.
Through the subsequent sale and distribution of Lycos shares, the Company's
ownership percentage in Lycos was reduced to below 50% beginning in November
1997. As such, beginning 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 CMGI's other majority owned subsidiaries in the Company's
consolidated balance sheets. The Company's historical quarterly consolidated
operating results for the fiscal quarter ended October 31, 1997 included Lycos
net revenues of $9,303,000 and operating losses of $433,000. As a result of
additional Lycos stock sales, beginning in January 1999, CMGI's ownership in
Lycos was further reduced below 20%. Accordingly, CMGI began accounting for its
investment in Lycos (net of shares attributable to CMG@Ventures I, LLC's profit
members and shares which may be required to be sold to Lycos pursuant to
employee stock option exercises) as available-for-sale securities, carried at
fair value (see Note J.)
The following table contains summarized financial information for Lycos for the
quarters ended October 31, 1998 and January 31, 1999, the periods under which
the Company accounted for its investment under the equity method of accounting:
(in thousands)
Condensed Statement of Operations:
<TABLE>
<CAPTION>
Quarter Quarter
Ended Ended
October 31, January 31,
1998 1999
----------- -----------
<S> <C> <C>
Net revenues $ 24,784 $ 30,552
======== ========
Operating loss $(15,612) $(15,368)
======== ========
Net loss $ (3,596) $(13,753)
======== ========
<CAPTION>
October 31, January 31,
1998 1999
----------- -----------
<S> <C> <C>
Current assets $203,041 $198,209
Noncurrent assets 272,991 266,706
-------- --------
Total assets $476,032 $464,915
======== ========
Current liabilities $ 53,694 $ 50,612
Noncurrent liabilities 29,873 29,087
Stockholders' equity 392,465 385,216
-------- --------
Total liabilities and stockholders' equity $476,032 $464,915
======== ========
</TABLE>
E. Two-For-One Common Stock Splits
On January 11, 1999 and May 27, 1999, respectively, the Company effected two-
for-one common stock splits in the form of stock dividends. Accordingly, the
consolidated financial statements have been retroactively adjusted for all
periods presented to reflect these events.
Page 7
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Sale of CMG@Ventures Investments and Investment in Hollywood
Entertainment
In August, 1998, the Company's subsidiary, CMG@Ventures II, LLC (CMG@Ventures
II) converted its holdings in Sage Enterprises, Inc. (Sage Enterprises) into
225,558 shares of Amazon.com, Inc. (Amazon.com) common stock as part of a merger
wherein Amazon.com acquired Sage Enterprises. CMG@Ventures II invested $4.5
million in Sage Enterprises beginning in June, 1997. The Company recorded a
pre-tax gain of $19,057,000 on the conversion of its investment in Sage
Enterprises during the fiscal quarter ended October 31, 1998. Such gain was
recorded net of the 20% interest attributable to CMG@Ventures II's profit
members.
In October 1998, CMG@Ventures II's holdings in Reel.com, Inc. (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. CMG@Ventures II invested $6.9 million in Reel.com beginning in July
1997. The Company recorded a pre-tax gain of $23,158,000 on the conversion of
its investment in Reel.com during the fiscal quarter ended October 31, 1998.
The gain was 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 cash purchase price of
$31.1 million. In December 1998, CMGI's and CMG@Ventures II's entire holdings in
Hollywood Entertainment preferred stock were converted into common shares on a
1-for-1 basis.
G. Gain on Stock Issuances by Lycos, Inc. and GeoCities
In August 1998, the Company's affiliate, GeoCities, completed its initial public
offering of common stock, issuing approximately 5.5 million shares at a price of
$17.00 per share, which raised $84.5 million in net proceeds for GeoCities. As
a result of the initial public offering, the Company's ownership interest in
GeoCities was reduced from approximately 34% to approximately 28%. The Company,
through its subsidiaries, CMG@Ventures I, LLC (CMG@Ventures I) and CMG@Ventures
II, has invested a total of $5.9 million in GeoCities beginning in January 1996.
In December 1998, GeoCities issued additional stock in conjunction with its
acquisition of Starseed, Inc. (known as WebRing) and in March 1999, issued
additional stock in its acquisition of Futuretouch. CMGI recorded pre-tax gains
of $24,132,000, $4,382,000, and $859,000 on the issuances of stock by GeoCities
during the first, second and third quarters of fiscal year 1999, respectively.
These pre-tax gains represent the increase in the book value of the Company's
net equity in GeoCities, primarily as a result of the initial public offering
and acquisitions. The gains were recorded net of the interests attributable to
CMG@Ventures I's and II's profit members.
The Company recorded a pre-tax gain of $20,374,000 in the first quarter of
fiscal 1999 resulting from the issuance of stock by Lycos. The gain for the
quarter was primarily related to the issuance of 4.1 million shares by Lycos
during August 1998 in its acquisition of WhoWhere? Inc. As a result of the
issuance of stock by Lycos for the acquisition of WhoWhere? Inc., the Company's
ownership interest in Lycos was reduced from approximately 24% to approximately
22%. The gain was recorded net of the interest attributable to CMG@Ventures I's
profit members.
Page 8
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Commitment to Fund CMG@Ventures III, LLC
In December 1998, CMGI announced the close of the @Ventures III venture capital
fund. This fund has secured $212 million in capital commitments from outside
investors, which will be invested in emerging Internet service and technology
companies through two newly formed entities, @Ventures III L.P. and @Ventures
III Foreign Fund, L.P. CMGI does not have a direct ownership interest in either
of these newly created entities, but is entitled to 2% of the net capital gains
realized by both entities. Management of these entities, including investment
and sale decisions, is the responsibility of @Ventures Partners III, LLC, whose
members include David S. Wetherell, CMGI's President and Chief Executive
Officer, and Andrew J. Hajducky III, CMGI's Chief Financial Officer. The
Company has committed to contribute $54 million to its newly formed limited
liability company subsidiary, CMG@Ventures III, LLC, of which approximately $10
million has been funded as of April 30, 1999. CMG@Ventures III, LLC will take
strategic positions side by side with @Ventures III L.P. CMGI owns 100% of the
capital and is entitled to 80% of the net capital gains realized by CMG@Ventures
III, LLC. @Ventures Partners III, LLC is entitled to the remaining 20% of the
net capital gains realized by CMG@Ventures III, LLC.
I. Acquisitions and Investments
During the first nine months of fiscal year 1999, through CMG@Ventures III, LLC,
CMGI acquired minority ownership interests in thirteen Internet companies,
including Raging Bull, Asimba, Virtual Ink, Ancestry.com, Furniture.com,
HotLinks, Medical Village, NextMonet.com, ONElist, OneCore.com, eCircles.com,
advoco.com, and Carparts.com, for an aggregate total of approximately $10
million. Raging Bull is a financial Web message board service that offers the
ability to filter content and tailor personally relevant financial information
to meet users' needs. Asimba is creating a content rich, personalized, online
community for the competitive and recreational sports market. Virtual Ink is a
newly launched company focused on the development of Digital Meeting Assistant
TM (DMA) technologies. Ancestry.com is a provider of community, content and
commerce resources for families via the Internet, including the Web's largest
repository of searchable genealogy data. Furniture.com is an e-commerce
provider of a broad selection of furniture and home furnishing accessories.
HotLinks operates a service that allows users to create personal Web
directories. Medical Village is an Internet community of medical professionals
offering members a variety of services including access to a searchable,
comprehensive healthcare industry database, communication with other members,
ordering from online medical product catalogs and access to current healthcare
industry news. NextMonet is developing an ecommerce site for purchasers of art,
in the form of an on-line art gallery. ONElist provides free e-mail communities
via the Internet, allowing users to search for or subscribe to tens of thousands
of communities on different topics or create their own community. OneCore.com
offers an integrated set of Web-based financial applications targeted at small
businesses. eCircles.com provides a free service that allows for friends and
family to share information and coordinate events on the World Wide Web.
Advoco provides an electronic marketplace for interactive advice servicing a
wide range of categories. Carparts.com operates the only Website that provides
consumers with a search capability to locate and order online certain auto
parts. The Company anticipates synergies between these strategic positions and
CMGI's core businesses, including speeding technological innovation and access
to markets. Each of the thirteen new investments made by CMG@Ventures III, LLC
during the first nine months of fiscal year 1999 are carried at cost in CMGI's
consolidated financial statements.
During the first nine months of fiscal year 1999 through CMG@Ventures II, LLC,
CMGI made follow-on investments in Chemdex, Critical Path, KOZ,
MotherNature.com, Silknet, Softway Systems and ThingWorld.com, for an aggregate
total of approximately $11 million.
During the third fiscal quarter of 1999, CMGI exercised its right to invest an
additional $22 million to increase its ownership in Magnitude Network
(Magnitude) from 23% to 92%. CMGI had previously invested a total of $2.5
million in Magnitude in July and October 1998. Accordingly, beginning in
February 1999, CMGI began accounting for its investment in Magnitude under the
consolidation method of accounting, rather than the equity method.
Page 9
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Acquisitions and Investments (continued)
On March 11, 1999, CMGI completed the acquisition of 2CAN Media, Inc. (2CAN) for
initial consideration of approximately $27,493,000. Immediately following the
completion of the acquisition, on March 11, 1999, 2CAN was merged with and into
Adsmart Corporation (Adsmart), a majority-owned subsidiary of CMGI, with Adsmart
becoming the surviving corporation. 2CAN was a Los Angeles, California-based
full-service interactive media company serving the entire online advertising
community with site-focused sales and advertising representation and was
comprised of five distinct sales channels: WebRep, Pinnacle Interactive, ECG,
MediaPlus and Grupo NetFuerza. As the primary component of the initial
consideration paid for 2CAN, CMGI and Adsmart jointly issued convertible
promissory notes (the "Promissory Notes") in the aggregate principal amount of
$26,983,000. The Promissory Notes bear interest at an annual rate of 6.5% and
are due and payable in full, with accrued interest, on March 11, 2004. The
holders of the Promissory Notes can elect at any time prior to March 11, 2004,
to convert all or a portion of the outstanding principal and accrued interest
(the "Conversion Amount") into the following: 14.66% of the Conversion Amount
will be paid in cash, 14.66% of the Conversion Amount will be paid in shares of
CMGI common stock and 70.68% of the Conversion Amount will be paid in either
shares of CMGI common stock or Adsmart common shares based on the election of
the Promissory Note holders. As of April 30, 1999, Promissory Notes in the
principal amount of $23,333,000 had been converted into $3,433,000 in cash and
304,210 shares of CMGI common stock. The principal amounts payable under the
Promissory Notes are subject to a $1 for $1 reduction if certain revenue amounts
are not achieved by Adsmart during the period from March 11, 1999 to December
31, 1999. Additionally, the initial consideration is subject to an increase of
$0.83 for each $1 of calendar year 1999 revenues achieved by Adsmart and 2CAN in
excess of $28 million. The additional consideration is payable in shares of
CMGI common stock. The shares of CMGI common stock issued in the 2CAN
acquisition are not registered under the Securities Act of 1933, as amended, and
are subject to a Lockup Agreement. The Lockup Agreement prohibits transfer of
the shares of CMGI common stock, without the permission of the Company, for a
period of twelve months following the date of the issuance.
On April 4, 1999, CMGI completed its acquisition of Activerse, Inc. (Activerse),
a provider of open standard Internet messaging technologies, for 198,536 shares
of the Company's common stock. The shares issued by the Company under the
Activerse acquisition are not registered under the Securities Act of 1933 and
are subject to restrictions on transferability for a period of one year from the
date of issuance. The total purchase price for Activerse was valued at
approximately $13,800,000, including costs of acquisition of $100,000. The
value of the Company's shares included in the purchase price was recorded net of
a weighted average 12% market value discount to reflect the restrictions on
transferability.
In April 1999, the Company's subsidiary, Engage, acquired Internet Profiles
Corporation (I/PRO), which provides Web site traffic measurement and audit
services, for approximately $30.6 million, consisting of $1.6 million in net
cash, $20.9 million in CMGI shares and $7.8 million in Engage shares and
options. Engage has recorded an expense of $4.5 million in the third quarter of
fiscal 1999 representing acquired in-process research and development that had
not yet reached technological feasibility and had no alternative future use. In
addition, CMGI must pay up to $3.0 million to I/PRO stockholders if performance
goals are met relating to the gross revenue of I/PRO for the year ended March
31, 2000; data contributed to the Engage knowledge database as of March 31,
2000; and various employees of I/PRO continuing employment with Engage. Engage
must reimburse CMGI for any such payments, at CMGI's election, in cash or by
issuance of shares of Engage common stock at its then fair market value. Any
additional payment will be treated as additional purchase price and amortized
over the balance of the two or five year period. The shares of CMGI common stock
are not registered under the Securities Act of 1933, as amended, and are subject
to a Lockup Agreement. The Lockup Agreement prohibits transfer of the CMGI
Shares, without the permission of the Company, for periods of up to twelve
months following the date of the issuance of the shares of CMGI common stock.
Page 10
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Acquisitions and Investments (continued)
The acquisitions during the third quarter of fiscal 1999 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 date of acquisition. Goodwill and other intangibles, totaling
$96.9 million, were recorded related to acquisition, and are being amortized on
a straight-line basis over two or five years, depending on the asset class. The
acquired companies are included in the Company's consolidated financial
statements from the dates of acquisition. The final acquisition accounting and
valuation for the Company's total investment of approximately $66 million in
2CAN, Activerse, and Magnitude is expected to result in a portion of the
purchase price being identified as in-process research and development, in
accordance with valuation methodologies provided by the Securities and Exchange
Commission which will be charged to operating results in the fourth quarter when
the amount is determined.
The purchase price for each of the above acquisitions was allocated as follows:
<TABLE>
<CAPTION>
Magnitude
Activerse Network 2CAN Media I/PRO Total
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Working capital, including cash
(cash overdraft) acquired $(3,896,000) $ 1,209,000 $(4,446,000) $ (150,000) $(7,283,000)
Property, plant and equipment 170,000 363,000 114,000 1,676,000 2,323,000
Other assets (liabilities), net -- (69,000) 25,000 (235,000) (279,000)
In-process research and development -- -- -- 4,500,000 --
Goodwill 17,543,000 22,713,000 31,800,000 19,900,000 91,956,000
Developed technology -- -- -- 3,000,000 3,000,000
Other identifiable intangible assets -- -- -- 1,920,000 1,920,000
Minority interest -- (119,000) -- -- (119,000)
Losses recorded under equity method -- 388,000 -- -- 388,000
----------- ----------- ----------- ----------- -----------
Purchase price $13,817,000 $24,485,000 $27,493,000 $30,611,000 $96,406,000
=========== =========== =========== =========== ===========
</TABLE>
J. Sales of Lycos and Amazon.com stock
During the first quarter of fiscal year 1999, CMG@Ventures I distributed
3,585,207 of its shares of Lycos common stock to the Company, and 558,317 shares
to CMG@Ventures I's profit members. During the first quarter of fiscal 1999 the
Company sold 70,000 of its Lycos shares on the open market. As a result of the
sale, the Company received proceeds of $2.5 million, and recognized a pre-tax
gain of $1,879,000, reported net of the associated interest attributed to
CMG@Ventures I's profit members. During the second quarter of fiscal 1999 the
Company sold 748,000 of its Lycos shares on the open market. As a result of
second quarter Lycos sales, the Company received proceeds of $50.6 million, and
recognized a pre-tax gain of $43,596,000, reported net of the associated
interest attributed to CMG@Ventures I's profit members. As a result of the
Company's sale of Lycos shares, during January, 1999, the Company's ownership
interest in Lycos fell below 20% of Lycos' outstanding shares. With this
decline in ownership below 20%, CMGI began accounting for its investment in
Lycos (net of shares attributable to CMG@Ventures I's profit members and shares
which may be required to be sold to Lycos pursuant to employee stock option
exercises) as available-for-sale securities, carried at fair value, rather than
under the equity method.
In November, 1998, CMGI received a distribution of 169,538 shares of Amazon.com
stock from CMG@Ventures II LLC. The Company sold these shares for total
proceeds of $27.2 million in November 1998, and recognized a pre-tax gain of
$7,002,000, reported net of the associated interest attributed to CMG@Ventures
II's profit members.
Page 11
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Segment Information
The Company's continuing operations are classified in two primary business
segments: (i) investment and development and (ii) fulfillment services. The
Company's lists and database services segment is reported as discontinued
operations (see Note C.) During the three and nine months ended April 30, 1999,
respectively, non-consolidated related parties accounted for approximately 10%
and 10% of net revenues, respectively, in the investment and development
segment. Additionally, during the quarter ended April 30, 1999, one customer
contract accounted for 22% of the net revenues of the investment and
development business segment. Summarized financial information by business
segment for continuing operations is as follows:
<TABLE>
<CAPTION>
Three months ended April 30, Nine months ended April 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Investment and development $ 10,610,000 $ 2,208,000 $ 20,424,000 $ 14,539,000
Fulfillment services 33,045,000 15,937,000 99,608,000 41,431,000
------------ ------------ ------------ ------------
$ 43,655,000 $ 18,145,000 $120,032,000 $ 55,970,000
============ ============ ============ ============
Operating income (loss):
Investment and development $(35,632,000) $(25,048,000) $(77,991,000) $(53,093,000)
Fulfillment services 1,565,000 1,547,000 2,727,000 3,757,000
------------ ------------ ------------ ------------
$(34,067,000) $(23,501,000) $(75,264,000) $(49,336,000)
============ ============ ============ ============
</TABLE>
Operating income in the fulfillment services segment 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 (loss) would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended
October 31, January 31, April 30, July 31,
1997 1998 1998 1998 Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
As 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
=========== =========== =========== =========== ===========
</TABLE>
Page 12
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
L. Borrowing Arrangements
The Company's $20 million collateralized corporate borrowing facility became
payable in full on January 20, 1999. Upon its maturity, CMGI renewed this $20
million facility for another one-year period, with similar terms as the expiring
facility. This borrowing is now secured by 762,465 of CMGI's shares of Lycos
common stock. Under this agreement, CMGI could become subject to additional
collateral requirements under certain circumstances. The Company expects to
again seek the renewal of this facility upon its next maturity on January 20,
2000. The Company's subsidiary, SalesLink, had a $14.7 million bank term note
outstanding at April 30, 1999, which provides for repayment in quarterly
installments through November 2002. Additionally, SalesLink's credit agreement
includes a $9 million revolving line of credit, of which $1.1 million has been
reserved in support of outstanding letters of credit for operating leases as of
April 30, 1999, and $7.9 million is available for future borrowings. The
obligations of SalesLink under its bank line of credit and bank term loans have
been guaranteed by CMGI. Such obligations had been classified as current
liabilities in the Company's July 31, 1998 and January 31, 1999 balance sheets
since, at those dates, SalesLink was not in compliance with certain covenants of
its borrowing arrangements. In connection with the investment by CMGI of a $10
million original principal amount of subordinated convertible notes and warrants
to purchase SalesLink Series A Convertible Preferred Stock, the bank has since
waived all covenant defaults and amended certain financial and operating
covenants contained in the SalesLink bank facility. There are no current
defaults. As such, $12,400,000 owed by SalesLink under its borrowing
arrangements which are payable after April 30, 2000 have been classified as
long-term liabilities as of April 30,1999. In addition, On-Demand Solutions,
Inc., a subsidiary of CMGI, was added to the SalesLink credit facility as an
additional borrower.
M. Issuance of Series B Convertible Redeemable Preferred Stock
On December 22, 1998, CMGI completed a $50 million private placement of 50,000
shares of newly issued Series B convertible preferred stock. Each preferred
share has a stated value of $1,000 per share, and accretes an incremental
conversion premium at a rate of 4% per year. Subject to certain limitations,
the Series B convertible preferred stock plus accreted conversion premium may be
converted into shares of the Company's common stock at a fixed price of $26 per
common share for one year or until the earlier occurrence of certain specified
events. Under certain circumstances, the Company has the option to redeem the
Series B convertible preferred stock; and under certain circumstances the
Company may be required to redeem the Series B convertible preferred stock.
After one year or the earlier occurrence of certain specified events, if the
Series B convertible preferred stock has not been redeemed, the conversion price
is based upon a formula which is tied to the undiscounted market price of the
Company's common stock. Subject to waiver by the Company, the maximum number of
shares of the Company's common stock into which the Series B convertible
preferred stock may convert is 4,166,668. The Series B convertible preferred
stock automatically converts into common stock on December 22, 2000. Preferred
stockholders have preference over common stockholders in dividends and
liquidation rights. Proceeds of the private placement were raised to be used
for acquisitions of controlling positions in companies and working capital
purposes. In April, 1999, 15,000 shares of Series B convertible preferred stock,
with a face amount of $15,000,000 and accumulated conversion premium of
$184,000, were converted into 584,004 shares of the Company's common stock.
Page 13
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
N. Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents and convertible preferred stock are included in the calculation of
diluted earnings per share only when the effect of their inclusion would be
dilutive. The effect of convertible preferred stock using the "if-converted"
method was anti-dilutive for the three and nine month periods ended April 30,
1999 and, therefore, has been excluded from the calculation of diluted earnings
per share.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from income (loss) from
continuing operations, 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 for the
three and nine months ended April 30, 1999 and 1998.
The following table sets forth the reconciliation of the numerators and
denominators for the earnings per share calculations per SFAS No. 128:
<TABLE>
<CAPTION>
(in thousands) Three months ended April 30, Nine months ended April 30,
------------------------------ -----------------------------
1999 1998 1999 1998
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Basic and diluted earnings per share:
- -------------------------------------
Income (loss) from continuing operations $(27,223) $ 8,069 $ 24,315 $ (126)
Less: Convertible preferred stock accretion (459) -- (684) --
-------- ------- -------- -------
Income (loss) from continuing operations available to
common stockholders (27,682) 8,069 23,631 (126)
Loss from discontinued operations of lists and
database services segment (527) (147) (806) (79)
Gain on sale of data warehouse product rights -- -- -- 4,978
-------- ------- -------- -------
Net income (loss) available to common stockholders $(28,209) $ 7,922 $ 22,825 $ 4,773
======== ======= ======== =======
Weighted average common shares outstanding - basic 93,904 85,672 92,727 80,852
Effect of dilutive stock options -- 7,016 8,798 --
-------- ------- -------- -------
Weighted average common shares outstanding diluted 93,904 92,688 101,525 80,852
======== ======= ======== =======
</TABLE>
Page 14
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
O. Comprehensive Income
As of August 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income or stockholders' equity. SFAS No. 130 requires all changes
in equity from non-owner sources to be included in the determination of
comprehensive income.
The components of comprehensive income (loss), net of income taxes, are as
follows:
<TABLE>
<CAPTION>
(in thousands) Three months ended April 30, Nine months ended April 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net income (loss) $(27,750) $7,922 $ 23,509 $ 4,773
Net unrealized holding gain (loss) arising during
period (60,543) -- 422,987 1,603
Less: reclassification adjustment for gain
realized in net income (loss) -- -- (4,119) (2,445)
-------- ------ -------- -------
Comprehensive income (loss) $(88,293) $7,922 $442,377 $ 3,931
======== ====== ======== =======
</TABLE>
P. Consolidated Statements of Cash Flows Supplemental Information
<TABLE>
<CAPTION>
(in thousands) Nine months ended April 30,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 2,857 $2,034
======= ======
Income taxes $10,615 $ 517
======= ======
</TABLE>
During the nine months ended April 30, 1999, significant non-cash investing
activities included the sale of the Company's equity interest in Reel.com in
exchange for Hollywood Entertainment available-for-sale securities valued at
$32,801,000, the sale of the Company's minority investment in Sage Enterprises
in exchange for Amazon.com available-for-sale securities valued at $26,519,000,
and the issuance of CMGI stock, Engage stock and convertible notes for
acquisitions (See Notes F and I.)
Q. Available-for-Sale Securities
At April 30, 1999, available-for-sale securities include 296,594 shares of Lycos
common stock and 130,167 shares of USWeb Corporation common stock held by
CMG@Ventures I. Available-for-sale securities at April 30, 1999 also include
the following securities held by CMG@Ventures II: 67,668 shares of Amazon.com
common stock (as adjusted for Amazon.com's 3-for-1 stock split in December 1998)
and 2,429,729 shares of Hollywood Entertainment common stock and 1,737,752
shares of Critical Path, Inc. common stock. Subject to the terms of
CMG@Ventures I and II's operating agreements, certain of the shares held by
these entities may be allocated to CMG@Ventures I and II's profit members in the
future.
Additionally, available-for-sale securities at April 30, 1999 include the
following securities held by CMGI, Inc. directly or through its other
subsidiaries: 5,523,845 shares of Lycos, Inc. common stock; 142,896 shares of
Informix Corporation (formerly Red Brick Systems) common stock; 386,473 shares
of Open Market, Inc. common stock; 2,327,934 shares of Hollywood Entertainment
common stock,
Page 15
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Q. Available-for-Sale Securities (continued)
Available-for-sale securities are carried at fair value as of April 30, 1999,
based on quoted market prices, net of a market value discount to reflect the
remaining restrictions on transferability on certain of these securities. A net
unrealized holding gain of $418,432,000, net of deferred income taxes of
$292,062,000, has been reflected in the equity section of the consolidated
balance sheet based on the change in market value of the available-for-sale
securities from dates of acquisition to April 30, 1999.
CMG@Ventures II also holds 45,177 shares of Amazon.com stock at April 30, 1999
which have been allocated to its profit members and, therefore, have not been
classified as available-for-sale securities in the accompanying consolidated
balance sheet. At April 30, 1999, CMG@Ventures I also holds approximately 1.4
million shares of Lycos common stock which have been allocated to its profit
members and approximately 730,000 Lycos shares which CMG@Ventures I may be
obligated to sell to Lycos in the future, as necessary, to provide for shares
issuable upon the exercise of certain stock options granted by Lycos under its
1995 stock option plan. These shares of Lycos common stock have not been
classified as available-for-sale securities in the accompanying consolidated
balance sheet.
CMG@Ventures II's shares of Amazon.com stock are being held in escrow by an
outside trustee until August 27, 1999 as indemnification related to Amazon.com's
acquisition of Sage Enterprises.
The Hollywood Entertainment common shares held by CMGI and CMG@Ventures II are
subject to restrictions on transferability until September 1, 1999.
R. New Accounting Pronouncements
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.
Page 16
<PAGE>
CMGI, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
S. Subsequent Events
On May 5, 1999, Silknet completed its initial public offering at a
price of $15 per share. CMG@Ventures II currently holds 2.8 million shares of
Silknet common stock (of which approximately 2.2 million shares are attributable
to CMGI), which it acquired at an average cost of $2.42 per share. On June 2,
1999, Critical Path priced an additional offering of 3.5 million shares of
common stock at $49.375 per share. Of the 3.5 million shares offered, 3 million
shares were sold by the company and 500,000 by certain selling shareholders, all
at $49.375 per share. Included in that offering, CMG@Ventures II sold
approximately 45,000 shares, receiving net proceeds of approximately $2.1
million. CMG@Ventures II now holds approximately 1.7 million shares of Critical
Path common stock (of which approximately 1.4 million shares are attributable to
CMGI), which it acquired at an average cost of $1.44 per share. On May 10,
1999, CMGI's majority owned subsidiary, Engage, announced that on
May 7, 1999 it filed with the Securities and Exchange Commission a registration
statement for the initial public offering of its common stock.
On May 13, 1999, CMGI and Gateway announced that the two companies formed a
strategic alliance and will seek out collaborative business and investment
opportunities on the Internet. In addition, Gateway agreed to invest $200
million for an ownership stake in CMGI, subject to certain closing conditions.
On June 7, 1999, CMGI's majority owned subsidiary, NaviSite, Inc., announced it
signed strategic agreements with Dell Computer Corporation and Microsoft
Corporation. In connection with separate strategic alliance agreements, Dell
and Microsoft have each also made separate investments in NaviSite in return for
4.9 and 4.4 percent fully diluted equity stakes, respectively.
On May 13, 1999, CMGI completed the sale of its CMG Direct subsidiary to
Marketing Services Group, Inc. in exchange for cash of approximately $13.9
million and approximately 2.3 million shares of MSGI stock. Also during May,
Yahoo! completed the acquisition of GeoCities, pursuant to which the 8.8 million
shares of GeoCities common stock, and options to purchase an additional 1
million GeoCities shares held by CMG@Ventures were converted to Yahoo! stock and
options. MSGI and Yahoo! shares received will be accounted for as available-
for-sale securities, at market value.
In May 1999, the Company completed the acquisition of Nascent Technologies, Inc.
for approximately $6 million in CMGI stock. Nascent Technologies is a developer
of value-added, carrier-class software that enables service providers to rapidly
launch new services on the World Wide Web.
Also, subsequent to April 30, 1999, CMG@Ventures III acquired minority interests
in Productopia, Inc., NextPlanetOver and one other investment and CMGI@Ventures
II made follow-on investments in Mothernature.com, Universal Learning
Technology, Visto.
Page 17
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this report contain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. All statements other than statements of
historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section and
elsewhere in this report, the risks discussed in the "Risk Factors" section
included in the Company's registration statement on Form S-3 filed with the SEC
on February 5, 1999, as amended and the risks discussed in the Company's other
filings with the SEC. These risks and uncertainties could cause actual results
to differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof.
Deconsolidation of Lycos beginning in the second quarter of fiscal year 1998
During the first quarter of fiscal year 1998, the Company owned in excess
of 50% of Lycos and accounted for its investment under the consolidation method.
Through the subsequent sale and distribution of Lycos shares, the Company's
ownership percentage in Lycos was reduced to below 50% beginning in November
1997. As such, beginning 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 CMGI's other majority owned subsidiaries in the Company's
consolidated balance sheets. The Company's historical quarterly consolidated
operating results for the fiscal quarter ended October 31, 1997 included Lycos
net revenues of $9,303,000 and operating losses of $433,000. Accordingly, CMGI
began accounting for its investment in Lycos (net of shares attributable to
CMG@Ventures I, LLC's profit members and shares which may be required to be
sold to Lycos pursuant to employee stock option exercises) as available-for-sale
securities, carried at fair value.
Deconsolidation of Vicinity beginning in the second quarter of fiscal year 1999
Beginning in November 1998, CMGI's ownership interest in Vicinity was
reduced to below 50% as a result of employee stock option exercises. As such,
beginning in November, 1998, the Company began to account for its remaining
investment in Vicinity under the equity method of accounting, rather than the
consolidation method. Prior to these events, the operating results of Vicinity
were consolidated within the operating results of the Company's investment and
development segment, and the assets and liabilities of Vicinity were
consolidated with those of CMGI's other majority owned subsidiaries in the
Company's consolidated balance sheets. The Company's historical quarterly
consolidated operating results for the fiscal quarter ended October 31, 1998
included Vicinity net revenues of $1,454,000 and operating losses of $621,000.
Page 18
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Fiscal 1998 Fulfillment Segment Results
Operating income in the fulfillment services segment 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 (loss) would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended
October 31, January 31, April 30, July 31,
1997 1998 1998 1998 Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
As 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
=========== =========== =========== =========== ===========
</TABLE>
Discontinued Operations
On March 11, 1999, the Company announced the signing of a binding agreement
to sell its wholly owned subsidiary, CMG Direct to Marketing Services Group,
Inc. (MSGI). At the time, CMG Direct comprised the Company's entire lists and
database services segment. As a result, the operations of the Company's lists
and database services segment have been reflected as income (loss) from
discontinued operations. The gain on sale of certain data warehouse product
rights by the Company's subsidiary, Engage Technologies, Inc. (Engage) in the
first quarter of fiscal 1998 has also been reflected as discontinued operations.
These data warehouse products were developed by Engage during fiscal 1996 and
1997, when Engage was included in the Company's lists and database services
segment. CMG Direct's net assets, which included accounts receivable, prepaid
expenses, net property and equipment, net goodwill, other assets, accounts
payable, accrued expenses and other liabilities are reported as net current and
non-current assets of discontinued operations at April 30, 1999. Certain prior
period amounts in the consolidated financial statements have been reclassified
in accordance with generally accepted accounting principles to reflect the
Company's lists and database services segment as discontinued operations.
Page 19
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Three months ended April 30, 1999 compared to three months ended April 30, 1998
Net revenues for the quarter ended April 30,1999 increased $25,510,000, or
141%, to $43,655,000 from $18,145,000 for the quarter ended April 30, 1998. The
increase was largely attributable to an increase of $17,108,000 in net revenues
for the Company's fulfillment services segment, reflecting increased volume of
turnkey business from Cisco Systems and the acquisitions of On-Demand Solutions
and InSolutions during the fourth quarter of fiscal 1998. Additionally, net
revenues in the Company's investment and development segment increased
$8,402,000. Vicinity net revenues for last year's third quarter ended April 30,
1998 were $1,148,000. Absent the impact of Vicinity, net revenues in the
investment and development segment increased by $9,550,000 or 900%, reflecting
increased revenues for Engage, including the addition of Internet Profiles
Corporation (I/PRO) during the quarter, Adsmart, including the addition of 2CAN
Media (2CAN) during the quarter, NaviSite, and Planet Direct, whose results
included approximately $2.3 million in license revenue from one significant
customer. During the quarter ended April 30, 1999, non-consolidated related
parties accounted for approximately 16% of net revenues in the investment and
development segment. The Company believes that its subsidiary 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 during the remainder of fiscal 1999. Additionally,
subsequent to April 30, 1999, the Company signed an agreement to acquire an
additional Internet company, Nascent Technologies, Inc. Therefore, as a result
of both increased revenue from existing companies, and incremental revenues from
new acquisitions, the Company expects to report future revenue growth.
Cost of revenues increased $24,939,000, or 145%, to $42,169,000 in the
third quarter of fiscal 1999 from $17,230,000 for the corresponding period in
fiscal 1998, reflecting increases of $14,576,000 and $10,363,000 in the
fulfillment services and investment and development segments, respectively.
Adjusted for the $891,000 impact of prior year understatements, cost of sales
increased $13,685,000 in the fulfillment services segment resulting from higher
revenues and the acquisitions of On-Demand Solutions and InSolutions.
Investment and development segment cost of revenues increases were primarily
attributable to higher revenues, the acceleration of operations in the segment
and the additions of I/PRO and 2CAN during the quarter, partially offset by
lower cost of revenues resulting from the deconsolidation of Vicinity beginning
in the second quarter of fiscal 1999. Revenue increases, offset in part by the
impact of deconsolidating Vicinity, is the primary reason cost of revenues as a
percentage of revenues in the investment and development segment decreased to
144% in the third quarter of fiscal 1999 from 222% in the prior year. After
adjusting for prior year understatements, fulfillment services segment cost of
revenues as a percentage of net revenues decreased to 81% in the third quarter
of fiscal 1999 from 83% in the third quarter of fiscal 1998, primarily
reflecting increased operating efficiencies related to turnkey operations.
Research and development expenses increased $1,204,000, or 31%, to
$5,053,000 in the quarter ended April 30, 1999 from $3,849,000 in the prior
year's third quarter. All research and development expenses in both periods
were incurred within the Company's investment and development segment. The
$1,204,000 increase over prior year was primarily due to increased development
efforts at Engage and Planet Direct and incremental costs associated with the
development of NaviNet's technology platform, partially offset by reductions due
to the deconsolidation of Vicinity and reduced NaviSite development costs. In-
process research and development expense was $4.5 million during the three
months ended April 30, 1999 which resulted from the I/PRO acquisition (See
further discussion in "In-Process Research and Development Expense related to
the Acquisition of I/PRO" below) compared to $9.2 million during the nine
months ended April 30, 1998 principally related to the Accipiter transaction.
All in-process research and development expenses in both periods were incurred
within the Company's investment and development segment. The Company
anticipates it will continue to devote substantial resources to product
development and that these costs may substantially increase in future periods.
Page 20
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling expenses increased $5,079,000 or 82% to $11,282,000 in the third
quarter ended April 30, 1999 from $6,203,000 for the corresponding period in
fiscal 1998, primarily reflecting a $5,311,000 increase in the Company's
investment and development segment. The increased costs in the investment and
development segment reflects sales and marketing efforts related to product
launches, the acquisitions of I/PRO and 2CAN and continued growth of sales and
marketing infrastructures, partially offset by reduced selling expenses due to
the deconsolidation of Vicinity. Selling expenses in the fulfillment services
segment decreased by $232,000 in comparison with last year's third quarter due
primarily to headcount reductions. Selling expenses decreased as a percentage
of net revenues to 26% in the third quarter of fiscal 1999 from 34% for the
corresponding period in fiscal 1998, primarily reflecting the impact of
increased revenues. As the Company's subsidiaries continue to introduce new
products and expand revenues, the Company expects to incur significant
promotional expenses, as well as expenses related to the hiring of additional
sales and marketing personnel and increased advertising expenses, and
anticipates that these costs will substantially increase in future periods.
General and administrative expenses increased $9,604,000, or 188%, to
$14,718,000 in the third quarter of fiscal 1999 from $5,114,000 for the
corresponding period in fiscal 1998. The investment and development segment
experienced an increase of $6,858,000, primarily due to the acquisitions of
I/PRO, 2CAN, Activerse, and Magnitude Network (Magnitude), including
approximately $3,200,000 related to higher goodwill charges, and to the building
of management infrastructures in several of the Company's Internet investments.
General and administrative expenses in the fulfillment services segment
increased by $2,746,000 in comparison with last year's third quarter, largely
due to the acquisitions of On-Demand Solutions and InSolutions, including
approximately $650,000 related to higher goodwill charges. General and
administrative expenses as a percentage of net revenues increased to 34% in the
third quarter fiscal 1999 from 28% for the corresponding period in fiscal 1998,
primarily reflecting the impact of increased goodwill charges during the third
quarter of fiscal 1999. The Company anticipates that its general and
administrative expenses will continue to increase significantly as the Company
adds newly acquired subsidiaries and as existing subsidiaries continue to grow
and expand their administrative staffs and infrastructures.
Gain on stock issuance by GeoCities in the third quarter of fiscal 1999
arose primarily as a result of the issuance of stock by GeoCities in its
acquisition of Futuretouch. Gain on sale of Lycos, Inc. common stock in the
third quarter of fiscal 1998 reflects the Company's net gain realized on the
sale of 445,000 shares of Lycos stock. Gain on stock issuance by Lycos, Inc. in
the third quarter of fiscal 1998 resulted primarily from the issuance of stock
by Lycos for the acquisitions of Tripod and WiseWire.
Interest income increased $279,000 to $852,000 in the third fiscal quarter
of 1999 from $573,000 in fiscal 1998, reflecting increased income associated
with higher average corporate cash equivalent balances compared with prior year.
Interest expense increased $287,000 compared with the third quarter of fiscal
1998, primarily due to higher corporate collateralized borrowings and borrowings
incurred in conjunction with the Company's acquisition of InSolutions.
Equity in losses of affiliates resulted from the Company's minority
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 the quarter ended
April 30, 1999 include the results from the Company's minority ownership in
GeoCities, ThingWorld.com, Silknet, Speech Machines, Vicinity, and Engage Japan
JV. Equity in losses of affiliates for the quarter ended April 30, 1998
included the results from the Company's minority ownership in ThingWorld.com,
Silknet, GeoCities, Reel.com, Lycos, Chemdex, Sage Enterprises and Speech
Machines. The Company expects its affiliate 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.
Income tax benefit in the third quarter of fiscal 1999 was $9,473,000.
Exclusive of taxes provided for significant, unusual or extraordinary items that
will be reported separately, the Company provides for income taxes on a year to
date basis at an effective rate based upon its estimate of full year earnings.
In determining the Company's effective rate for the third quarter of fiscal
1999, one-time in-process research and development expense and gain on stock
issuance by GeoCities were excluded.
Page 21
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Nine months ended April 30, 1999 compared to nine months ended April 30, 1998
Net revenues for the nine months ended April 30, 1999 increased
$64,062,000, or 115%, to $120,032,000 from $55,970,000 for the nine months ended
April 30, 1998. The increase was largely attributable to an increase of
$58,177,000 in net revenues for the Company's fulfillment services segment,
reflecting increased volume of turnkey business from Cisco Systems and the
acquisitions of On-Demand Solutions and InSolutions during the fourth quarter of
fiscal 1998. Net revenues from the Company's investment and development segment
increased $5,885,000 compared with the first nine months of fiscal 1998, which
included Lycos and Vicinity net revenues of $9,303,000 and $3,291,000,
respectively. Absent the impact of Lycos and Vicinity, net revenues in the
investment and development segment increased by $17,025,000 reflecting improved
sales by Engage, including the impact of the acquisition of Accipiter in April
1998 and I/PRO in April 1999, Adsmart, including the acquisition of 2CAN in
March 1999, and Planet Direct, including approximately $2.3 million in license
revenue recognized from one significant customer during the third fiscal
quarter. The Company believes that its subsidiary 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 during the remainder of fiscal 1999. Additionally, subsequent to
April 30, 1999, the Company signed an agreement to acquire an additional
Internet company, Nascent Technologies, Inc. Therefore, as a result of both
increased revenues by existing companies and incremental revenues from new
acquisitions, the Company expects to report future revenue growth.
Cost of revenues increased $69,737,000, or 154%, to $114,917,000 for the
nine months ended April 30, 1999 from $45,180,000 for the corresponding period
in fiscal 1998, reflecting increases of $52,696,000 and $17,041,000 in the
fulfillment services and investment and development segments, respectively.
Adjusted for the $2,487,000 impact of prior year understatements, cost of
revenues increased $50,209,000 in the fulfillment services segment, primarily
resulting from higher revenues, the acquisitions of On-Demand Solutions and
InSolutions, and incremental costs incurred in fiscal 1999 associated with
relocating SalesLink's Boston and Chicago operations to more efficient
facilities. Investment and development segment cost of revenues increases were
primarily attributable to higher revenues, the acceleration of operations in the
segment and the impact of acquisitions, partially offset by lower cost of
revenues resulting from the deconsolidation of Lycos beginning in the second
quarter and the deconsolidation of Vicinity beginning in the second quarter of
fiscal 1999. The start up of Internet operations with minimal revenues during
early stages, and the impact of deconsolidating Lycos and Vicinity, are the
primary reasons cost of revenues as a percentage of revenues in the investment
and development segment increased to 148% in the first nine months of fiscal
1999 from 91% in the prior year. After adjusting for prior year
understatements, fulfillment services segment cost of revenues as a percentage
of net revenues increased to 85% in the first nine months of fiscal 1999 from
83% in the first nine months of fiscal 1998, reflecting operating inefficiencies
during a period of high volume growth and the impact of incremental facilities
relocation costs.
Research and development expenses increased $1,236,000, or 9%, to
$15,645,000 for the nine months ended April 30, 1999 from $14,409,000 for the
corresponding period in fiscal 1998. All research and development expenses in
both periods were incurred within the Company's investment and development
segment. The net increase in research and development expenses primarily
reflects development efforts at Engage and its acquisitions of Accipiter and
I/PRO, and incremental costs associated with the development of NaviNet's
technology platform, partially offset by the impact of the deconsolidation of
Lycos and Vicinity. In addition, the Company recorded $4,500,000 of in-process
research and development expenses during the first nine months of fiscal year
1999 related to the Company's acquisition of I/PRO (See further discussion in
"In-process Research and Development Charge Related to Acquisition of I/PRO"
below) compared to the $10,125,000 of in-process research development expense
during the first nine months of fiscal 1998 related to the Company's acquisition
of Accipiter and investments in Speech Machines and Chemdex. The Company
anticipates it will continue to devote substantial resources to product
development and that these costs may substantially increase in future periods.
Page 22
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling expenses increased $4,501,000 or 21% to $26,452,000 for the nine
months ended April 30, 1999 from $21,951,000 for the corresponding period in
fiscal 1998, primarily reflecting a $4,396,000 increase in the Company's
investment and development segment due to the acquisitions of 2 CAN, I/PRO and
Activerse. Investment and development results include a $5,479,000 decrease due
to the deconsolidation of Lycos and reduced marketing expenditures at Planet
Direct, offset by sales and marketing efforts related to several product
launches, the impact of acquisitions, and continued growth of sales and
marketing infrastructures. Selling expenses in the fulfillment services segment
increased by $105,000 in comparison with the corresponding period in fiscal 1998
due to the acquisitions of On-Demand Solutions and InSolutions, partially offset
by headcount reductions. Selling expenses decreased as a percentage of net
revenues to 22% for the first nine months of fiscal 1999 from 39% for the
corresponding period in fiscal 1998, primarily reflecting the deconsolidations
of Lycos and Vicinity as well as the impact of increased revenues. As existing
subsidiaries continue to introduce new products and expand sales, the Company
expects to incur significant promotional expenses, as well as expenses related
to the hiring of additional sales and marketing personnel and increased
advertising expenses, and anticipates that these costs will substantially
increase in future periods.
General and administrative expenses increased $20,141,000, or 148%, to
$33,782,000 for the nine months ended April 30, 1999 from $13,641,000 for the
corresponding period in fiscal 1998. The investment and development segment
experienced an increase of $13,735,000, primarily due to the impact of
acquisitions and the building of management infrastructures in several of the
Company's Internet investments. Such increases were somewhat offset by
reductions associated with the deconsolidations of Lycos and Vicinity. General
and administrative expenses in the fulfillment services segment increased by
$6,406,000 in comparison with last year's corresponding period, largely due to
the acquisitions of On-Demand Solutions and InSolutions, including approximately
$1.2 million in increased goodwill charges. General and administrative expenses
increased as a percentage of net revenues to 28% for the nine months ended April
30, 1999 from 24% for the corresponding period in fiscal 1998. The Company
anticipates that its general and administrative expenses will continue to
increase significantly as the Company adds newly acquired subsidiaries and as
existing subsidiaries continue to grow and expand their administrative staffs
and infrastructures.
Gain on sale of Lycos, Inc. common stock reflects the Company's net gain
realized on the sale of 818,000 Lycos shares in fiscal 1999 and 1,004,900 shares
in fiscal 1998. Gain on stock issuance by Lycos, Inc. in fiscal 1999 resulted
primarily from the issuance of stock by Lycos for the first quarter fiscal 1999
acquisition of WhoWhere? Gain on stock issuance by Lycos, Inc. in fiscal 1998
resulted primarily from the issuance of stock by Lycos for the acquisitions of
Tripod and WiseWire. Gain on stock issuance by GeoCities in fiscal 1999 arose
primarily as a result of the sale of stock by GeoCities in an initial public
offering in August 1998, and the sales of stock by GeoCities in its acquisitions
of Starseed, Inc. (known as WebRing) in December 1998 and Futuretouch during the
third fiscal quarter of 1999. Gain on sale of investment in Sage Enterprises,
Inc. occurred during the first quarter of fiscal year 1999 when CMG@Ventures
II's holdings in Sage Enterprises were converted into 225,558 shares of
Amazon.com, Inc. common stock as part of a merger wherein Amazon.com, Inc.
acquired Sage Enterprises. Gain on sale of investment in Reel.com, Inc.
occurred in October, 1998, when 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. Gain on sale of Amazon.com, Inc. stock reflects the Company's net
gain realized on the sale of 169,538 shares in the second quarter of fiscal
1999. Gain on sale of Premiere Technologies, Inc. stock reflects the Company's
net gain on the sale of 224,795 shares of Premiere Technologies, Inc. stock
during the first quarter of fiscal 1998.
Interest income increased $447,000 to $2,159,000 for the nine months ended
April 30, 1999 from $1,712,000 in fiscal 1998, reflecting increased income
associated with higher average corporate cash equivalent balances compared with
prior year, partially offset by a $540,000 decrease from the deconsolidation of
Lycos. Interest expense increased $1,034,000 compared with the corresponding
period in fiscal 1998, primarily due to higher corporate collateralized
borrowings and borrowings incurred in conjunction with the Company's acquisition
of InSolutions.
Page 23
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Equity in losses of affiliates resulted from the Company's minority
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 the nine months
ended April 30, 1999 include the results from the Company's minority ownership
in Lycos (until January 1999 when the Company's ownership in Lycos was reduced
below 20%), GeoCities, ThingWorld.com, Silknet, Speech Machines, Mother Nature,
Vicinity, Engage Japan JV, and Magnitude Network (until February 1999 when the
Company's ownership in Magnitude Network increased above 50%). Equity in losses
of affiliates for the nine months ended, April 30, 1998 included the results
from the Company's minority ownership in Ikonic, ThingWorld.com, Silknet,
GeoCities, Reel.com, Lycos, Chemdex, Planet All and Speech Machines. The
Company expects its affiliate 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.
Income tax expense from continuing operations for the nine months ended
April 30, 1999 was $30,981,000. Exclusive of taxes provided for significant,
unusual or extraordinary items that will be reported separately, the Company
provides for income taxes on a year to date basis at an effective rate based
upon its estimate of full year earnings. In determining the Company's effective
rate for fiscal 1999, one-time in-process research and development expense,
gains on stock issuances by Lycos and GeoCities, gains on sales of investments
in Sage Enterprises, Inc. and Reel.com, Inc., and gains on sales of Lycos, Inc.
and Amazon.com, Inc. common stock were excluded.
In-Process Research and Development Expense Related to the Acquisition of I/PRO
The Company's subsidiary, Engage acquired I/PRO on April 7, 1999 for total
purchase consideration of $30.3 million. The portion of the purchase price
allocated to in-process research and development expense was $4.5 million, or
approximately 15% of the total purchase price. At the acquisition date, I/PRO's
major in-process project was the development of a new data processing system,
project name Normandy, which is intended to provide improved functionality. In
general, the existing data processing system does not provide for the fault
tolerance, scalability and data processing efficiency that may be required to
meet future customer needs. Accordingly, customers' long-term product needs
required I/PRO to substantially redesign the data processing system to develop
new technologies in the areas of: (1) fault tolerance and scalability, (2)
system management, (3) data capture and (4) path analysis functionality (the
ability to track movement of Web visitors across Web pages).
At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August 1999. The initial
development effort had commenced in late 1998. At the acquisition date, the new
Normandy technology had not reached a completed prototype stage and beta testing
had not yet commenced. At the time of the I/PRO acquisition, the Normandy
project was approximately 64% complete.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including core developed technology, assembled
workforce, working capital and fixed assets. The cash flows are then discounted
to present value at an appropriate rate. Discount rates are determined by an
analysis of the risks associated with each of the identified intangible assets.
The discount rate used for in-process research and development was 30%, a
premium over Engage's estimated weighted-average forecast period. Revenue was
predicted to grow at rates comparable to the growth of Internet cost of capital
of 25%. The discount rate used for core developed technology was 22%.
The resulting net cash flows to which the discount rate was applied are
based on management's estimates of revenues, cost of revenues, research and
development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are based
on the assumptions set forth below.
Page 24
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Management projected average annual revenue increases for the forecast
period based on its assessment of future market potential and the ability of
I/PRO to successfully implement the Normandy technology. Revenue was predicted
to grow at rates comparable to the growth of Internet users and online activity
and the impact such growth would have on Internet service companies. Revenue
related to the Normandy project were separately identified.
These projections are based on management's estimates of the significant
growth in the number of companies engaged in e-commerce (which is supported by
independent market data), the need for e-commerce companies to utilize
independent audit, verification and analysis services, expected trends in
technology (such as increased speed of the Internet, reduced hardware costs and
the resulting increase in new Internet users) and the nature and expected timing
of new product introductions by its competitors. These estimates also include
growth related to the use of certain I/PRO technologies in conjunction with
Engage's products and the benefits of Engage's incremental financial support and
stability.
I/PRO's estimated cost of revenues as a percentage of revenue is expected
to significantly decrease on a stand-alone basis (85% in 1998), as certain fixed
costs included in cost of sales are spread over a larger revenue base and
provide for the realization of efficiencies due to economies of scale. The
Normandy technology is expected to greatly increase the automation of data
processing, allowing significant labor cost savings per revenue dollar.
Increases in hardware utilization are also expected. Due to these savings, the
estimated cost of sales as a percentage of revenue is expected to decrease to a
low of 20% in the fifth forecast year.
I/PRO's operating expenses are expected to increase on an absolute basis,
but to significantly decrease as a percentage of revenue over the term of the
forecast (192% in 1998). Certain fixed expenses are spread over a larger revenue
base and provide for the realization of efficiencies due to economies of scale.
Due to these savings, the estimated operating expenses as a percentage of
revenue is expected to decrease to a low of 49% in the fifth forecast year.
Page 25
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
During January 1999, CMGI sold 748,000 shares of Lycos, Inc. stock for
total proceeds of $50.6 million. As a result of the Company's sale of Lycos
shares during January 1999, the Company's ownership interest in Lycos fell below
20% of Lycos' outstanding shares. With this decline in ownership below 20%,
CMGI began accounting for its investment in Lycos as available-for-sale
securities, carried at fair value, rather than under the equity method.
Excluding shares attributable to profit members of CMG@Ventures I, LLC and
shares which may be required to be sold to Lycos pursuant to employee stock
option exercises at April 30, 1999, the carrying value of the Lycos shares was
approximately $580 million. On March 29, 1999, Critical Path successfully
completed its initial public offering (IPO) at a price of $24 per share, raising
net proceeds to Critical Path in excess of $100 million. The Company, through
its subsidiary limited liability company, CMG@Ventures II, has invested a total
of $2.5 million in Critical Path beginning in April 1998, and prior to March 29,
1999, accounted for its minority investment in Critical Path at cost. As a
result of the Critical Path IPO, it became appropriate for CMGI to begin
accounting for its investment in Critical Path as available-for-sale securities,
carried at fair value, rather than at cost. Excluding shares attributable to
profit members of CMG@Ventures II, LLC, at April 30, 1999, the carrying value of
the Critical Path shares was approximately $173 million.
Working capital at April 30, 1999 increased to $595 million compared to
$13 million at July 31, 1998. Approximately $563 million of the net increase
in working capital is attributable to increased amounts of available-for sale
securities, net of associated deferred tax liabilities. The largest
contributing factors to this increase were the changes in the Company's method
of accounting for its investments in Lycos and Critical Path to available-for-
sale securities, carried at fair value, rather than under the equity and cost
methods, respectively. The Company's principal sources of capital during the
first nine months of fiscal 1999 were $53.1 million received from the sale of
Lycos stock, $49.9 million from issuance of Series B convertible preferred
stock, and $27.2 million received from the sale of Amazon.com stock. The
Company's principal uses of capital during the first nine months of fiscal 1999
were $62.4 million for funding of operations, primarily those of start-up
activities in the Company's investment and development segment, $31.1 million
for the purchase of Hollywood Entertainment stock, $49.4 million for investments
in affiliates and acquisitions of subsidiaries (net of cash acquired), $11.6
million for net repayments of notes payable and long-term debt, and $7.8 million
for purchases of property and equipment.
The Company's $20 million collateralized corporate borrowing facility
became payable in full on January 20, 1999. Upon its maturity, CMGI renewed
this $20 million facility for another one-year period, with similar terms as the
expiring facility. This borrowing is now secured by 762,465 of CMGI's shares of
Lycos common stock. Under this agreement, CMGI could become subject to
additional collateral requirements under certain circumstances. The Company
expects to again seek the renewal of this facility upon its next maturity on
January 20, 2000. The Company's subsidiary, SalesLink has a $14.7 million bank
term note outstanding at April 30, 1999, which provides for repayment in
quarterly installments through November 2002. Additionally, SalesLink's credit
agreement includes a $9 million revolving line of credit, of which $1.1 million
has been reserved in support of outstanding letters of credit for operating
leases as of April 30, 1999, and $7.9 million is available for future
borrowings. The obligations of SalesLink under its bank line of credit and bank
term loans had been classified as current liabilities in the Company's July 31,
1998 and January 31, 1999 balance sheets since, at those dates, SalesLink was
not in compliance with certain covenants of its borrowing arrangements. In
connection with the investment by CMGI in $10 million original principal amount
of subordinated convertible notes and warrants to purchase SalesLink Series A
Convertible Preferred Stock, the bank has since waived all covenant defaults and
amended certain covenants contained in the SalesLink bank facility. There are
no current defaults. In addition, On-Demand Solutions, Inc. was added to the
SalesLink credit facility as an additional borrower.
Page 26
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
In December 1998, CMGI announced the close of the @Ventures III venture
capital fund. This fund has secured $212 million in capital commitments from
outside investors, which will be invested in emerging Internet service and
technology companies through two newly formed entities, @Ventures III L.P. and
@Ventures III Foreign Fund, L.P. CMGI does not have a direct ownership interest
in either of these newly created entities, but CMGI is entitled to 2% of the net
capital gains realized by both entities. Management of these entities,
including investment and sale decisions, is the responsibility of @Ventures
Partners III, LLC, whose members include David S. Wetherell, CMGI's President
and Chief Executive Officer, and Andrew J. Hajducky III, CMGI's Chief Financial
Officer. The Company has committed to contribute $54 million to its newly
formed limited liability company subsidiary, CMG@Ventures III, LLC, of which
approximately $10 million has been funded as of April 30, 1999. CMG@Ventures
III, LLC will take strategic positions side by side with @Ventures III L.P.
CMGI owns 100% of the capital and is entitled to 80% of the net capital gains
realized by CMG@Ventures III, LLC. @Ventures Partners III, LLC is entitled to
the remaining 20% of the net capital gains realized by CMG@Ventures III, LLC.
During the first nine months of fiscal year 1999 through CMG@Ventures
III, LLC, CMGI acquired minority ownership interests in thirteen Internet
companies, including Raging Bull, Asimba, Virtual Ink, Ancestry.com,
Furniture.com, HotLinks, Medical Village, NextMonet.com, ONElist, OneCore.com,
eCircles.com, advoco.com, and Carparts.com, for an aggregate total of
approximately $10 million. Raging Bull is a financial Web message board service
that offers the ability to filter content and tailor personally relevant
financial information to meet users' needs. Asimba is creating a content rich,
personalized, online community for the competitive and recreational sports
market. Virtual Ink is a newly launched company focused on the development of
Digital Meeting Assistant TM (DMA) technologies. Ancestry.com is a provider of
community, content and commerce resources for families via the Internet,
including the Web's largest repository of searchable genealogy data.
Furniture.com is an e-commerce provider of a broad selection of furniture and
home furnishing accessories. HotLinks operates a service that allows users to
create personal Web directories. Medical Village is an Internet community of
medical professionals offering members a variety of services including access to
a searchable, comprehensive healthcare industry database, communication with
other members, ordering from online medical product catalogs and access to
current healthcare industry news. NextMonet is developing an ecommerce site for
purchasers of art, in the form of an on-line art gallery. ONElist provides free
e-mail communities via the Internet, allowing users to search for or subscribe
to tens of thousands of communities on different topics or create their own
community. OneCore.com offers an integrated set of Web-based financial
applications targeted at small businesses. eCircles.com provides a free service
that allows for friends and family to share information and coordinate events on
the World Wide Web. Advoco provides an electronic marketplace for interactive
advice servicing a wide range of categories. Carparts.com operates the only
Website that provides consumers with a search capability to locate and order
online certain auto parts. The Company anticipates synergies between these
strategic positions and CMGI's core businesses, including speeding technological
innovation and access to markets. Each of the thirteen new investments made by
CMG@Ventures III, LLC during the first nine months of fiscal year 1999 are
carried at cost in CMGI's consolidated financial statements.
During the first nine months of fiscal year 1999 through CMG@Ventures II,
CMGI made follow-on investments in Chemdex, Critical Path, KOZ,
MotherNature.com, Silknet, Softway Systems and ThingWorld.com, for an aggregate
total of approximately $11 million.
During February 1999, CMGI exercised its right to invest an additional $22
million to increase its ownership in Magnitude Network from 23% to 92%. CMGI
had previously invested a total of $2.5 million in Magnitude Network in July and
October 1998. Accordingly, beginning in February 1999, CMGI began accounting for
its investment in Magnitude Network under the consolidation method of
accounting, rather than the equity method. The acquisition accounting and
valuation for CMGI's investment in Magnitude Network may result in a significant
portion of the investment being identified as in-process research and
development, in accordance with valuation methodologies provided by the
Securities and Exchange Commission, which is expected to be charged to operating
results in the fourth quarter when the amount is determined.
Page 27
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
On March 11, 1999, CMGI completed the acquisition of 2CAN Media, Inc.
(2CAN) for initial consideration of approximately $27,493,000. Immediately
following the completion of the acquisition, on March 11, 1999, 2CAN was merged
with and into Adsmart Corporation (Adsmart), a majority-owned subsidiary of
CMGI, with Adsmart becoming the surviving corporation. 2CAN was a Los Angeles,
California-based full-service interactive media company serving the entire
online advertising community with site-focused sales and advertising
representation and was comprised of five distinct sales channels: WebRep,
Pinnacle Interactive, ECG, MediaPlus and Grupo NetFuerza. As the primary
component of the initial consideration paid for 2CAN, CMGI and Adsmart jointly
issued convertible promissory notes (the "Promissory Notes") in the aggregate
principal amount of $26,983,000. The Promissory Notes bear interest at an annual
rate of 6.5% and are due and payable in full, with accrued interest, on March
11, 2004. The holders of the Promissory Notes can elect at any time prior to
March 11, 2004, to convert all or a portion of the outstanding principal and
accrued interest (the "Conversion Amount") into the following: 14.66% of the
Conversion Amount will be paid in cash, 14.66% of the Conversion Amount will be
paid in shares of CMGI common stock and 70.68% of the Conversion Amount will be
paid in either shares of CMGI common stock or Adsmart common shares based on the
election of the Promissory Note holders. As of April 30, 1999, Promissory Notes
in the principal amount of $23,333,000 had been converted into $3,433,000 in
cash and 304,210 shares of CMGI common stock. The principal amounts payable
under the Promissory Notes are subject to a $1 for $1 reduction if certain
revenue amounts are not achieved by Adsmart during the period from March 11,
1999 to December 31, 1999. Additionally, the initial consideration is subject to
an increase of $0.83 for each $1 of calendar year 1999 revenues achieved by
Adsmart and 2CAN in excess of $28 million. The additional consideration is
payable in shares of CMGI common stock. The shares of CMGI common stock are not
registered under the Securities Act of 1933, as amended, and are subject to a
Lockup Agreement. The Lockup Agreement prohibits transfer of the shares of CMGI
common stock, without the permission of the Company, for a period of twelve
months following the date of the issuance.
In April 1999, the Company's subsidiary, Engage, acquired Internet Profiles
Corporation (I/PRO), which provides Web site traffic measurement and audit
services, for approximately $30.6 million, consisting of $1.6 million in net
cash, $20.9 million in CMGI shares and $7.8 million in Engage shares and
options. Engage has recorded an expense of $4.5 million in the third quarter of
fiscal 1999 representing acquired in-process research and development that had
not yet reached technological feasibility and had no alternative future use. In
addition, CMGI must pay up to $3.0 million to I/PRO stockholders if performance
goals are met relating to the gross revenue of I/PRO for the year ended March
31, 2000; data contributed to the Engage knowledge database as of March 31,
2000; and various employees of I/PRO continuing employment with Engage. Engage
must reimburse CMGI for any such payments, at CMGI's election, in cash or by
issuance of shares of Engage common stock at its then fair market value. Any
additional payment will be treated as additional purchase price and amortized
over the balance of the two or five year period. The shares of CMGI common stock
are not registered under the Securities Act of 1933, as amended, and are subject
to a Lockup Agreement. The Lockup Agreement prohibits transfer of the CMGI
Shares, without the permission of the Company, for periods of up to twelve
months following the date of the issuance of the shares of CMGI common stock.
On April 4, 1999, CMGI completed its acquisition of Activerse, Inc.
(Activerse), a provider of open standard Internet messaging technologies, for
198,536 shares of the Company's common stock. The shares issued by the Company
under the Activerse acquisition are not registered under the Securities Act of
1933 and are subject to restrictions on transferability for a period of one year
from the date of issuance. The total purchase price for Activerse was valued at
approximately$13,800,000, including costs of acquisition of $100,000. The
value of the Company's shares included in the purchase price was recorded net of
a weighted average 12% market value discount to reflect the restrictions on
transferability.
Page 28
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
On May 5, 1999, Silknet completed its initial public offering at a price of
$15 per share. CMG@Ventures II currently holds 2.8 million shares of Silknet
common stock (of which approximately 2.2 million shares are attributable to
CMGI), which it acquired at an average cost of $2.42 per share. On June 2, 1999,
Critical Path priced an additional offering of 3.5 million shares of common
stock at $49.375 per share. Of the 3.5 million shares offered, 3 million shares
were sold by Critical Path and 500,000 by certain selling shareholders, all at
$49.375 per share. Included in that offering, CMG@Ventures II sold approximately
45,000 shares, receiving net proceeds of approximately $2.1 million.
On May 13, 1999, CMGI and Gateway announced that the two companies formed a
strategic alliance and will seek out collaborative business and investment
opportunities on the Internet. In addition, Gateway agreed to invest $200
million for an ownership stake in CMGI, subject to certain closing conditions.
On June 7, 1999, CMGI's majority owned subsidiary, NaviSite, Inc., announced it
signed strategic agreements with Dell Computer Corporation and Microsoft
Corporation. In connection with separate strategic alliance agreements, Dell and
Microsoft have each also made seperate investments in NaviSite in return for 4.9
and 4.4 percent fully diluted equity stakes, respectively.
On May 13, 1999, CMGI completed the sale of its CMG Direct subsidiary to
Marketing Services Group, Inc. in exchange for cash of approximately $13.9
million and approximately 2.3 million shares of MSGI stock. Also during May,
Yahoo! completed the acquisition of GeoCities, pursuant to which the 8.8 million
shares of GeoCities common stock, and options to purchase an additional 1
million GeoCities shares held by CMG@Ventures were converted to Yahoo! stock and
options. MSGI and Yahoo! shares received will be accounted for as available-
for-sale securities, at market value.
Along with CMGI's other Internet subsidiaries, CMGI's newly acquired
subsidiaries, Activerse, I/PRO, Magnitude Network, Nascent Technologies and 2CAN
are in early stages of business development and therefore are expected to
require additional cash funding by the Company to fund their operations. 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 available-for-sale securities which could be sold or
posted as additional collateral for additional loans, will be sufficient to fund
its operations, investments and capital expenditures for the foreseeable future.
Additionally, the Company may also choose to raise additional capital through
private placement. Should additional capital be needed to fund future
investment and acquisition activity, the Company may seek to raise additional
capital through public or private offerings of the Company's or its
subsidiaries' stock, or through debt financing. It is also contemplated that
the Company may look to raise a fourth Internet investment fund, which could
seek to secure outside investment commitments of up to $1 billion in the near
future.
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 will need to update or replace
their software and computer systems in order to comply with such "Year 2000"
requirements. CMGI is in the process of evaluating the Year 2000 compliance of
its products and services. The Company is also evaluating the Year 2000
compliance of third party equipment and software that CMGI uses in both
information technology and non-information technology applications in our
business. Examples of non-information technology systems include our building
security and voice mail systems.
Page 29
<PAGE>
CMGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company's Year 2000 project plan is coordinated by a committee that
reports to senior management, as well as to CMGI's Board of Directors on a
periodic basis. The Company's Year 2000 readiness efforts consist of the
following four phases:
(1) Identification of all software products, information technology
systems and non-information technology systems the Company offers or
uses. The Company has substantially completed this phase for its
existing systems.
(2) Testing and assessment of these products and systems to determine
repair or replacement requirements for each. The Company expects to
substantially complete this phase by July 1999 for its existing
systems.
(3) Repair or replacement of products and systems, where required, to
achieve Year 2000 compliance. The Company expects to substantially
complete this phase by July 1999 for its existing business-critical
systems.
(4) Creation of contingency plans in the event of Year 2000 failures. The
Company expects that its initial contingency plan will be completed by
July 1999.
Acquisitions made subsequent to May 1, 1999 may not follow the dates
specified above.
Through April 30, 1999, the Company has incurred expenditures of
approximately $2 million in connection with Year 2000 readiness efforts.
Preliminary cost estimates for the Company to evaluate and address its Year 2000
issues for CMGI's existing business-critical systems are in the range of $4.5
million to $6 million. There is no assurance that our Year 2000 costs will not
exceed these estimated amounts.
The Company's business model includes expansion through the acquisition of
businesses, technologies, products and services from other businesses. As the
Company continues to expand in this manner throughout calendar 1999, the scope
and cost estimates of CMGI's Year 2000 efforts may increase substantially.
The Company's failure to resolve Year 2000 issues with respect to its
products and services could damage CMGI's business and revenues and result in
liability on the Company's part for such failure. The Company's business and its
prospects may be permanently affected by either the liability the Company incurs
to third parties or the negative impact on CMGI's business reputation. The
Company also relies upon various vendors, utility companies, telecommunications
service companies, delivery service companies and other service providers who
are outside of CMGI's control. There is no assurance that such companies will
not suffer a Year 2000 business disruption, which could harm CMGI's business and
financial condition. Furthermore, if third-party equipment or software CMGI
uses in its business fails to operate properly with regard to the year 2000 CMGI
may need to incur significant unanticipated expenses to remedy any such
problems.
Page 30
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to equity price risks on the marketable portion of
its equity securities. The Company's available-for-sale securities at April 30,
1999 include strategic equity positions in companies in the Internet industry
sector, including Lycos, Inc., Critical Path, Amazon.com, Inc. and Open Market,
Inc., many of which have experienced significant historical volatility in their
stock prices. The Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 20% adverse change in equity prices,
based on a sensitivity analysis of the Company's available-for-sale securities
portfolio as of April 30, 1999, would result in an approximate $177.2 million
decrease in the fair value of the Company's available-for-sale securities.
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate 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.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in interest rates on its borrowing
arrangements. The Company does not enter into derivative financial instruments
for trading purposes. As a matter of policy all derivative positions are used
to reduce risk by hedging underlying economic exposure. The derivatives the
Company uses are straightforward instruments with liquid markets. At April 30,
1999, the Company was primarily exposed to the London Interbank Offered Rate
(LIBOR) interest rate on the outstanding borrowings under its line of credit and
other bank borrowing arrangements.
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may
dramatically increase. Therefore, in the future, the Company may consider
utilizing derivative instruments to mitigate such risks.
Page 31
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
On March 11, 1999 as a result of a conversion of notes issued to effect its
acquisition of 2CAN Media, the Company issued 304,210 shares of its common stock
to holders of the notes in consideration of the acquisition of all of the issued
and outstanding shares of capital stock of 2Can Media. The shares issued by the
Company are not registered under the Securities Act of 1933, as amended and
carry restrictions on transfer or sale for a period of twelve months.
On April 4, 1999 the Company issued 198,536 shares of its common stock to
shareholders of Activerse, Inc. in consideration of the acquisition of all of
the issued and outstanding shares of capital stock of Activerse, Inc. The shares
issued by the Company are not registered under the Securities Act of 1933, as
amended and carry restrictions on transfer or sale for a period of twelve
months.
The shares issued in the above mentioned transactions were issued in
private placements in reliance upon the exemption provided by section 4 (2) of
the Securities Act of 1933.
Page 32
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 13, 1999 the Company held a Special Meeting of Stockholders. At
the meeting the following matters were approved (Note: All amounts are split-
adjusted):
1. An amendment to the Company's Restated Certificate of Incorporation to
provide for an increase in the number of authorized shares of Common
Stock, $0.01 par value per share, from 100,000,000 to 400,000,000 was
approved. 64,468,974 shares of Common Stock were voted for such
amendment, 1,120,376 shares of Common Stock were voted against such
amendment and 72,858 shares of Common Stock abstained from the vote.
1,000 shares of common stock were subject to non-votes.
2. An amendment to the Company's 1986 Stock Option Plan and 1995 Employee
Stock Option Purchase Plan to provide for an increase in the maximum
number of shares of the Company's Common Stock available under its two
plans combined from nine million shares to fourteen million shares was
approved. 31,700,584 shares of Common Stock were voted for such
amendment, 5,520,190 shares of Common Stock were voted against such
amendment and 244,268shares of Common Stock abstained from the vote.
24,677,996 shares of common stock were subject to non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are filed herewith or incorporated by reference
pursuant to Rule 12b-32 under the Securities Exchange Act of 1934:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Exhibit No. Title Method of Filing
- --------------- ------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
3 (I) Amended and Restated Certificate of Incorporated by reference from Exhibit 99.3 to the
Incorporation Current Report on Form 8-K filed with the SEC on
January 7, 1999.
- -----------------------------------------------------------------------------------------------------------------------
3 (ii) Restated By-Laws Incorporated by reference from Registration
Statement on Form S-1, as amended, filed on
November 10, 1993 (Registration No. 33-71518).
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 33
<PAGE>
CMGI, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K (continued)
--------------------------------------------
(b) Exhibits (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Exhibit No. Title Method of Filing
- --------------- ------------------------------------------------------------- ---------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
10.1 First Amendment to Amended and Restated Revolving Credit Filed herewith.
and Term Loan Agreement, dated as of June 11, 1998, among
SalesLink Corporation, InSolutions Incorporated, Pacific
Direct Marketing Corp., BankBoston, N.A. and the other
lending institutions set forth in Schedule 1.
- ----------------------------------------------------------------------------------------------------------------------------------
10.2 Second Amended and Restated Term Note, dated March 16, 1999 Filed herewith.
among Saleslink.com Corporation, Insolutions Incorporated,
On-Demand Solutions, Inc. and BankBoston, N.A.
- ----------------------------------------------------------------------------------------------------------------------------------
10.3 Second Amended and Restated Term Note, dated March 16, 1999 Filed herewith.
among Saleslink.com Corporation, Insolutions Incorporated,
On-Demand Solutions, Inc. and Imperial Bank
- ----------------------------------------------------------------------------------------------------------------------------------
10.4 Security Agreement, dated March 16, 1999 between On-Demand Filed herewith.
Solutions and BankBoston, N.A.
- ----------------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule for the nine months ended April 30, Filed herewith.
1999
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) Reports on Form 8-K.
On May 7, 1999, the Company filed a Current Report on Form 8-K in
conjunction with its news release related to the restatement of its results for
its third and fourth quarters of fiscal 1998 ended April 30, 1998 and July 31,
1998, respectively, and its first and second quarters of fiscal 1999 ended
October 31, 1998 and January 31, 1999, respectively.
Page 34
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
--------------------------
Date: June 14, 1999 Andrew J. Hajducky III, CPA
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
Page 35
<PAGE>
Exhibit 10.1
FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING
CREDIT AND TERM LOAN AGREEMENT
FIRST Amendment to amended and restated REVOLVING Credit AND TERM LOAN
Agreement, dated as of March 16, 1999 (this "Amendment"), by and among
SALESLINK.COM CORPORATION ("SalesLink"), INSOLUTIONS INCORPORATED
("InSolutions", and, collectively with SalesLink, the "Existing Borrowers" and
each individually, an "Existing Borrower"), ON-DEMAND SOLUTIONS, INC., a
Massachusetts corporation (the "New Borrower" and, collectively with the
Existing Borrowers, the "Borrowers" and each individually, a "Borrower") PACIFIC
DIRECT MARKETING CORP. (the "Subsidiary Guarantor"), BANKBOSTON, N.A. and the
other lending institutions listed on Schedule 1 to the Credit Agreement
-------- -
(collectively, the "Banks") and BANKBOSTON, N.A. as agent for the Banks (in such
capacity, the "Agent"), amending certain provisions of the Amended and Restated
Revolving Credit and Term Loan Agreement, dated as of June 11, 1998 (as amended
and in effect from time to time, the "Credit Agreement"), by and among the
Existing Borrowers, the Subsidiary Guarantor, the Agent and the Banks. Terms
not otherwise defined herein which are defined in the Credit Agreement shall
have the same respective meanings herein as therein.
WHEREAS, the New Borrower wishes to become a party (and a joint and several
Borrower) to the Credit Agreement and the Banks have agreed, subject to the
terms and conditions set forth in the Credit Agreement and herein, to make Loans
and otherwise extend credit to the New Borrower;
WHEREAS, the Borrowers, the Banks and the Agent desire to amend certain
provisions of the Credit Agreement as provided more fully herein below;
NOW THEREFORE, in consideration of the mutual agreements contained in the
Credit Agreement and herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
(S)1. Amendment to Introductory Paragraph of the Credit Agreement. The
--------- -- ------------ --------- -- --- ------ ---------
introductory paragraph of the Credit Agreement is hereby amended by deleting
such paragraph in its entirety and restating it as follows:
This AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT
(this "Agreement") is made as of June 11, 1998 by and among (a)
SALESLINK.COM CORPORATION ("SalesLink"), a Delaware corporation having its
principal place of business at 425 Medford Street, Charlestown,
Massachusetts 02129, (b) INSOLUTIONS INCORPORATED ("InSolutions"), a
Delaware corporation having its principal place
<PAGE>
-2-
of business at 2940 Kifer Road, Santa Clara, California 95051, (c) ON-
DEMAND SOLUTIONS, INC. ("On-Demand", and collectively with SalesLink and
Insolutions, the "Borrowers" and each individually, a "Borrower"), a
Massachusetts corporation having its principal place of business at 30A
Upton Drive, Wilmington, MA 01887, (d) PACIFIC DIRECT MARKING CORP.
("Pacific Direct"), a California corporation having its principal place of
business at 8356 Thornton Avenue, Newark, California 94520, (e) BANKBOSTON,
N.A. (formerly known as The First National Bank of Boston), a national
banking association, and the other lending institutions listed on Schedule
1 hereto and (f) BANKBOSTON, N.A. as agent for itself and such other
lending institutions.
(S)2. Amendment to Section 1. Section 1 of the Credit Agreement is hereby
--------- -- ---------
amended as follows:
(a) the definition of "Combined Total Interest Expense" is hereby amended
by deleting such definition in its entirety and restating it as follows:
Combined Total Interest Expense: For any period, the aggregate
-------- ----- -------- -------
amount of interest required to be paid or accrued by the Borrowers and
their Subsidiaries during such period on all Indebtedness of the Borrowers
and their Subsidiaries outstanding during all or any part of such period,
other than the Subordinated Debt, whether such interest was or is required
to be reflected as an item of expense or capitalized, including payments
consisting of interest in respect of Capitalized Leases and including
commitment fees, agency fees, facility fees, balance deficiency fees and
similar fees or expenses in connection with the borrowing of money.
(b) the definition of "EBITDA" is hereby amended by deleting such
definition in its entirety and restating it as follows:
EBITDA: With respect to any fiscal period, an amount equal to the
------
sum of (a) Combined Net Income for such period, plus (b) to the extent
----
deducted in the calculation of such Person's Combined Net Income and
without duplication, (i) depreciation and amortization for such period,
plus (ii) other noncash charges, including, without limitation, in process
----
research and development expenses or charges, made in calculating Combined
Net Income for such period, plus (iii) restructuring charges taken by any
----
Borrower in such period (1) for inventory writedown up to a maximum
aggregate amount of not more than $3,100,000 and (2) relating to moving and
relocation up to a maximum aggregate amount of not more than $2,100,000,
plus (iv) tax expense for such period, plus (v) Combined Total Interest
---- ----
Expense paid or accrued during such period, all as determined in accordance
with GAAP.
<PAGE>
-3-
(c) the definition of "Loan Documents" is hereby amended by inserting
immediately following the words "the Letters of Credit" a comma and the words
"the Subordination Agreement".
(d) the definition of "Security Agreements" is hereby amended by deleting
such definition in its entirety and restating it as follows:
Security Agreements: Collectively, (a) the Amended and Restated
-------------------
Security Agreement, dated or to be dated on or prior to the Closing Date,
among SalesLink, InSolutions and the Agent and in form and substance
satisfactory to the Agent; (b) the Amended and Restated Security Agreement,
dated or to be dated on or prior to the Closing Date, between Pacific
Direct and the Agent, and in form and substance satisfactory to the Agent;
and (c) the Security Agreement, dated or to be dated on or prior to March
16, 1999, between On-Demand and the Agent and in form and substance
satisfactory to the Agent, and as each Security Agreement may be amended,
restated, modified and/or supplemented from time to time.
(e) the definition of "Total Funded Indebtedness" is hereby amended by
deleting such definition in its entirety and restating it as follows:
Total Funded Indebtedness: All Indebtedness of the Borrowers and their
-------------------------
Subsidiaries for borrowed money (other than the Subordinated Debt),
purchase money Indebtedness and with respect to Capitalized Leases,
determined on a consolidated basis in accordance with GAAP.
(f) Section 1.1 of the Credit Agreement is further amended by inserting
the following definition in the appropriate alphabetical order:
Subordinated Debt. Unsecured Indebtedness of SalesLink that is
-----------------
expressly subordinated and made junior to the payment and performance in
full of the Obligations, and evidenced as such by the Subordination
Agreement or by another written instrument containing subordination
provisions in form and substance approved by the Agent in writing.
Subordination Agreement. The Subordination Agreement, dated as of
-----------------------
January 29, 1999, among the Agent, the Parent and SalesLink and in form and
substance satisfactory to the Banks and the Agent.
(S)3. Amendment to Section 2 of the Credit Agreement. Section 2.2(d) of
----------------------------------------------
the Credit Agreement is hereby amended by deleting the words "dated
<PAGE>
-4-
as of the Closing Date" which appears in the first sentence of (S)2.2 and
substituting in place thereof the words "dated as of March 16, 1999".
(S)4. Amendment to Section 3 of the Credit Agreement. Section 3.2 of the
----------------------------------------------
Credit Agreement is hereby amended by deleting the words "dated the Closing
Date" which appears in the first sentence of (S)3.2 and substituting in place
thereof the words "dated as of March 16, 1999".
(S)5. Amendment to Section 9 of the Credit Agreement. Section 9 of the
----------------------------------------------
Credit Agreement is hereby amended as follows:
(a) Section 9.1(a)(v) of the Credit Agreement is hereby amended by
deleting the words "within twenty (20) days after the end of each calendar month
or at such earlier time as the Agent may reasonably request, a Borrowing Base
Report" and substituting in place thereof the words "within thirty (30) days
after the end of each calendar month or at such earlier time as the Agent may
reasonably request, a Borrowing Base Report";
(b) Section 9.1(a)(vi) of the Credit Agreement is hereby amended by
deleting the words "within twenty (20) days after the end of each calendar
month, an Accounts Receivable aging report" and substituting in place thereof
the words "within thirty (30) days after the end of each calendar month, an
Accounts Receivable aging report".
(c) Section 9.2(a)(vi) of the Credit Agreement is hereby amended by
deleting the text of (S)9.2(a)(vi) in its entirety and restating it as follows:
"the Subordinated Debt and Indebtedness not otherwise included above and listed
on Schedule 9.2(a) hereto; and".
(d) Section 9.3(a) of the Credit Agreement is hereby amended by deleting
(S)9.3(a) in its entirety and restating it as follows:
(a) make capital expenditures or incur Indebtedness in respect of
capitalized leases which in the aggregate and on a combined basis exceed
(i) $5,000,000 for the fiscal year ending July 31, 1999; and (ii)
$6,000,000 in any fiscal year thereafter.
(S)6. Amendment to Section 10 of the Credit Agreement. Section 10(f) of
-----------------------------------------------
the Credit Agreement is hereby by deleting (S)10(f) in its entirety and
restating it as follows:
(f) the Borrowers or any of their Subsidiaries shall be in default (after
any applicable period of grace or cure period) under any agreement or
agreements evidencing Indebtedness owing to any Bank or any affiliates of
any Bank, to the Seller, to any other Person in excess of $500,000 in the
aggregate principal amount, or any Subordinated Debt, or shall fail to pay
such Indebtedness when due, or within any applicable period of grace, or
the holders of all or any part of the Subordinated Debt shall accelerate
the
<PAGE>
-5-
maturity of all or any part of the Subordinated Debt or the Subordinated
Debt shall be (or shall be required at such time to be) prepaid, redeemed
or repurchased in whole or in part, except if such prepayment, redemption
or repurchase is made not in cash but solely in shares of the Borrower's
capital stock pursuant to the express conversion provisions set forth in
any document evidencing the Subordinated Debt, or the Borrowers or any of
their Subsidiaries shall be or become required under the terms of any of
the Subordinated Debt to prepay, redeem or repurchase (or shall be or
become required thereunder to offer to prepay, redeem or repurchase),
except if such prepayment, redemption or repurchase is made not in cash but
solely in shares of the Borrower's capital stock pursuant to the express
conversion provisions set forth in any document evidencing the Subordinated
Debt, all or any part of the Subordinated Debt;
(S)7. Conditions to Effectiveness. This Amendment shall not become
---------- -- -------------
effective until the Agent shall have received the following:
(a) a counterpart of this Amendment executed by the Borrowers, the
Subsidiary Guarantor, the Agent and the Banks;
(b) duly executed and delivered replacement Revolving Credit Notes and
Term Notes for each of the Banks;
(c) duly executed and delivered Security Agreement and all UCC-1 financing
statements and similar documents necessary to perfect the Agent's security
interest in all assets of the New Borrower, all to be in form and substance
satisfactory to the Agent;
(d) evidence satisfactory to the Agent and the Banks that all corporate
action necessary for the valid execution, delivery and performance by the
Borrowers of the Credit Agreement as amended by this Amendment and the other
Loan Documents to which it is or is to become a party have been duly and
effectively taken;
(e) a certification from a duly authorized officer of each Existing
Borrower to the effect that each of its charter or other incorporation documents
and its bylaws delivered to the Agent and the Banks in connection with the entry
into the Credit Agreement are true and correct copies of such documents as in
effect on the effective date hereof and, with respect to the New Borrower, its
charter or other incorporation documents certified to be true and complete as of
the date of certification by the Secretary of State or other appropriate
governmental official of the New Borrower's jurisdiction of organization, which
date of certification shall be no more than ten (10) days before the effective
date hereof and its bylaws as in effect on such date, certified by a duly
authorized officer of the New Borrower to be true and complete on the effective
date hereof;
<PAGE>
-6-
(f) an incumbency certificate from each Borrower, dated the effective date
hereof, signed by a duly authorized officer of such Borrower and giving the name
and bearing the specimen signature of each individual who shall be authorized to
(i) sign, in the name and on behalf of the such Borrower, this Amendment and
each of the Loan Documents to which it is or is to become a party, (ii) make
Loan Requests and submit Letter of Credit Applications and (iii) give notices
and to take other action on its behalf under the Loan Documents;
(g) Each of the Banks shall have received from Palmer and Dodge LLP,
counsel to the Borrowers, a favorable legal opinion addressed to the Agent and
the Banks dated as of the effective date hereof, in form and substance
satisfactory to the Agent; and
(h) payment in cash of an amendment fee in the aggregate amount of
$30,000, which amendment fee shall be for the pro rata accounts of the Banks.
(S)8. Ratification and Joinder by New Borrower. The Borrowers, the Banks
----------------------------------------
and the Agent agree that, from and after the date on which all of the conditions
precedent set forth in (S)7 hereof shall have been satisfied, (a) the New
Borrower shall be a party to the Credit Agreement with all of the rights and
joint and several obligations of a Borrower thereunder, including without
limitation, the right to borrow Loans and to request Letters of Credit, subject
to the terms and conditions of the Credit Agreement; (b) the New Borrower agrees
to be bound by all of the terms, conditions and covenants of the Credit
Agreement and the other Loan Documents as though the New Borrower had been an
original party thereto and agrees to perform all of the obligations of a
Borrower under, and to be bound in all respects by the terms of, the Credit
Agreement applicable to a Borrower party thereto, including without limitation
the absolute and unconditional joint and several liability for, and promise to
pay and perform all of the Obligations owing from time to time to the Banks and
the Agent as provided in the Loan Documents; and (c) the New Borrower hereby
acknowledges and agrees that the representations and warranties set forth in
(S)7(a)-(c), (S)7(f)-(i) and (S)7(k)-(n) of the Credit Agreement are true and
correct in all material respects as to the undersigned as of the date hereof,
except to the extent of changes resulting from transactions contemplated or
permitted by the Credit Agreement and the other Loan Documents, and to the
extent that such representations and warranties relate expressly to an earlier
date.
(S)9. Representations and Warranties. Each of the Borrowers and the
--------------- --- ----------
Subsidiary Guarantor hereby represents and warrants to the Agent and the Banks
as follows:
(a) Representation and Warranties in the Credit Agreement. The
------------------------------------------------------
representations and warranties of each of the Borrowers and the Subsidiary
Guarantor contained in the Credit Agreement were true and correct in all
material respects as of the date when made and continue to be true and
correct in all material respects on the date hereof, except to the extent
of changes resulting from transactions or events contemplated
<PAGE>
-7-
by the Credit Agreement and the other Loan Documents and changes occurring
in the ordinary course of business that singly or in the aggregate are not
materially adverse to the Borrowers or the Subsidiary Guarantor, or to the
extent that such representations and warranties relate expressly to an
earlier date or were otherwise disclosed in writing to the Banks on or
prior to the date hereof.
(b) Ratification, Etc. Except as expressly amended hereby, the Credit
------------ ----
Agreement, the Security Documents and all other documents, instruments and
agreements related thereto, are hereby ratified and confirmed in all
respects and shall continue in full force and effect. The Credit
Agreement, shall together with this Amendment, be read and construed as a
single agreement. All references in the Credit Agreement or any related
agreement or instrument shall hereafter refer to the Credit Agreement as
amended hereby.
(c) Authority, Etc. The execution and delivery by each of the
--------------
Borrowers and the Subsidiary Guarantor of this Amendment and the
performance by each of the Borrowers and the Subsidiary Guarantor of all of
its agreements and obligations under the Credit Agreement as amended hereby
are within the corporate authority of the Borrowers and the Subsidiary
Guarantor and have been duly authorized by all necessary corporate action
on the part of the Borrowers and the Subsidiary Guarantor.
(d) Enforceability of Obligations. This Amendment and the Credit
-------------- -- -----------
Agreement as amended hereby constitute the legal, valid and binding
obligations of the Borrowers and the Subsidiary Guarantor enforceable
against the Borrowers and the Subsidiary Guarantor in accordance with their
terms, except as enforceability is limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting generally
the enforcement of, creditors' rights and except to the extent that
availability of the remedy of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding therefor
may be brought.
(e) No Default. No Default or Event of Default has occurred and is
-- -------
continuing, and no Default or Event of Default will exist after execution
and delivery of this Amendment.
(S)10. No Other Amendments or Waivers. Except as expressly provided in
-- ----- ---------- -- -------
this Amendment, all of the terms and conditions of the Credit Agreement and the
other Loan Documents remain in full force and effect.
(S)11. Execution in Counterparts. This Amendment may be executed in any
--------- -- ------------
number of counterparts, each of which shall be deemed an original, but which
together shall constitute one instrument.
<PAGE>
-8-
(S)12. Expenses. Pursuant to (S)14 of the Credit Agreement, all costs and
--------
expenses incurred or sustained by the Agent in connection with this Amendment,
including the fees and disbursements of legal counsel for the Agent in
producing, reproducing and negotiating the Amendment, will be for the account of
the Borrowers whether or not the transactions contemplated by this Amendment are
consummated.
(S)13. Miscellaneous. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT
-------------
UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). The
captions in this Amendment are for convenience of reference only and shall not
define or limit the provisions hereof.
<PAGE>
-9-
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a
document under seal as of the date first above written.
SALESLINK.COM CORPORATION
By:
----------------------------------
Title:
INSOLUTIONS INCORPORATED
By:
----------------------------------
Title:
ON-DEMAND SOLUTIONS, INC.
By:
----------------------------------
Title:
PACIFIC DIRECT MARKETING CORP.
By:
----------------------------------
Title:
BANKBOSTON, N.A., Individually
and Agent
By:
----------------------------------
Title:
IMPERIAL BANK
<PAGE>
-10-
By:
----------------------------------
Title:
<PAGE>
-11-
RATIFICATION OF GUARANTY
The undersigned guarantor hereby acknowledges and consents to the foregoing
First Amendment as of March 16, 1999, and agrees that the Guaranty dated as of
October 30, 1999 from CMGI, Inc. in favor of the Agent and each of the Banks
remains in full force and effect, and the undersigned confirms and ratifies all
of its obligations thereunder.
CMGI, INC.
By:
----------------------------------
Title:
<PAGE>
Exhibit 10.2
SECOND AMENDED AND RESTATED TERM NOTE
-------------------------------------
$9,893,616.99 as of March 16, 1999
FOR VALUE RECEIVED, the undersigned SALESLINK.COM CORPORATION, a Delaware
corporation ("SalesLink"), INSOLUTIONS INCORPORATED, a Delaware corporation
"InSolutions" and ON-DEMAND SOLUTIONS, INC., a Massachusetts corporation ("On-
Demand", and, collectively with SalesLink and InSolutions, the "Borrowers"),
hereby jointly and severally promise to pay to the order of BANKBOSTON, N.A., a
national banking association (the "Bank") at the Agent's Head Office (as defined
in the Credit Agreement referred to below):
(a) prior to or on the Term Loan Maturity Date the principal amount
of NINE MILLION EIGHT HUNDRED NINETY THREE THOUSAND SIX HUNDRED SIXTEEN
DOLLARS AND NINETY NINE CENTS ($9,893,616.99) evidencing the Term Loan made
by the Bank to the Borrowers pursuant to the Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 11, 1998 (as amended and in
effect from time to time, the "Credit Agreement"), by and among the
Borrower, the Bank and other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest from the date hereof on the principal amount from time
to time outstanding to and including the maturity hereof at the rates and
terms and in all cases in accordance with the terms of the Credit
Agreement.
This Note constitutes the amendment and restatement in its entirety of the
Amended and Restated Term Note issued by SalesLink to the Bank in the original
principal amount of $9,893,616.99, dated as of June 11, 1998 (the "Original
Note") and is issued in substitution therefor and an amendment and replacement
thereof. Nothing herein or in any other document shall be construed to
constitute payment of the Original Note or to release or terminate any guaranty,
lien, mortgage, pledge or other security interest in favor of the Bank.
This Note evidences borrowings under and has been issued by the Borrowers
in accordance with the terms of the Credit Agreement. The Bank and any holder
hereof is entitled to the benefits of the Credit Agreement, the Security
Documents and the other Loan Documents, and may enforce the agreements of the
Borrowers contained therein, and any holder hereof may exercise the respective
remedies provided for thereby or otherwise available in respect thereof, all in
accordance with the respective terms thereof. All capitalized terms used in
this Note and not otherwise defined herein shall have the same meanings herein
as in the Credit Agreement.
<PAGE>
-2-
Each Borrower irrevocably authorizes the Bank to make or cause to be made,
at the time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid, or
any other similar record, including computer records, reflecting the receipt of
such payment. The outstanding amount of the Term Loan set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to the
Term Loan shall be prima facie evidence of the principal amount of the Term Loan
----- -----
owing and unpaid to the Bank, but the failure to record, or any error in so
recording, any such amount on any such grid, continuation or other record shall
not limit or otherwise affect the joint and several obligations of the Borrowers
hereunder or under the Credit Agreement to make payments of principal of and
interest on this Note when due.
Each Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any future occasion.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE JOINT AND SEVERAL OBLIGATIONS OF THE BORROWERS HEREUNDER
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR
ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE
JURISDICTION OF SUCH
<PAGE>
-3-
COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWERS
BY MAIL AT THE ADDRESS SPECIFIED BENEATH THE BORROWERS' SIGNATURE ON THE
SIGNATURE PAGE OF THE CREDIT AGREEMENT. EACH BORROWER HEREBY WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY
SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
<PAGE>
-4-
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
SALESLINK.COM CORPORATION
By:
--------------------------
Title:
INSOLUTIONS INCORPORATED
By:
--------------------------
Title:
ON-DEMAND SOLUTIONS, INC.
By:
--------------------------
Title:
<PAGE>
Exhibit 10.3
------------
SECOND AMENDED AND RESTATED TERM NOTE
-------------------------------------
$5,606,383.01 as of March 16, 1999
FOR VALUE RECEIVED, the undersigned SALESLINK.COM CORPORATION, a Delaware
corporation ("SalesLink"), INSOLUTIONS INCORPORATED, a Delaware corporation
"InSolutions" and ON-DEMAND SOLUTIONS, INC., a Massachusetts corporation ("On-
Demand", and, collectively with SalesLink and InSolutions, the "Borrowers"),
hereby jointly and severally promise to pay to the order of IMPERIAL BANK, a
national banking association (the "Bank") at the Agent's Head Office (as defined
in the Credit Agreement referred to below):
(a) prior to or on the Term Loan Maturity Date the principal amount of
FIVE MILLION SIX HUNDRED SIX THOUSAND THREE HUNDRED EIGHTY THREE DOLLARS
AND ONE CENT ($5,606,383.01) evidencing the Term Loan made by the Bank to
the Borrowers pursuant to the Amended and Restated Revolving Credit and
Term Loan Agreement dated as of June 11, 1998 (as amended and in effect
from time to time, the "Credit Agreement"), by and among the Borrower, the
Bank and other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest from the date hereof on the principal amount from time
to time outstanding to and including the maturity hereof at the rates and
terms and in all cases in accordance with the terms of the Credit
Agreement.
This Note constitutes the amendment and restatement in its entirety of the
Amended and Restated Term Note issued by SalesLink to the Bank in the original
principal amount of $9,893,616.99, dated as of June 11, 1998 (the "Original
Note") and is issued in substitution therefor and an amendment and replacement
thereof. Nothing herein or in any other document shall be construed to
constitute payment of the Original Note or to release or terminate any guaranty,
lien, mortgage, pledge or other security interest in favor of the Bank.
This Note evidences borrowings under and has been issued by the Borrowers
in accordance with the terms of the Credit Agreement. The Bank and any holder
hereof is entitled to the benefits of the Credit Agreement, the Security
Documents and the other Loan Documents, and may enforce the agreements of the
Borrowers contained therein, and any holder hereof may exercise the respective
remedies provided for thereby or otherwise available in respect thereof, all in
accordance with the respective terms thereof. All capitalized terms used in
this Note and not otherwise defined herein shall have the same meanings herein
as in the Credit Agreement.
<PAGE>
-2-
Each Borrower irrevocably authorizes the Bank to make or cause to be made,
at the time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid, or
any other similar record, including computer records, reflecting the receipt of
such payment. The outstanding amount of the Term Loan set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to the
Term Loan shall be prima facie evidence of the principal amount of the Term Loan
----- -----
owing and unpaid to the Bank, but the failure to record, or any error in so
recording, any such amount on any such grid, continuation or other record shall
not limit or otherwise affect the joint and several obligations of the Borrowers
hereunder or under the Credit Agreement to make payments of principal of and
interest on this Note when due.
Each Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any future occasion.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE JOINT AND SEVERAL OBLIGATIONS OF THE BORROWERS HEREUNDER
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR
ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE
JURISDICTION OF SUCH
<PAGE>
-3-
COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWERS
BY MAIL AT THE ADDRESS SPECIFIED BENEATH THE BORROWERS' SIGNATURE ON THE
SIGNATURE PAGE OF THE CREDIT AGREEMENT. EACH BORROWER HEREBY WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY
SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
<PAGE>
-4-
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
SALESLINK.COM CORPORATION
By:
--------------------------------
Title:
INSOLUTIONS INCORPORATED
By:
--------------------------------
Title:
ON-DEMAND SOLUTIONS, INC.
By:
--------------------------------
Title:
<PAGE>
Exhibit 10.4
SECURITY AGREEMENT
------------------
SECURITY AGREEMENT, dated as of March 16, 1999, between ON-DEMAND
SOLUTIONS, a Massachusetts corporation (the "Company"), and BANKBOSTON, N.A., a
national banking association, as agent (hereinafter, in such capacity, the
"Agent") for itself and other banking institutions (hereinafter, collectively,
the "Banks") which are or may become parties to an Amended and Restated
Revolving Credit and Term Loan Agreement dated as of June 11, 1998 (as amended
and in effect from time to time, the "Credit Agreement"), among SalesLink.com
Corporation ("SalesLink"), InSolutions Incorporation ("InSolutions"), the
Company (collectively with SalesLink and InSolutions, the "Borrowers"), Pacific
Direct Marketing Corp. (the "Subsidiary Guarantor"), the Banks and the Agent.
WHEREAS, the Borrowers, the Subsidiary Guarantor, the Banks and the Agent
are parties to that certain First Amendment to Amended and Restated Revolving
Credit and Term Loan Agreement dated as of the date hereof (the "First
Amendment"), pursuant to which the parties thereto have agreed, subject to the
conditions contained therein, to amend the Credit Agreement to, among other
things, permit the Company to become a Borrower under the Credit Agreement; and
WHEREAS, it is a condition precedent to the Banks' continuing to make loans
or otherwise extend credit to the Borrower under the Credit Agreement that the
Company execute and deliver to the Agent, for the benefit of the Banks and the
Agent, a security agreement in substantially the form hereof; and
WHEREAS, the Company wishes to grant security interests in favor of the
Agent, for the benefit of the Banks and the Agent, as herein provided;
NOW, THEREFORE, in consideration of the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Definitions. All capitalized terms used herein without definitions
-----------
shall have the respective meanings provided therefor in the Credit Agreement.
All terms defined in the Uniform Commercial Code of the Commonwealth of
Massachusetts and used herein shall have the same definitions herein as
specified therein.
2. Grant of Security Interest.
--------------------------
2.1. Collateral Granted. The Company hereby grants to the Agent, for
------------------
the benefit of the Banks and the Agent, to secure the payment and
performance in full of all of the Obligations, a security interest in and
so pledges and assigns to the Agent, for the benefit of the Banks and the
Agent, the following properties, assets and rights of the Company, wherever
located, whether now owned or hereafter acquired or arising,
<PAGE>
-2-
and all proceeds and products thereof (all of the same being hereinafter
called the "Collateral"):
All personal and fixture property of every kind and nature
including without limitation all furniture, fixtures, equipment, raw
materials, inventory, other goods, accounts, contract rights, rights
to the payment of money, insurance refund claims and all other
insurance claims and proceeds, tort claims, chattel paper, documents,
instruments, securities and other investment property, deposit
accounts, rights to proceeds of letters of credit and all general
intangibles including, without limitation, all tax refund claims,
license fees, patents, patent applications, trademarks, trademark
applications, trade names, copyrights, copyright applications, rights
to sue and recover for past infringement of patents, trademarks and
copyrights, computer programs, computer software, engineering
drawings, service marks, customer lists, goodwill, and all licenses,
permits, agreements of any kind or nature pursuant to which the
Company possesses, uses or has authority to possess or use property
(whether tangible or intangible) of others or others possess, use or
have authority to possess or use property (whether tangible or
intangible) of the Company, and all recorded data of any kind or
nature, regardless of the medium of recording including, without
limitation, all software, writings, plans, specifications and
schematics.
2.2. Delivery of Instruments, etc.
----------------------------
(a) Pursuant to the terms hereof, the Company has endorsed,
assigned and delivered to the Agent all negotiable or non-negotiable
instruments, certificated securities and chattel paper pledged by it
hereunder, together with instruments of transfer or assignment duly
executed in blank as the Agent may have specified. In the event that
the Company shall, after the date of this Agreement, acquire any other
negotiable or non-negotiable instruments, certificated securities or
chattel paper to be pledged by it hereunder, the Company shall
forthwith endorse, assign and deliver the same to the Agent,
accompanied by such instruments of transfer or assignment duly
executed in blank as the Agent may from time to time specify.
(b) To the extent that any securities now or hereafter acquired
by the Company are uncertificated and are issued to the Company or its
nominee directly by the issuer thereof, the Company shall cause the
issuer to note on its books the security interest of the Agent in such
securities and shall cause the issuer, pursuant to an agreement in
form and substance satisfactory to the Agent, to agree to comply with
instructions from the Agent as to such securities, without further
consent of the Company or
<PAGE>
-3-
such nominee. To the extent that any securities, whether certificated
or uncertificated, or other investment property now or hereafter
acquired by the Company is held by the Company or its nominee through
a securities intermediary or commodity intermediary, the Company
shall, at the request of the Agent, cause such securities intermediary
or (as the case may be) commodity intermediary, pursuant to an
agreement in form and substance satisfactory to the Agent, to agree to
comply with entitlement orders or other instructions from the Agent to
such securities intermediary as to such securities or other investment
property, or (as the case may be) to apply any value distributed on
account of any commodity contract as directed by the Agent to such
commodity intermediary, without further consent of the Company or such
nominee. The Agent agrees with the Company that the Agent shall not
give any such entitlement orders or instructions or directions to any
such issuer, securities intermediary or commodity intermediary unless
an Event of Default has occurred and is continuing and the Agent has
elected to exercise its rights and remedies as contemplated by (S)14.
(c) To the extent that the Company is a beneficiary under any
written letter of credit now or hereafter issued in favor of the
Company, the Company shall deliver such letter of credit to the Agent.
The Agent shall from time to time, at the request and expense of the
Company, make such arrangements with the Company as are in the Agent's
reasonable judgment necessary and appropriate so that the Company may
make any drawing to which the Company is entitled under such letter of
credit, without impairment of the Agent's perfected security interest
in the Company's rights to proceeds of such letter of credit or in the
actual proceeds of such drawing. At the Agent's request, the Company
shall, for any letter of credit, whether or not written, now or
hereafter issued in favor of the Company as beneficiary, execute and
deliver to the issuer and any confirmer of such letter of credit an
assignment of proceeds form, in favor of the Agent and satisfactory to
the Agent and such issuer or (as the case may be) such confirmer,
requiring the proceeds of any drawing under such letter of credit to
be paid directly to the Agent for application as provided in the
Credit Agreement.
2.3. Excluded Collateral. Notwithstanding the foregoing provisions of
-------------------
this (S)2, such grant of security interest shall not extend to, and the term
"Collateral" shall not include, any chattel paper and general intangibles which
are now or hereafter held by the Company as licensee, lessee or otherwise, to
the extent that (a) such chattel paper and general intangibles are not
assignable or capable of being encumbered as a matter of law or under the terms
of the license, lease or other agreement applicable thereto (but solely to the
extent that any such restriction shall be enforceable under applicable law),
without the consent of the licensor
<PAGE>
-4-
or lessor thereof or other applicable party thereto and (b) such consent
has not been obtained; provided, however, that the foregoing grant of
-------- -------
security interest shall extend to, and the term "Collateral" shall include,
(i) any and all proceeds of such chattel paper and general intangibles to
the extent that the assignment or encumbering of such proceeds is not so
restricted and (ii) upon any such licensor, lessor or other applicable
party consent with respect to any such otherwise excluded chattel paper or
general intangibles being obtained, thereafter such chattel paper or
general intangibles as well as any and all proceeds thereof that might have
theretofore have been excluded from such grant of a security interest and
the term "Collateral".
3. Title to Collateral, etc. The Company is the owner of the Collateral
------------------------
free from any adverse lien, security interest or other encumbrance, except for
the security interest created by this Agreement and other liens permitted by the
Credit Agreement. None of the Collateral constitutes, or is the proceeds of,
"farm products" as defined in (S)9-109(3) of the Uniform Commercial Code of the
Commonwealth of Massachusetts. None of the account debtors in respect of any
accounts, chattel paper or general intangibles and none of the obligors in
respect of any instruments included in the Collateral is a governmental
authority subject to the Federal Assignment of Claims Act.
4. Continuous Perfection. The Company's place of business or, if more than
---------------------
one, chief executive office is indicated on the Perfection Certificate delivered
to the Agent herewith (the "Perfection Certificate"). The Company will not
change the same, or the name, identity or corporate structure of the Company in
any manner, without providing at least 30 days prior written notice to the
Agent. The Collateral, to the extent not delivered to the Agent pursuant to
(S)2.2, will be kept at those locations listed on the Perfection Certificate and
the Company will not remove the Collateral from such locations, without
providing at least 30 days prior written notice to the Agent.
5. No Liens. Except for the security interest herein granted and liens
--------
permitted by the Credit Agreement, the Company shall be the owner of the
Collateral free from any lien, security interest or other encumbrance, and the
Company shall defend the same against all claims and demands of all persons at
any time claiming the same or any interests therein adverse to the Agent or any
of the Banks. The Company shall not pledge, mortgage or create, or suffer to
exist a security interest in the Collateral in favor of any person other than
the Agent, for the benefit of the Banks and the Agent, except for liens
permitted by the Credit Agreement.
6. No Transfers. The Company will not sell or offer to sell or otherwise
------------
transfer the Collateral or any interest therein except for (a) sales and leases
of inventory and licenses of general intangibles in the ordinary course of
business and (b) sales or other dispositions of obsolescent items of equipment
in the ordinary course of business consistent with past practices.
7. Insurance.
---------
<PAGE>
-5-
7.1. Maintenance of Insurance. The Company will maintain with
------------------------
financially sound and reputable insurers insurance with respect to its
properties and business against such casualties and contingencies as shall
be in accordance with general practices of businesses engaged in similar
activities in similar geographic areas. Such insurance shall be in such
minimum amounts that the Company will not be deemed a co-insurer under
applicable insurance laws, regulations and policies and otherwise shall be
in such amounts, contain such terms, be in such forms and be for such
periods as may be reasonably satisfactory to the Agent. In addition, all
such insurance shall be payable to the Agent as loss payee under a
"standard" or "New York" loss payee clause for the benefit of the Banks and
the Agent. Without limiting the foregoing, the Company will (a) keep all of
its physical property insured with casualty or physical hazard insurance on
an "all risks" basis, with broad form flood and earthquake coverages and
electronic data processing coverage, with a full replacement cost
endorsement and an "agreed amount" clause in an amount equal to 100% of the
full replacement cost of such property, (b) maintain all such workers'
compensation or similar insurance as may be required by law and (c)
maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar
geographic areas, general public liability insurance against claims of
bodily injury, death or property damage occurring, on, in or about the
properties of the Company; business interruption insurance; and product
liability insurance.
7.2. Insurance Proceeds. The proceeds of any casualty insurance in
------------------
respect of any casualty loss of any of the Collateral shall, subject to the
rights, if any, of other parties with a prior interest in the property
covered thereby, (a) so long as no Default or Event of Default has occurred
and is continuing and to the extent that the amount of such proceeds is
less than $25,000, be disbursed to the Company for direct application by
the Company solely to the repair or replacement of the Company's property
so damaged or destroyed and (b) in all other circumstances, be held by the
Agent as cash collateral for the Obligations. The Agent may, at its sole
option, disburse from time to time all or any part of such proceeds so held
as cash collateral, upon such terms and conditions as the Agent may
reasonably prescribe, for direct application by the Company solely to the
repair or replacement of the Company's property so damaged or destroyed, or
the Agent may apply all or any part of such proceeds to the Obligations
with the Total Commitment (if not then terminated) being reduced by the
amount so applied to the Obligations.
7.3. Notice of Cancellation, etc. All policies of insurance shall
---------------------------
provide for at least thirty (30) days prior written cancellation notice to
the Agent. In the event of failure by the Company to provide and maintain
insurance as herein provided, the Agent may, at its option, provide such
insurance and charge the amount thereof to the Company. The
<PAGE>
-6-
Company shall furnish the Agent with certificates of insurance and policies
evidencing compliance with the foregoing insurance provision.
8. Maintenance of Collateral; Compliance with Law. The Company will keep
----------------------------------------------
the Collateral in good order and repair and will not use the same in violation
of law or any policy of insurance thereon. The Agent, or its designee, may
inspect the Collateral at any reasonable time, wherever located. The Company
will pay promptly when due all taxes, assessments, governmental charges and
levies upon the Collateral or incurred in connection with the use or operation
of such Collateral or incurred in connection with this Agreement. The Company
has at all times operated, and the Company will continue to operate, its
business in compliance with all applicable provisions of the federal Fair Labor
Standards Act, as amended, and with all applicable provisions of federal, state
and local statutes and ordinances dealing with the control, shipment, storage or
disposal of hazardous materials or substances.
9. Collateral Protection Expenses; Preservation of Collateral.
----------------------------------------------------------
9.1. Expenses Incurred by Agent. In its discretion, the Agent may
--------------------------
discharge taxes and other encumbrances at any time levied or placed on any
of the Collateral, make repairs thereto and pay any necessary filing fees.
The Company agrees to reimburse the Agent on demand for any and all
expenditures so made. The Agent shall have no obligation to the Company to
make any such expenditures, nor shall the making thereof relieve the
Company of any default.
9.2. Agent's Obligations and Duties. Anything herein to the contrary
------------------------------
notwithstanding, the Company shall remain liable under each contract or
agreement comprised in the Collateral to be observed or performed by the
Company thereunder. Neither the Agent nor any Bank shall have any
obligation or liability under any such contract or agreement by reason of
or arising out of this Agreement or the receipt by the Agent or any Bank of
any payment relating to any of the Collateral, nor shall the Agent or any
Bank be obligated in any manner to perform any of the obligations of the
Company under or pursuant to any such contract or agreement, to make
inquiry as to the nature or sufficiency of any payment received by the
Agent or any Bank in respect of the Collateral or as to the sufficiency of
any performance by any party under any such contract or agreement, to
present or file any claim, to take any action to enforce any performance or
to collect the payment of any amounts which may have been assigned to the
Agent or to which the Agent or any Bank may be entitled at any time or
times. The Agent's sole duty with respect to the custody, safe keeping and
physical preservation of the Collateral in its possession, under (S)9-207
of the Uniform Commercial Code of the Commonwealth of Massachusetts or
otherwise, shall be to deal with such Collateral in the same manner as the
Agent deals with similar property for its own account.
<PAGE>
-7-
10. Securities and Deposits. The Agent may at any time after the
-----------------------
occurrence of an Event of Default, at its option, transfer to itself or any
nominee any securities constituting Collateral, receive any income thereon and
hold such income as additional Collateral or apply it to the Obligations.
Whether or not any Obligations are due, the Agent may, after the occurrence of
an Event of Default, demand, sue for, collect, or make any settlement or
compromise which it deems desirable with respect to the Collateral. Regardless
of the adequacy of Collateral or any other security for the Obligations, any
deposits or other sums at any time credited by or due from the Agent or any Bank
to the Company may at any time be applied to or set off against any of the
Obligations.
11. Notification to Account Debtors and Other Obligors. If an Event of
--------------------------------------------------
Default shall have occurred and be continuing, the Company shall, at the request
of the Agent, notify account debtors on accounts, chattel paper and general
intangibles of the Company and obligors on instruments for which the Company is
an obligee of the security interest of the Agent in any account, chattel paper,
general intangible or instrument and that payment thereof is to be made directly
to the Agent or to any financial institution designated by the Agent as the
Agent's agent therefor, and the Agent may itself, if an Event of Default shall
have occurred and be continuing, without notice to or demand upon the Company,
so notify account debtors and obligors. After the making of such a request or
the giving of any such notification, the Company shall hold any proceeds of
collection of accounts, chattel paper, general intangibles and instruments
received by the Company as trustee for the Agent, for the benefit of the Banks
and the Agent, without commingling the same with other funds of the Company and
shall turn the same over to the Agent in the identical form received, together
with any necessary endorsements or assignments. The Agent shall apply the
proceeds of collection of accounts, chattel paper, general intangibles and
instruments received by the Agent to the Obligations, such proceeds to be
immediately entered after final payment in cash or solvent credits of the items
giving rise to them.
12. Further Assurances. The Company, at its own expense, shall do, make,
------------------
execute and deliver all such additional and further acts, things, deeds,
assurances and instruments as the Agent may require more completely to vest in
and assure to the Agent and the Banks their respective rights hereunder or in
any of the Collateral, including, without limitation, (a) executing, delivering
and, where appropriate, filing financing statements and continuation statements
under the Uniform Commercial Code, (b) obtaining governmental and other third
party consents and approvals, including without limitation any consent of any
licensor, lessor or other applicable party referred to in (S)2.3, (c) obtaining
waivers from mortgagees and landlords and (d) taking all actions required by
Sections 8-313 and 8-321 of the Uniform Commercial Code (1990) or Sections 8-106
and 9-115 of the Uniform Commercial Code (1994), as applicable in each relevant
jurisdiction, with respect to certificated and uncertificated securities.
13. Power of Attorney.
-----------------
<PAGE>
-8-
13.1. Appointment and Powers of Agent. The Company hereby irrevocably
-------------------------------
constitutes and appoints the Agent and any officer or agent thereof, with
full power of substitution, as its true and lawful attorneys-in-fact with
full irrevocable power and authority in the place and stead of the Company
or in the Agent's own name, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any
and all documents and instruments that may be necessary or desirable to
accomplish the purposes of this Agreement and, without limiting the
generality of the foregoing, hereby gives said attorneys the power and
right, on behalf of the Company, without notice to or assent by the
Company, to do the following:
(a) upon the occurrence and during the continuance of an Event
of Default, generally to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral in such
manner as is consistent with the Uniform Commercial Code of the
Commonwealth of Massachusetts and as fully and completely as though
the Agent were the absolute owner thereof for all purposes, and to do
at the Company' expense, at any time, or from time to time, all acts
and things which the Agent deems necessary to protect, preserve or
realize upon the Collateral and the Agent's security interest therein,
in order to effect the intent of this Agreement, all as fully and
effectively as the Company might do, including, without limitation,
(i) the filing and prosecuting of registration and transfer
applications with the appropriate federal or local agencies or
authorities with respect to trademarks, copyrights and patentable
inventions and processes, (ii) upon written notice to the Company, the
exercise of voting rights with respect to voting securities, which
rights may be exercised, if the Agent so elects, with a view to
causing the liquidation in a commercially reasonable manner of assets
of the issuer of any such securities and (iii) the execution, delivery
and recording, in connection with any sale or other disposition of any
Collateral, of the endorsements, assignments or other instruments of
conveyance or transfer with respect to such Collateral; and
(b) to file such financing statements with respect hereto, with
or without the Company's signature, or a photocopy of this Agreement
in substitution for a financing statement, as the Agent may deem
appropriate and to execute in the Company's name such financing
statements and amendments thereto and continuation statements which
may require the Company's signature.
13.2. Ratification by Company. To the extent permitted by law, the
-----------------------
Company hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with
an interest and shall be irrevocable.
<PAGE>
-9-
13.3. No Duty on Agent. The powers conferred on the Agent hereunder
----------------
are solely to protect the interests of the Agent and the Banks in the
Collateral and shall not impose any duty upon the Agent to exercise any
such powers. The Agent shall be accountable only for the amounts that it
actually receives as a result of the exercise of such powers and neither it
nor any of its officers, directors, employees or agents shall be
responsible to the Company for any act or failure to act, except for the
Agent's own gross negligence or willful misconduct.
14. Remedies. If an Event of Default shall have occurred and be
--------
continuing, the Agent may, without notice to or demand upon the Company, declare
this Agreement to be in default, and the Agent shall thereafter have in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code, including, without limitation, the right to take
possession of the Collateral, and for that purpose the Agent may, so far as the
Company can give authority therefor, enter upon any premises on which the
Collateral may be situated and remove the same therefrom. The Agent may in its
discretion require the Company to assemble all or any part of the Collateral at
such location or locations within the state(s) of the Company's principal
office(s) or at such other locations as the Agent may designate. Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market, the Agent shall give to the
Company at least five Business Days prior written notice of the time and place
of any public sale of Collateral or of the time after which any private sale or
any other intended disposition is to be made. The Company hereby acknowledges
that five Business Days prior written notice of such sale or sales shall be
reasonable notice. In addition, the Company waives any and all rights that it
may have to a judicial hearing in advance of the enforcement of any of the
Agent's rights hereunder, including, without limitation, its right following an
Event of Default to take immediate possession of the Collateral and to exercise
its rights with respect thereto. To the extent that any of the Obligations are
to be paid or performed by a person other than the Company, the Company waives
and agrees not to assert any rights or privileges which it may have under (S)9-
112 of the Uniform Commercial Code of the Commonwealth of Massachusetts.
15. No Waiver, etc. The Company waives demand, notice, protest, notice of
--------------
acceptance of this Agreement, notice of loans made, credit extended, Collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description. With respect to both the Obligations and
the Collateral, the Company assents to any extension or postponement of the time
of payment or any other indulgence, to any substitution, exchange or release of
or failure to perfect any security interest in any Collateral, to the addition
or release of any party or person primarily or secondarily liable, to the
acceptance of partial payment thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Agent may deem advisable. The Agent shall have no duty as to the collection or
protection of the Collateral or any income thereon, nor as to the preservation
of rights against prior parties, nor as to the
<PAGE>
-10-
preservation of any rights pertaining thereto beyond the safe custody thereof as
set forth in (S)9.2. The Agent shall not be deemed to have waived any of its
rights upon or under the Obligations or the Collateral unless such waiver shall
be in writing and signed by the Agent with the consent of the Majority Banks. No
delay or omission on the part of the Agent in exercising any right shall operate
as a waiver of such right or any other right. A waiver on any one occasion shall
not be construed as a bar to or waiver of any right on any future occasion. All
rights and remedies of the Agent with respect to the Obligations or the
Collateral, whether evidenced hereby or by any other instrument or papers, shall
be cumulative and may be exercised singularly, alternatively, successively or
concurrently at such time or at such times as the Agent deems expedient.
16. Marshalling. Neither the Agent nor any Bank shall be required to
-----------
marshal any present or future collateral security (including but not limited to
this Agreement and the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights of the
Agent hereunder and of the Agent or any Bank in respect of such collateral
security and other assurances of payment shall be cumulative and in addition to
all other rights, however existing or arising. To the extent that it lawfully
may, the Company hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Agent's rights under this Agreement or under any other instrument
creating or evidencing any of the Obligations or under which any of the
Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
the Company hereby irrevocably waives the benefits of all such laws.
17. Proceeds of Dispositions; Expenses. The Company shall pay to the Agent
----------------------------------
on demand any and all expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Agent in protecting, preserving or
enforcing the Agent's rights under or in respect of any of the Obligations or
any of the Collateral. After deducting all of said expenses, the residue of any
proceeds of collection or sale of the Obligations or Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as is provided in the Credit Agreement, proper
allowance and provision being made for any Obligations not then due. Upon the
final payment and satisfaction in full of all of the Obligations and after
making any payments required by Section 9-504(1)(c) of the Uniform Commercial
Code of the Commonwealth of Massachusetts, any excess shall be returned to the
Company, and the Company shall remain liable for any deficiency in the payment
of the Obligations.
18. Overdue Amounts. Until paid, all amounts due and payable by the
---------------
Company hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Credit Agreement.
<PAGE>
-11-
19. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS INTENDED TO
--------------------------------------
TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. The Company
agrees that any suit for the enforcement of this Agreement may be brought in the
courts of the Commonwealth of Massachusetts or any federal court sitting therein
and consents to the non-exclusive jurisdiction of such court and to service of
process in any such suit being made upon the Company by mail at the address
specified in the signature page of the Credit Agreement. The Company hereby
waives any objection that it may now or hereafter have to the venue of any such
suit or any such court or that such suit is brought in an inconvenient court.
20. Waiver of Jury Trial. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL
--------------------
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF
ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives
any right which it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages. The Company (a)
certifies that neither the Agent or any Bank nor any representative, agent or
attorney of the Agent or any Bank has represented, expressly or otherwise, that
the Agent or any Bank would not, in the event of litigation, seek to enforce the
foregoing waivers and (b) acknowledges that, in entering into the Credit
Agreement and the other Loan Documents to which the Agent or any Bank is a
party, the Agent and the Banks are relying upon, among other things, the waivers
and certifications contained in this (S)20.
21. Miscellaneous. The headings of each section of this Agreement are for
-------------
convenience only and shall not define or limit the provisions thereof. This
Agreement and all rights and obligations hereunder shall be binding upon the
Company and its respective successors and assigns, and shall inure to the
benefit of the Agent, the Banks and their respective successors and assigns. If
any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall in no way be
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had not been included herein. The
Company acknowledges receipt of a copy of this Agreement.
<PAGE>
-12-
IN WITNESS WHEREOF, intending to be legally bound, the Company has caused
this Agreement to be duly executed as of the date first above written.
ON-DEMAND SOLUTIONS, INC.
By:
---------------------------------
Title:
Accepted:
BANKBOSTON, N.A.,
as Agent
By:
--------------------------------
Title:
CERTIFICATE OF ACKNOWLEDGMENT
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF _______________________________)
Before me, the undersigned, a Notary Public in and for the county
aforesaid, on this ____ day of March, 1999, personally appeared _________ to me
known personally, and who, being by me duly sworn, deposes and says that he is
the ______ of On-Demand Solutions, Inc., and that said instrument was signed and
sealed on behalf of said corporation by authority of its Board of Directors, and
said __________ acknowledged said instrument to be the free act and deed of said
corporation.
--------------------------------
Notary Public
My commission expires:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q OF CMGI, INC. FOR THE QUARTER ENDED APRIL 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 41,758
<SECURITIES> 886,242
<RECEIVABLES> 30,216
<ALLOWANCES> 0
<INVENTORY> 9,028
<CURRENT-ASSETS> 995,835
<PP&E> 17,885
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,246,582
<CURRENT-LIABILITIES> 400,555
<BONDS> 0
35,305
0
<COMMON> 953
<OTHER-SE> 689,740
<TOTAL-LIABILITY-AND-EQUITY> 1,246,582
<SALES> 120,032
<TOTAL-REVENUES> 120,032
<CGS> 114,917
<TOTAL-COSTS> 114,917
<OTHER-EXPENSES> 80,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,295
<INCOME-PRETAX> 55,296
<INCOME-TAX> 30,981
<INCOME-CONTINUING> 24,315
<DISCONTINUED> (806)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,509
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.22
</TABLE>
