<PAGE>
As filed with the Securities and Exchange Commission on March 27, 2000
Registration No. 333-32158
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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CMGI, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 7331 04-2921333
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
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100 Brickstone Square, Andover, Massachusetts 01810, (978) 684-3600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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David S. Wetherell
Chairman of the Board, President and Chief Executive Officer
CMGI, Inc.
100 Brickstone Square
Andover, Massachusetts 01810
(978) 684-3600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Mark G. Borden, Esq. William Williams II, Esq. Robert M. Mattson, Jr., Esq.
Hale and Dorr LLP CMGI, Inc. Morrison & Foerster LLP
60 State Street 100 Brickstone Square 19900 MacArthur Boulevard
Boston, Massachusetts 02109 Andover, Massachusetts 01810 Irvine, California 92612
Telephone: (617) 526-6000 Telephone: (978) 684-3600 Telephone: (949) 251-7500
Telecopy: (617) 526-5000 Telecopy: (978) 684-3601 Telecopy: (949) 251-0900
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the Agreement and Plan of Merger and Reorganization are
met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Proposed maximum
Title of each class of maximum aggregate Amount of
securities to be Amount to be offering price offering registration
registered registered(1) per share(2) price(2) fee(3)
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Common stock, $.01 par
value per share....... 3,549,979 shares $33.25 $449,150,709 $118,575.78
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(1) Based upon the estimated maximum number of shares of common stock of the
Registrant issuable in the merger described herein in respect of
outstanding (a) shares of uBid, Inc. common stock and (b) options to
acquire uBid, Inc. common stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(c) and 457(f) under the Securities Act of 1933, as
amended, and based upon the average of the high and low sale prices of
uBid, Inc. common stock as reported on the Nasdaq National Market on March
3, 2000.
(3) The registration fee of $118,575.78 was previously paid by the Registrant
upon its initial filing of this registration statement.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
[LOGO OF UBID]
March 27, 2000
Dear uBid, Inc. stockholders:
I am writing to you today about our proposed merger with CMGI, Inc. This
merger will create a combined company capable of taking advantage of a number
of highly synergistic opportunities with other e-commerce companies in the CMGI
network.
In the merger, each share of uBid, Inc. common stock will be exchanged for
0.2628 shares of CMGI common stock. Based on the number of shares of uBid
common stock and vested options to purchase uBid common stock outstanding as of
March 1, 2000, CMGI expects to issue a total of approximately 3,549,979 shares
of CMGI common stock and options to purchase shares of CMGI common stock in the
merger. CMGI common stock is traded on the Nasdaq National Market under the
trading symbol "CMGI," and closed at $121.31 per share on March 24, 2000. The
merger is described more fully in this proxy statement/prospectus.
You will be asked to vote upon the merger agreement with CMGI and the merger
at a special meeting of uBid stockholders to be held on April 28, 2000 at 10:00
am, local time, at the Chicago O'Hare Westin Hotel, 6100 River Road, Rosemont,
Illinois 60018. The merger cannot be consummated unless the holders of a
majority of the shares of uBid common stock approve the merger. Only
stockholders who hold shares of uBid common stock at the close of business on
March 22, 2000 will be entitled to vote at the special meeting.
We are very excited about the opportunities we envision for the combined
company. Your board of directors has determined that the terms and conditions
of the merger are fair to you and in your best interests, and has unanimously
recommended that you approve the merger agreement and the merger.
This proxy statement/prospectus provides detailed information about CMGI and
the merger. Please give all of this information your careful attention. In
particular, you should carefully consider the discussion in the section
entitled "Risk Factors" beginning on page 7 of this proxy statement/prospectus.
Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card or attend the special
stockholders meeting in person. To approve the merger agreement and the merger,
you MUST vote "FOR" the proposal by following the instructions stated on the
enclosed proxy card. If you do not vote at all, your non-vote will, in effect,
count as a vote against the merger agreement and the merger. We urge you to
vote FOR this proposal. The approval of this proposal is a necessary step in
the merger of uBid and CMGI.
Sincerely,
/s/ Gregory Jones
Gregory Jones
Chief Executive Officer and President
This proxy statement/prospectus is being furnished to uBid stockholders in
connection with the solicitation of proxies by uBid's board of directors for
use at the special meeting of uBid stockholders to be held at 10:00 a.m., local
time, on April 28, 2000 at the Chicago O'Hare Westin Hotel, 6100 River Road,
Rosemont, Illinois 60018, and at any postponement or adjournment of the special
meeting.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of this transaction
or the CMGI common stock to be issued in the merger, or determined that
this proxy statement/prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated March 27, 2000, and was
first mailed to uBid stockholders on or about March 29, 2000.
<PAGE>
Sources of Additional Information
This proxy statement/prospectus incorporates important business and
financial information about CMGI that is not included or delivered with
this document. This information is available without charge to uBid
stockholders upon written or oral request. Contact CMGI at 100 Brickstone
Square, Andover, Massachusetts 01810, Attention: Catherine Taylor,
Director of Investor Relations. CMGI's telephone number is (978) 684-3600.
To obtain timely delivery of requested documents prior to the special
meeting of uBid stockholders, you must request them no later than April
21, 2000, which is five business days prior to the date of the special
meeting.
Also see "Where You Can Find More Information" on page 100 of this proxy
statement/prospectus.
<PAGE>
[CMGI LOGO] [uBID LOGO]
CMGI, Inc. uBid, Inc.
100 Brickstone Square 8550 West Bryn Mawr, Suite 200
Andover, Massachusetts 01810 Chicago, Illinois 60631
Proxy Statement/Prospectus
This proxy statement/prospectus is the prospectus of CMGI, Inc. with respect
to the issuance by CMGI of approximately 3,543,059 shares of CMGI common stock
and options to purchase shares of CMGI common stock in connection with the
Agreement and Plan of Merger and Reorganization among CMGI, Senlix Corporation,
a wholly owned subsidiary of CMGI, and uBid, Inc. The merger agreement provides
for the merger of uBid with Senlix Corp. Following the merger, uBid will be a
wholly owned subsidiary of CMGI.
This proxy statement/prospectus is the proxy statement of uBid and is being
furnished to stockholders in connection with the special meeting of uBid
stockholders to be held on April 28, 2000 at 10:00 am, local time, at the
Chicago O'Hare Westin Hotel, 6100 River Road, Rosemont, Illinois 60018.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
disclosure document. Any representation to the contrary is a
criminal offense.
----------------
The date of this proxy statement/prospectus is March 27, 2000.
<PAGE>
uBid, Inc.
8550 West Bryn Mawr, Suite 200
Chicago, IL 60631
(773) 272-5000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 28, 2000
We will hold a special meeting of stockholders of uBid at 10:00 am, local
time, on April 28, 2000 at the Chicago O'Hare Westin Hotel, 6100 River Road,
Rosemont, Illinois 60018.
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger and Reorganization, dated as of February 9,
2000, by and among CMGI, Inc., Senlix Corp. and uBid, Inc., and the merger,
under which uBid will become a wholly owned subsidiary of CMGI and each
outstanding share of uBid common stock will be converted into the right to
receive 0.2628 shares of CMGI common stock; and
2. To transact such other matters which may properly come before the
special meeting or any and all adjournments thereof.
Only uBid stockholders of record at the close of business on March 22, 2000
are entitled to notice of and to vote at the special meeting or any adjournment
of the special meeting.
Your vote is important regardless of the number of shares you own. To ensure
that your shares are represented at the special meeting, we urge you to
complete, date and sign the enclosed proxy card and mail it promptly in the
enclosed postage-paid envelope whether or not you plan to attend the
special meeting in person. You may revoke your proxy in the manner described in
this proxy statement/ prospectus at any time before it has been voted at the
special meeting. You may vote in person at the special meeting even if you have
returned a proxy.
By Order of the Board of Directors
Secretary
<PAGE>
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... i
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 7
Risks Relating to the Merger............................................ 7
CMGI's stock price is volatile and the value of CMGI common stock
issued in the merger will depend on its market price at the time of
the merger, and no adjustment will be made as a result of the changes
in the market price of CMGI's common stock............................ 7
CMGI has agreed to guarantee any tax indemnification obligation of uBid
to Creative Computers that may arise following the effective time of
the merger and if such an obligation arises, it may be significant.... 7
CMGI may face challenges in integrating CMGI and uBid and, as a result,
may not realize the expected benefits of the anticipated merger....... 8
If CMGI does not successfully integrate uBid or the merger's benefits
do not meet the expectations of financial or industry analysts, the
market price of CMGI common stock may decline......................... 8
If CMGI does not manage the integration of other acquired companies
successfully, it may be unable to achieve desired results............. 8
Failure to complete the merger could negatively impact the market price
of uBid common stock and uBid's operating results..................... 8
uBid may not be able to enter into a merger or business combination
with another party at a favorable price because of restrictions in the
merger agreement...................................................... 9
uBid's officers and directors have conflicts of interest that may
influence them to support or approve the merger....................... 9
Uncertainties associated with the merger may cause uBid to lose key
personnel............................................................. 10
Customers of CMGI and uBid may delay or cancel orders as a result of
concerns over the merger.............................................. 10
Risks Relating to CMGI's Business....................................... 10
CMGI may not have operating income or net income in the future......... 10
CMGI may have problems raising the money it needs in the future........ 10
CMGI's success depends greatly on increased use of the Internet by
businesses and individuals............................................ 10
CMGI may incur significant costs to avoid investment company status and
may suffer other adverse consequences if deemed to be an investment
company............................................................... 10
CMGI depends on certain important employees, and the loss of any of
those employees may harm CMGI's business.............................. 11
In fiscal 1999 and the first three months of fiscal 2000, CMGI derived
a significant portion of its revenues from a small number of customers
and loss of any of those customers could significantly damage CMGI's
business.............................................................. 11
CMGI's strategy of expanding its business through acquisitions of other
businesses and technologies presents special risks.................... 11
Growing concerns about the use of "cookies" and data collection may
limit CMGI's ability to develop user profiles......................... 12
If the United States or other governments regulate the Internet more
closely, CMGI's business may be harmed................................ 12
To succeed, CMGI must respond to the rapid changes in technology and
distribution channels related to the Internet......................... 12
CMGI is subject to intense competition................................. 12
CMGI's strategy of selling assets of or investments in the companies
that CMGI has acquired and developed presents risks................... 13
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The value of CMGI's business may fluctuate because the value of some of
its assets fluctuates................................................. 13
CMGI's growth places strains on its managerial, operational and
financial resources................................................... 13
CMGI must develop and maintain positive brand name awareness........... 13
CMGI's quarterly results may fluctuate widely.......................... 14
The price of CMGI's common stock has been volatile..................... 14
CMGI faces security risks.............................................. 14
Ownership of CMGI is concentrated...................................... 14
CMGI's business will suffer if any of its products or systems, or the
products or systems of third parties on which CMGI relies, experience
year 2000 related problems............................................ 15
CMGI relies on NaviSite for network connectivity....................... 15
The success of CMGI's global operations is subject to special risks and
costs................................................................. 15
CMGI could be subject to infringement claims........................... 15
CMGI may have liability for information retrieved from the Internet.... 15
CMGI litigation........................................................ 16
Risks Relating to uBid's Business....................................... 17
uBid has a limited operating history and may experience risks
encountered by early-stage companies.................................. 17
uBid is subject to restrictions on its ability to issue equity
securities, which may limit its ability to grow its business and
compete effectively................................................... 17
uBid anticipates continued losses and uBid may never become
profitable............................................................ 18
Revenue growth in prior periods may not be indicative of uBid's future
growth................................................................ 19
uBid's financial results fluctuate and may be difficult to forecast.... 19
uBid may not be successful in developing brand awareness, and the
failure to do so could significantly harm its business and financial
condition............................................................. 20
uBid's business model is unproven and evolving......................... 20
uBid's failure to remain competitive may significantly hinder its
growth................................................................ 20
uBid relies on its relationships with other online companies to drive
traffic to its Website and promote its brand.......................... 21
uBid's growth and future success depend on its ability to generate
traffic to its Website................................................ 21
uBid's purchased inventory model subjects it to risks of decreased or
negative gross margins................................................ 21
If uBid fails to maintain satisfactory relationships with its
suppliers, or is unable to obtain sufficient quantities of
merchandise, uBid's business would be materially harmed............... 22
uBid relies on third parties to maintain its critical systems and, if
these third parties fail to adequately perform their services, uBid
could experience disruptions in its operations........................ 22
uBid's business may suffer from capacity constraints or system
interruptions......................................................... 23
uBid's failure to manage growth effectively could adversely affect
uBid's business and financial condition............................... 23
uBid may not be able to sustain or grow its business unless it keeps up
with rapid technology changes......................................... 24
Increasing governmental regulation of the Internet could adversely
affect uBid's business................................................ 24
uBid's business may be adversely affected if uBid loses key personnel.. 24
uBid's business will suffer if uBid does not attract and retain
additional highly skilled personnel................................... 25
uBid may suffer disruption in its business because of changes in its
systems, facilities and fulfillment activities........................ 25
Concerns about transaction security on the Internet may hinder uBid's
business.............................................................. 25
uBid's business could be adversely affected if uBid is unable to
adequately protect its proprietary technology......................... 25
uBid may infringe on third party intellectual property rights and could
become involved in costly intellectual property litigation............ 26
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uBid may experience unexpected expenses or delays in service
enhancements if uBid is unable to license third party technology on
commercially reasonable terms.......................................... 26
uBid may encounter barriers to international expansion, which could
limit its future growth and adversely impact its business and financial
condition.............................................................. 26
uBid's stock price is volatile, which could lead to losses by investors
and costly securities litigation....................................... 27
Potential year 2000 problems may involve significant time and expense
and could disrupt uBid's operations.................................... 27
SELECTED HISTORICAL CONDENSED CONSOLIDATED AND UNAUDITED PRO FORMA
FINANCIAL INFORMATION..................................................... 29
CMGI Selected Historical Condensed Consolidated Financial Information.... 29
uBid Selected Historical Condensed Financial Information................. 30
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................. 31
PRO FORMA FINANCIAL INFORMATION............................................ 33
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET....................... 35
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS............. 36
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.. 38
CMGI AND UBID SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION................................................................ 42
COMPARATIVE PER SHARE DATA................................................. 43
MARKET PRICE INFORMATION................................................... 44
CMGI Market Price Information............................................ 44
uBid Market Price Information............................................ 44
Recent Closing Prices.................................................... 45
Date..................................................................... 45
Dividends................................................................ 45
THE SPECIAL MEETING........................................................ 46
Date, Time and Place..................................................... 46
Matters to be Considered at the Special Meeting.......................... 46
Record Date.............................................................. 46
Voting and Revocation of Proxies......................................... 46
Vote Required............................................................ 47
Quorum; Abstentions and Broker Non-Votes................................. 47
You Do Not Have Appraisal Rights......................................... 47
Solicitation of Proxies and Expenses..................................... 47
Board Recommendation..................................................... 47
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THE MERGER................................................................ 49
Background of the Merger................................................ 49
CMGI's Reasons for the Merger........................................... 51
uBid's Reasons for the Merger; Recommendation of the uBid Board of
Directors.............................................................. 52
Opinion of Financial Advisor to uBid.................................... 54
uBid.................................................................... 56
CMGI.................................................................... 57
Interests of Merrill Lynch in the Merger................................ 58
Interests of Executive Officers and Directors of uBid in the Merger..... 58
Treatment of uBid Common Stock.......................................... 60
Accounting Treatment of the Merger...................................... 60
Regulatory Approvals.................................................... 61
Material United States Federal Income Tax Considerations................ 61
Nasdaq National Market Quotation........................................ 62
Resales of CMGI Common Stock Issued in Connection with the Merger;
Affiliate Agreements; Lock-up Agreements............................... 62
No Appraisal Rights..................................................... 63
Delisting and Deregistration of uBid's Common Stock Following the
Merger................................................................. 63
THE MERGER AGREEMENT...................................................... 64
General................................................................. 64
The Exchange Ratio and Treatment of uBid Common Stock................... 64
Treatment of uBid Stock Options......................................... 64
Exchange of Certificates................................................ 64
Representations and Warranties.......................................... 65
Certain Covenants....................................................... 66
Conditions to Obligations to Effect the Merger.......................... 68
Termination; Expenses and Termination Fees.............................. 69
Amendment............................................................... 71
OTHER AGREEMENTS.......................................................... 72
Stockholder Agreement................................................... 72
Amendment to Tax Indemnification Agreement.............................. 72
DESCRIPTION OF UBID'S BUSINESS............................................ 74
Overview................................................................ 74
Industry Background..................................................... 74
The uBid Solution....................................................... 75
Business Strategy....................................................... 75
The uBid Auction........................................................ 77
Products and Merchandising.............................................. 77
Supplier Relationship................................................... 79
Sales and Marketing .................................................... 79
Order Fulfillment....................................................... 80
Customer Support and Service............................................ 80
Technology.............................................................. 80
Systems Operations...................................................... 81
Competition............................................................. 82
Intellectual Property and Other Proprietary Rights...................... 83
Employees............................................................... 83
Facilities.............................................................. 84
Legal Proceedings....................................................... 84
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 85
Overview............................................................... 85
Results of Operations.................................................. 86
Liquidity and Capital Resources........................................ 89
Year 2000 ............................................................. 90
Market Risk............................................................ 91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT OF UBID.. 92
COMPARISON OF STOCKHOLDER RIGHTS......................................... 94
Capitalization......................................................... 94
Voting Rights.......................................................... 94
Number and Classification of Directors................................. 95
Removal of Directors................................................... 95
Filling Vacancies on the Board of Directors............................ 95
Charter Amendments..................................................... 96
Amendments to By-Laws.................................................. 96
Notice of Stockholder Actions.......................................... 97
Right to Call Special Meeting of Stockholders.......................... 97
Dividends and Distributions............................................ 97
Redemption............................................................. 98
Liquidation............................................................ 98
STOCKHOLDER PROPOSALS.................................................... 99
LEGAL MATTERS............................................................ 99
EXPERTS.................................................................. 99
WHERE YOU CAN FIND MORE INFORMATION...................................... 100
FINANCIAL STATEMENTS OF UBID............................................. F-1
ANNEXES
A. AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
Exhibit A Form of Stockholder Agreement
Exhibit B Form of Stockholder Lock-ups
Exhibit C Form of Company Affiliate Letter
B. OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INC.
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are the companies proposing to merge?
A: CMGI and uBid are proposing to merge because we believe the resulting
combination will create a stronger, more competitive company capable of
achieving greater financial strength, operational efficiencies, earning
power and growth potential than either company would have on its own.
We believe that uBid's technology will complement the technology of CMGI's
current network of Internet advertising and e-commerce companies. We also
believe that uBid will be able to continue to expand its customer base by
providing services to many of the companies affiliated with CMGI.
Q: How will these two companies merge?
A: CMGI and uBid will combine under a merger agreement providing that a wholly
owned subsidiary of CMGI will merge with and into uBid, with uBid surviving
the merger as a wholly owned subsidiary of CMGI.
Q: What will I receive in the merger?
A: If the merger is completed, you will receive 0.2628 shares of CMGI common
stock for each share of uBid common stock that you own. CMGI will not issue
fractional shares of its common stock. Instead, you will receive cash,
without interest, based on the average of the last reported sales prices of
CMGI common stock on the Nasdaq National Market during the ten consecutive
trading days ending on and including the last trading day prior to the day
on which the merger is completed.
On February 9, 2000, the last full trading day before the public
announcement of the proposed merger, the last reported sale price of CMGI
common stock on the Nasdaq National Market was $120.50 per share. On March
24, 2000, the most recent practicable date prior to the printing of this
proxy statement/prospectus, the last reported sale price of CMGI common
stock on the Nasdaq National Market was $121.31 per share.
Q: When do you expect to complete the merger of CMGI and uBid?
A: We are working to complete the merger as quickly as possible. We expect to
complete the merger promptly following the special meeting. However, we
cannot predict the exact timing because the merger is subject to
governmental and other regulatory approvals. If necessary or desirable,
CMGI and uBid may agree to complete the merger at a later date.
Q: What are the federal income tax consequences of the merger?
A: The merger is intended to qualify as a reorganization under the Internal
Revenue Code. Provided that the merger qualifies as a reorganization under
the Internal Revenue Code, no gain or loss will generally be recognized for
federal income tax purposes by CMGI, uBid or the transitory subsidiary as a
result of the merger. Additionally, no gain or loss will be recognized for
federal income tax purposes by uBid stockholders to the extent they receive
shares of CMGI common stock in exchange for uBid common stock in the
merger. In general, however, uBid stockholders will recognize taxable
income to the extent they receive cash in the merger. uBid stockholders
should consult their tax advisors for a full understanding of the tax
consequences of the merger.
Q: Who must approve the merger?
A: In addition to the approvals by the CMGI board of directors and the uBid
board of directors, each of which has already been obtained, and
governmental and other regulatory approvals, the merger agreement and the
merger must be approved by uBid stockholders.
Q: What stockholder vote is required to approve the merger agreement and the
merger?
A: A majority of the outstanding shares of uBid common stock entitled to vote
constitutes a quorum for the uBid special meeting. The affirmative vote of
the holders of at least a
i
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majority of the outstanding shares of uBid common stock is required to
approve the merger agreement and the merger.
Q: Does the uBid board of directors recommend approval of the merger
agreement and the merger?
A: Yes. After careful consideration, the uBid board of directors unanimously
recommends that its stockholders vote in favor of the merger agreement and
the merger. For a more complete description of the recommendation of the
uBid board of directors, see the section entitled "The Merger--uBid's
Reasons for the Merger; Recommendation of the uBid Board of Directors" on
page 52.
Q: What do I need to do now?
A: We urge you to read this proxy statement/ prospectus, including the
annexes and exhibits, carefully, and to consider how the merger will
affect you as a stockholder. You also may want to review the documents
referenced under "Where You Can Find More Information" on page 100.
Q: How do I vote?
A: You may indicate how you want to vote on your proxy card and then sign and
mail your proxy card in the enclosed return envelope as soon as possible
so that your shares will be represented at the uBid special meeting. You
may also attend the special meeting and vote in person instead of
submitting a proxy.
If you fail either to return your proxy card or to vote in person at the
special meeting, or if you mark your proxy "abstain," the effect will be a
vote against the merger agreement and the merger. If you sign and send in
your proxy without indicating how you want to vote, your proxy will be
counted as a vote for the merger agreement and the merger unless your
shares are held in a brokerage account.
Q: If my shares are held in a brokerage account, will my broker vote my
shares for me?
A: Your broker cannot vote your shares without instructions from you on how
to vote. Therefore, it is important that you follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares. If you fail to provide your broker with instructions, it will have
the same effect as a vote against the merger agreement and the merger.
Q: May I change my vote after I have mailed in my signed proxy card?
A: You may change your vote at any time before the vote takes place at the
uBid special meeting. To do so, you may either complete and submit a later
dated proxy card or send a written notice stating that you would like to
revoke your proxy. In addition, you may attend the special meeting and
vote in person. However, if you elect to vote in person at the special
meeting and your shares are held by a broker, bank or other nominee, you
must bring to the special meeting a letter from the broker, bank or other
nominee confirming your beneficial ownership of the shares.
Q: When and where is the uBid special meeting?
A: The special meeting of uBid stockholders will be held at 10:00 a.m., local
time, on April 28, 2000 at the Chicago O'Hare Westin Hotel, 6100 River
Road, Rosemont, Illinois 60018.
Q: Should I send in my certificates now?
A: No. After we complete the merger, CMGI or its exchange agent will send
instructions to you explaining how to exchange your shares of uBid common
stock for the appropriate number of shares of CMGI common stock.
Q: Who may I contact with any additional questions?
A: You may call Morrow & Company, Inc., investor relations for uBid, at (212)
754-8000.
Q: Are there any risks associated with the merger?
A: The merger does involve risks. For a discussion of risk factors that
should be considered in evaluating the merger, see "Risk Factors"
beginning on page 7.
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" on page
100. We have included page references parenthetically to direct you to a more
complete description of the topics in this summary.
The Companies
CMGI, Inc.
100 Brickstone Square
Andover, Massachusetts 01810
(978) 684-3600
CMGI develops and operates Internet and fulfillment services companies.
CMGI's Internet strategy includes the internal development and operation of
majority-owned subsidiaries as well as taking strategic positions in other
Internet companies that have demonstrated synergies with CMGI's core
businesses. CMGI's strategy also envisions and promotes opportunities for
synergistic business relationships among the Internet companies within its
portfolio. In addition, CMGI provides fulfillment services through three wholly
owned subsidiaries, SalesLink Corporation, InSolutions Incorporated and On-
Demand Solutions, Inc. SalesLink's services are also provided through its
subsidiary, Pacific Direct Marketing Corporation. CMGI's fulfillment services
offerings include product and literature fulfillment, supply chain management,
telemarketing, and outsourced e-business program management. Other than
references to a specific CMGI subsidiary, any reference to CMGI includes its
subsidiaries.
uBid, Inc.
8550 West Bryn Mawr
Suite 200
Chicago, Illinois 60631
(773) 272-5000
uBid is an Internet leader in business-to-consumer auctions, operating an
online auction marketplace offering brand-name products to both consumers and
businesses. uBid provides consumers the opportunity to set their own prices on
popular products at significant discounts to those found in traditional
channels. In addition, uBid auctions provide leading suppliers such as Sony,
IBM, Hewlett Packard, Canon, Epson, and Harmon Kardon with an inexpensive and
highly efficient channel for selling excess or unique items on a timely basis,
while preserving their existing distribution channels. uBid's auctions feature
a rotating selection of brand name items in several categories or "stores":
computer products; consumer electronics; sporting goods and memorabilia;
jewelry and gifts; home improvement; appliances; clothing and apparel; home and
leisure; travel and events; and art.
The Merger
Through the merger, uBid will become a wholly owned subsidiary of CMGI. uBid
stockholders will receive CMGI common stock in exchange for their shares of
uBid common stock. The merger agreement is attached to this proxy
statement/prospectus as Annex A. We urge you to read the merger agreement as it
is the legal document that governs the merger.
Vote Required
(Page 47)
Approval of the merger agreement and the merger requires the vote of a
majority of the outstanding shares of uBid common stock. uBid directors and
executive officers and their respective affiliates held less than 1% of the
outstanding shares of uBid common stock on March 1, 2000.
Holders of uBid common stock, who on March 1, 2000 collectively beneficially
held approximately 22.4% of the outstanding voting power of uBid, have already
agreed to vote in favor of the merger agreement and the merger.
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uBid Board Recommendation to Stockholders
(Page 47)
The uBid board of directors unanimously voted to approve the merger
agreement and the merger. The uBid board of directors believes that the merger
is advisable and in your best interest and unanimously recommends that you vote
FOR the proposal to approve the merger agreement and the merger.
What Holders of
uBid Common Stock Will Receive
(Page 64)
Each share of uBid common stock will be exchanged for 0.2628 shares of CMGI
common stock.
CMGI will not issue fractional shares of CMGI common stock in connection
with the merger. Instead, CMGI will pay cash, without interest, for any
fractional shares.
Based on 11,583,473 shares of uBid common stock outstanding on February 9,
2000, the day on which the merger agreement was entered into, CMGI estimates
that uBid stockholders will receive approximately 3,044,137 shares of CMGI
common stock in the merger.
Conditions to the Merger
(Page 68)
The completion of the merger depends upon meeting a number of conditions,
including:
. the approval of uBid stockholders;
. the expiration or termination of all applicable waiting periods, and any
extensions of these periods, under the Hart-Scott-Rodino Act;
. the receipt of legal opinions regarding the treatment of the merger as a
reorganization; and
. other customary contractual conditions specified in the merger agreement.
Certain of the conditions to the merger may be waived by the party entitled
to assert the condition.
No Solicitation by uBid
(Page 67)
With certain exceptions, including compliance with the Securities and
Exchange Commission's tender offer requirements, and subject to applicable
fiduciary duties of the uBid board of directors to recommend a superior
proposal to uBid stockholders, uBid has agreed that neither it nor any of its
subsidiaries will (a) solicit, initiate or encourage any proposal that might
lead to an acquisition proposal, (b) enter into negotiations or discussions
concerning, or provide any information to a third party relating to, any
acquisition proposal or (c) agree to recommend any acquisition proposal. uBid
has further agreed to cause each of its officers, directors, employees,
financial advisors, representatives and agents, as well as the officers,
directors, employees, financial advisors, representatives and agents of its
subsidiaries, not to take any of these actions.
Termination of the Merger Agreement
(Page 69)
CMGI and uBid can mutually agree to terminate the merger agreement without
completing the merger, and either CMGI or uBid can terminate the merger
agreement upon the occurrence of a number of events, including if:
. the merger is not completed by August 31, 2000;
. a governmental entity issues a nonappealable final order that enjoins or
otherwise prohibits the merger;
. uBid stockholders do not approve the merger agreement and the merger at the
special meeting of uBid stockholders; or
. the other party breaches or fails to perform any material representation,
warranty, covenant or agreement in the merger agreement and fails to cure
the breach or to perform within 20 days of receiving notice of the breach.
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In addition, CMGI can terminate the merger agreement upon the occurrence of
a number of events, including if:
. the uBid board of directors fails to recommend approval of the merger
agreement and the merger to uBid stockholders or withdraws or modifies its
recommendation;
. the uBid board of directors approves or recommends to uBid stockholders an
alternative transaction with a third party meeting the requirements set
forth in the merger agreement;
. an alternative transaction is announced or otherwise publicly known and the
uBid board of directors has either failed to recommend against acceptance of
it by uBid stockholders within ten days of receiving a written request from
CMGI to do so or it has failed to reconfirm its approval of the merger
agreement and the merger within ten days of receiving a written request from
CMGI to do so; or
. a third party commences a tender offer or exchange offer for 20% or more of
the outstanding shares of uBid common stock and the uBid board of directors
either recommends that uBid stockholders tender their shares in the tender
or exchange offer, or within ten days after the tender or exchange offer is
commenced, it fails to recommend against acceptance of the offer or takes no
position with respect to the acceptance of it.
In addition, uBid can terminate the merger agreement if (a) it receives an
unsolicited acquisition proposal that the uBid board of directors has
determined after consultation with its financial advisor is a superior
proposal, (b) it has complied with all of the provisions in the merger
agreement with respect to the nonsolicitation of acquisition proposals, (c) the
uBid board of directors has determined in good faith after consultation with
its outside legal counsel that termination of the merger agreement is necessary
for the uBid board of directors to fulfill its fiduciary duties under
applicable law and (d) uBid, contemporaneously with, and as a condition to, its
termination of the merger agreement, pays CMGI the fee and expenses provided
for in the merger agreement.
Termination Fee
(Page 71)
uBid must pay CMGI a termination fee of $20 million if CMGI terminates the
merger agreement upon the occurrence of a number of events, including:
. the uBid board of directors fails to recommend approval of the merger
agreement and the merger to uBid stockholders or withdraws or modifies its
recommendation;
. the uBid board of directors approves or recommends to uBid stockholders an
alternative transaction with a third party meeting the requirements set
forth in the merger agreement;
. an alternative transaction is announced or otherwise publicly known and the
uBid board of directors has either failed to recommend against acceptance of
it by uBid stockholders within ten days of receiving a written request from
CMGI to do so or it has failed to reconfirm its approval of the merger
agreement and the merger within ten days of receiving a written request from
CMGI to do so;
. a third party commences a tender offer or exchange offer for 20% or more of
the outstanding shares of uBid common stock and the uBid board of directors
recommends that uBid stockholders tender their shares in the tender or
exchange offer, or within ten days after the tender or exchange offer is
commenced, it fails to recommend against acceptance of the offer or takes no
position with respect to the acceptance of it;
. uBid breaches the provisions in the merger agreement with respect to the
nonsolicitation of acquisition proposals or the holding of the special
meeting; or
. uBid terminates the merger agreement upon receiving an unsolicited, superior
acquisition proposal.
Also, if CMGI or uBid terminates the merger agreement as a result of uBid
stockholders voting against the merger agreement and the merger at the special
meeting and, prior to such termination, a bona fide proposal for an alternative
transaction has been publicly announced, uBid must pay a termination fee of $10
million. In addition, if a definitive agreement with respect to an alternative
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transaction is entered into or an alternative transaction is completed within
12 months after such termination, uBid must pay CMGI an additional $10 million.
Additionally, uBid must pay CMGI up to $500,000 as reimbursement for
expenses incurred by CMGI related to the merger if CMGI or uBid terminates the
merger agreement in certain circumstances, including the failure of the merger
to be completed by August 31, 2000 because specified conditions to CMGI's
obligation to effect the merger have not been satisfied.
Amendment to Tax Indemnification Agreement
(Page 72)
In connection with the merger agreement, Creative Computers, Inc., uBid and
CMGI entered into an amendment to the tax indemnification agreement existing
between Creative and uBid which amendment becomes effective only upon the
closing of the merger. The amendment, among other things,
. deletes from the tax allocation agreement all provisions that would prohibit
uBid from undertaking the merger,
. provides that neither the negotiation of the merger nor the consummation
thereof constitutes a breach of uBid's obligations under the agreement, and
. provides that CMGI agrees to unconditionally guarantee any indemnification
obligation that uBid may have under the tax indemnification agreement.
Opinion of Financial Advisor
(Page 54)
Merrill Lynch, Pierce, Fenner & Smith Incorporated, uBid's financial
advisor, has rendered a written opinion, dated February 9, 2000, to the uBid
board of directors as to the fairness to the holders of uBid common stock, from
a financial point of view, of the exchange ratio in the merger. The full text
of the written opinion of Merrill Lynch is attached to this document as
Appendix B. We encourage you to read the opinion carefully in its entirety to
understand the procedures followed, assumptions made, matters considered and
limitations on the review undertaken. The opinion of Merrill Lynch is directed
to the uBid board of directors and does not constitute a recommendation to any
stockholder with respect to any matter relating to the merger.
Interests of Merrill Lynch in the Merger
(Page 58)
Pursuant to the terms of Merrill Lynch's engagement, uBid has agreed to pay
Merrill Lynch for its financial advisory services in connection with the merger
an aggregate fee of $2.3 million payable in cash upon the closing of the
merger. uBid also has agreed to reimburse Merrill Lynch for the reasonable fees
and expenses of legal counsel provided, however, that except with regard to any
of the indemnification provisions or procedures contained in the engagement
letter, the fees and expenses of Merrill Lynch's legal counsel shall not exceed
$50,000 without uBid's prior consent, which consent shall not be unreasonably
withheld, and to indemnify Merrill Lynch and related persons and entities
against liabilities, including liabilities under the federal securities laws,
arising out of Merrill Lynch's engagement.
Interests of Executive Officers and
Directors of uBid in the Merger
(Page 58)
In considering the recommendation of the uBid board of directors, you should
be aware of the interests that uBid executive officers and directors have in
the merger. These include the following:
. uBid executive officers will receive retention and severance benefits;
. certain uBid executive officers have been granted an aggregate of
approximately 2,150,000 options to purchase shares of common stock in the
surviving company, uBid, following the merger with an exercise price of
$8.25 per share, which represented the fair market value on the date of
grant assuming a four-for-one stock split.
. uBid executive officers and directors will have the benefit of accelerated
vesting of options to acquire uBid common stock granted under uBid's stock
option plans, as described below, in connection with the merger; and
. uBid officers and directors have customary rights to indemnification against
specified liabilities.
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uBid executive officers and directors have options to acquire uBid common
stock. As of March 1, 2000, the executive officers and directors of uBid, and
their respective affiliates, held options for an aggregate of approximately
1,310,814 shares of uBid common stock, which options were vested with respect
to 249,317 shares. Assuming the merger is completed on April 30, 2000, these
options will vest with respect to an additional 712,833 shares of uBid common
stock immediately prior to the effective time of the merger. At the effective
time of the merger all outstanding uBid options to purchase uBid common stock
will terminate; provided that CMGI will offer each holder of an outstanding
uBid option the opportunity to have the vested portion of any unexercised uBid
option exchanged for an option to acquire CMGI common stock, as provided for in
the merger agreement.
In considering the fairness of the merger to uBid stockholders, the uBid
board of directors took into account these interests. These interests are
different from and in addition to your and their interests as stockholders.
Accounting Treatment
(Page 60)
CMGI will account for the merger using the purchase method of accounting,
which means that the assets and liabilities of uBid, including intangible
assets, will be recorded at their fair market value with the remaining purchase
price reflected as goodwill, and other intangible assets and the results of
operations and cash flows of uBid will be included in CMGI's financial
statements prospectively as of the consummation of the merger.
Material United States Federal Income Tax Considerations
(Page 61)
We intend the merger to qualify as a reorganization under the Internal
Revenue Code. If the merger qualifies as a reorganization, no gain or loss
generally will be recognized by uBid stockholders for federal income tax
purposes on the exchange of shares of uBid common stock solely for shares of
CMGI common stock.
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your tax
advisor for a full understanding of the tax consequences of the merger to you.
uBid Stockholders Have No Appraisal Rights
(Page 63)
Under Delaware law, uBid stockholders do not have appraisal rights.
Forward-Looking Statements May Prove Inaccurate
(Page 31)
We have made forward-looking statements in this proxy statement/prospectus
(and in documents that are incorporated by reference) that are subject to risks
and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of CMGI. Also, when
we use words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. Stockholders should note
that many factors could affect the future financial results of CMGI and uBid,
and could cause these results to differ materially from those expressed in our
forward-looking statements. These factors include the following:
. the risk that CMGI encounters greater than expected costs and difficulties
related to combining uBid technology with the technology of CMGI's current
network of Internet companies;
. changes in laws or regulations, including increased government regulation of
the Internet, and privacy related issues;
. increased competitive pressures from the issuance of patents and other
intellectual property to competitors of CMGI and uBid;
. the risk that CMGI will be unable to retain certain uBid employees;
. the risk that CMGI will be unable to retain certain customers of uBid who
may terminate their relationship with uBid as a result of the merger because
they deem themselves competitors of CMGI; and
. the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be unsuccessful.
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CMGI Market Price Information
(Page 44)
Shares of CMGI common stock are quoted on the Nasdaq National Market. On
February 9, 2000, the last full trading day prior to the public announcement of
the proposed merger, CMGI common stock closed at $120.50 per share. On March
24, 2000, CMGI common stock closed at $121.31 per share.
uBid Market Price Information
(Page 44)
Shares of uBid common stock are also quoted on the Nasdaq National Market.
On February 9, 2000, the last full trading day prior to the public announcement
of the proposed merger, uBid common stock closed at $26.69 per share. On March
24, 2000, uBid common stock closed at $31.44 per share.
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RISK FACTORS
You should carefully consider the following risk factors before you decide
whether to vote to approve and adopt the merger agreement and the merger. You
should also consider the other information in this proxy statement/prospectus
and the additional information in CMGI's other reports on file with the
Securities and Exchange Commission and in the other documents incorporated by
reference in this proxy statement/prospectus. See "Where You Can Find More
Information" on page 100.
Risks Relating to the Merger
CMGI's stock price is volatile and the value of CMGI common stock issued in
the merger will depend on its market price at the time of the merger, and no
adjustment will be made as a result of changes in the market price of CMGI's
common stock.
At the closing of the merger, each share of uBid common stock will be
exchanged for 0.2628 shares of CMGI common stock. This exchange ratio will not
be adjusted for changes in the market price of CMGI common stock or of uBid
common stock. In addition, neither CMGI nor uBid may terminate or renegotiate
the merger agreement, and uBid may not resolicit the vote of its stockholders
solely because of changes in the market price of CMGI common stock or of uBid
common stock. Any reduction in CMGI's common stock price will result in you
receiving less value in the merger at closing. You will not know the exact
value of CMGI's common stock to be issued to you in the merger at the time of
the special meeting of uBid stockholders.
The market price of CMGI's common stock, like that of the shares of many
other high technology and Internet companies, has been, and will likely
continue to be, volatile. For example, from January 4, 1999 to January 4, 2000,
CMGI common stock traded as high as $163.50 per share and as low as $13.53 per
share.
Recently, the stock market in general and the shares of Internet companies
in particular have experienced significant price fluctuations. The market price
of CMGI's common stock may continue to fluctuate significantly in response to
various factors, including:
. quarterly variations in . announcements of mergers and
operating results or growth acquisitions and other actions
rates; by competitors;
. the announcement of
technological innovations;
. regulatory and judicial actions;
. the introduction of new
products;
. general economic conditions; and
. changes in estimates by
securities analysts;
. patents and other intellectual
. market conditions in the property rights issued to
industry; competitors of CMGI.
. announcements of mergers and
acquisitions by CMGI;
CMGI has agreed to guarantee any tax indemnification obligation of uBid to
Creative Computers, Inc. that may arise following the effective time of the
merger and if such an obligation arises, it may be significant.
CMGI has agreed to guarantee any tax indemnification obligation of uBid to
Creative Computers that may arise following the effective time of the merger
arising out of actions by uBid after the spin-off of uBid by Creative
Computers, including transactions similar to the merger, that would disqualify
the spin-off as a tax-free distribution or make the spin-off taxable to
Creative Computers for federal income tax purposes. If the spin-off were
taxable due to uBid's actions, for example, as a result of the merger, uBid
would face an indemnity obligation to Creative Computers of approximately $100
million. This indemnity obligation could have a significant material adverse
effect on CMGI's business and financial condition.
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CMGI may face challenges in integrating CMGI and uBid and, as a result, may
not realize the expected benefits of the anticipated merger.
Integrating the operations and personnel of CMGI and uBid will be a complex
process, and CMGI is uncertain that the integration will be completed rapidly
or will achieve the anticipated benefits of the merger. Since uBid is located
in the Midwest, it will be more difficult to retain employees of uBid if, after
the merger, some of the activities and management of uBid move from the Midwest
to the East Coast. The successful integration of CMGI and uBid will require,
among other things, integration of their finance, human resources and sales and
marketing groups and coordination of development efforts. The diversion of the
attention of CMGI's management and any difficulties encountered in the process
of combining the companies could cause the disruption of, or a loss of momentum
in, the activities of CMGI's business. Further, the process of combining CMGI
and uBid could negatively affect employee morale and the ability of CMGI to
retain some of its key employees after the merger.
If CMGI does not successfully integrate uBid or the merger's benefits do not
meet the expectations of financial or industry analysts, the market price of
CMGI common stock may decline.
The market price of CMGI common stock may decline as a result of the merger
if:
. the integration of CMGI and uBid is unsuccessful;
. CMGI does not achieve the perceived benefits of the merger as rapidly as, or
to the extent anticipated by, financial or industry analysts; or
. the effect of the merger on CMGI's financial results is not consistent with
the expectations of financial or industry analysts.
If CMGI does not manage the integration of other acquired companies
successfully, it may be unable to achieve desired results.
As a part of its business strategy, CMGI may enter into additional business
combinations, strategic investments and acquisitions such as with Tallan, Inc.
Acquisitions are typically accompanied by a number of risks, including:
. the maintenance of uniform
. the difficulty of integrating the standards, controls, procedures
operations and personnel of the and policies;
acquired companies;
. the impairment of relationships
. the potential disruption of with employees and customers as a
CMGI's ongoing business and result of any integration of new
distraction of management; management personnel; and
. the difficulty of incorporating . potential unknown liabilities
acquired technology and rights associated with acquired
into CMGI's products and businesses.
services;
. unanticipated expenses related to
acquired technology and its
integration into existing
technology;
CMGI may not succeed in addressing these risks or any other problems
encountered in connection with potential business combinations, strategic
investments and acquisitions, potentially disrupting CMGI's business and
causing increased losses.
Failure to complete the merger could negatively impact the market price of
uBid common stock and uBid's operating results.
If the merger is not completed for any reason, uBid may be subject to a
number of material risks, including:
. uBid may be required to pay CMGI a termination fee of up to $20 million
and/or reimburse CMGI for expenses of up to $500,000;
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. the market price of uBid common stock may decline to the extent that the
current market price of uBid common stock reflects a market assumption that
the merger will be completed; and
. costs related to the merger, such as legal and accounting fees, must be paid
even if the merger is not completed.
If the merger is terminated and the uBid board of directors seeks another
merger or business combination, you cannot be certain that uBid will be able to
find a partner willing to pay an equivalent or more attractive price than the
price to be paid by CMGI in the merger.
uBid may not be able to enter into a merger or business combination with
another party at a favorable price because of restrictions in the merger
agreement.
While the merger agreement is in effect, subject to specified exceptions,
uBid is prohibited from entering into or soliciting, initiating or encouraging
any inquiries or proposals that may lead to a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, tender offer,
sale of shares of capital stock or other similar transactions with any person
other than CMGI. As a result of this prohibition, uBid may not be able to enter
into an alternative transaction at a favorable price.
uBid's officers and directors have conflicts of interest that may influence
them to support or approve the merger.
The directors and officers of uBid participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours, including the
following:
. as of March 1, 2000, the
executive officers and directors . certain officers of uBid have
of uBid owned stock or options to entered into employment
purchase an aggregate of agreements with CMGI pursuant to
1,314,814 shares of uBid common which these officers will receive
stock, of which approximately options to purchase uBid common
1,061,497 represent options which stock following the merger;
are unvested. If the merger is
completed, on or about April 30, . upon completion of the merger,
2000 approximately 577,384 of the CMGI and uBid may enter into
unvested options will accelerate employment agreements with
and become immediately additional officers of uBid; and
exercisable prior to the
effective time of the merger; . CMGI has agreed to cause the
surviving corporation in the
merger to indemnify each present
. directors and officers and their and former uBid officer and
respective affiliates, director against liabilities
representing a significant arising out of such person's
percentage of uBid stockholders, services as an officer or
have agreed to vote in favor of director. CMGI will cause the
the merger agreement and the surviving corporation to maintain
merger; officers' and directors'
liability insurance to cover any
. certain officers of uBid are such liabilities for the next six
entitled to certain benefits, years.
including substantial severance
packages, under their employment
agreements with uBid if their
employment is terminated upon
uBid's change of control, such as
in the merger;
The directors and officers of uBid may therefore have been more likely to
vote to approve the merger agreement and the merger than if they did not have
these interests. uBid stockholders should consider whether these interests may
have influenced these directors and officers to support or recommend the
merger. You should read more about these interests under "The Merger--Interests
of Executive Officers and Directors of uBid in the Merger" on page 58.
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Uncertainties associated with the merger may cause uBid to lose key personnel.
Current and prospective uBid employees may experience uncertainty about
their future roles with CMGI. This uncertainty may adversely affect uBid's
ability to attract and retain key management, sales, marketing and technical
personnel.
Customers of CMGI and uBid may delay or cancel orders as a result of concerns
over the merger.
The announcement and closing of the merger could cause customers and
potential customers of CMGI and uBid to delay or cancel contracts for services.
In particular, customers could be concerned about future service offerings and
integration support of current services. Moreover, they may terminate their
relationship with uBid because they deem themselves competitors of CMGI. Such a
delay or cancellation of orders could have a material adverse effect on the
business, results of operations and financial condition of CMGI or uBid.
Risks Relating to CMGI's Business
CMGI may not have operating income or net income in the future.
During the fiscal year ended July 31, 1999 and for the six months ended
January 31, 2000, CMGI had an operating loss of approximately $127 million and
$686 million, respectively. CMGI anticipates continuing to incur significant
operating expenses in the future including significant cost of revenues,
selling, general and administrative and amortization expenses. As a result,
CMGI expects to continue to incur operating losses and may not have enough
money to grow its business in the future.
CMGI may have problems raising the money it needs in the future.
In recent years, CMGI has financed its operating losses in part with profits
from selling some of the stock of companies in which it had invested. This
funding source may not be sufficient in the future, and CMGI may need to obtain
funding from outside sources. However, CMGI may not be able to obtain funding
from outside sources. In addition, even if CMGI finds outside funding sources,
CMGI may be required to issue to such outside sources securities with greater
rights than those currently possessed by holders of shares of CMGI common
stock. CMGI may also be required to take other actions which may lessen the
value of CMGI's common stock, including borrowing money on terms that are not
favorable to CMGI.
CMGI's success depends greatly on increased use of the Internet by businesses
and individuals.
CMGI's success depends greatly on increased use of the Internet for
advertising, marketing, providing services, and conducting business. Commercial
use of the Internet is currently at an early stage of development and the
future of the Internet is not clear. In addition, it is not clear how effective
advertising on the Internet will be in generating business as compared to more
traditional types of advertising such as print, television, and radio. Because
a significant portion of CMGI's business depends on CMGI's Internet operating
company subsidiaries, CMGI's business will suffer if commercial use of the
Internet fails to grow in the future.
CMGI may incur significant costs to avoid investment company status and may
suffer other adverse consequences if deemed to be an investment company.
CMGI may incur significant costs to avoid investment company status and may
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. Some equity investments in other businesses
made by CMGI and its venture subsidiaries may constitute investment securities
under the 1940 Act. A company may be deemed to be an investment company if it
owns investment securities with a value exceeding 40% of its total assets,
subject to certain exclusions. Investment companies are subject to registration
under, and compliance with, the 1940 Act unless a particular exclusion or
Securities and Exchange Commission safe harbor applies. If CMGI were to be
deemed an investment company, it would become subject to the requirements of
the 1940 Act. As a consequence, CMGI would be prohibited from engaging in
business or issuing its securities as it has in the past and might be subject
to civil and criminal penalties for noncompliance. In addition, certain of
CMGI's contracts might be voidable, and a court-appointed receiver could take
control of CMGI and liquidate its business.
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Although CMGI's investment securities currently comprise less than 40% of
its total assets, fluctuations in the value of these securities or of CMGI's
other assets may cause this limit to be exceeded. Unless an exclusion or safe
harbor were available to it, CMGI would have to attempt to reduce its
investment securities as a percentage of its total assets. This reduction can
be attempted in a number of ways, including the disposition of investment
securities and the acquisition of non-investment security assets. If CMGI were
required to sell investment securities, it may sell them sooner than it
otherwise would. These sales may be at depressed prices and CMGI may never
realize anticipated benefits from, or may incur losses on, these investments.
Some investments may not be sold due to contractual or legal restrictions or
the inability to locate a suitable buyer. Moreover, CMGI may incur tax
liabilities when it sells assets. CMGI may also be unable to purchase
additional investment securities that may be important to its operating
strategy. If CMGI decides to acquire non-investment security assets, it may not
be able to identify and acquire suitable assets and businesses.
CMGI depends on certain important employees, and the loss of any of those
employees may harm CMGI's business.
CMGI's performance is substantially dependent on the performance of its
executive officers and other key employees, in particular, David S. Wetherell,
its chairman, president, and chief executive officer, Andrew J. Hajducky III,
its executive vice president, chief financial officer and treasurer, and David
Andonian, its president, corporate development. The familiarity of these
individuals with the Internet industry makes them especially critical to CMGI's
success. In addition, CMGI's success is dependent on its ability to attract,
train, retain and motivate high quality personnel, especially for its
management team. The loss of the services of any of CMGI's executive officers
or key employees may harm its business. CMGI's success also depends on its
continuing ability to attract, train, retain, and motivate other highly
qualified technical and managerial personnel. Competition for such personnel is
intense.
In fiscal 1999 and the first six months of fiscal 2000, CMGI derived a
significant portion of its revenues from a small number of customers and loss
of any of those customers could significantly damage CMGI's business.
During the fiscal year ended July 31, 1999, sales to Cisco Systems, Inc.
accounted for 36% of CMGI's total revenues and 47% of CMGI's revenues from its
fulfillment services segment. During the six months ended January 31, 2000,
sales to Cisco accounted for 14.8% of CMGI's total revenues and 53% of CMGI's
revenues from its fulfillment services segment. CMGI currently does not have
any agreements with Cisco which obligate this customer to buy a minimum amount
of products from CMGI or to designate CMGI as its sole supplier of any
particular products or services. During the six months ended January 31, 2000,
sales to DoubleClick, Inc. accounted for 18.9% of CMGI's total revenues and
26.2% of CMGI's revenues from its Internet segment. CMGI believes that it will
continue to derive a significant portion of its operating revenues from sales
to a small number of customers.
CMGI's strategy of expanding its business through acquisitions of other
businesses and technologies presents special risks.
CMGI intends to continue to expand through the acquisition of businesses,
technologies, products and services from other businesses. Acquisitions involve
a number of special problems, including:
. the need to incur additional
. difficulty integrating acquired debt;
technologies, operations, and
personnel with the existing
business;
. strain on managerial and
operational resources as
management tries to oversee
. diversion of management attention larger operations;
in connection with both
negotiating the acquisitions and . exposure to unforeseen
integrating the assets; liabilities of acquired
companies; and
. potential issuance of securities
in connection with the . the requirement to record
acquisition, which securities additional future operating costs
dilute the holders of CMGI's for the amortization of good will
currently outstanding securities; and other intangible assets,
which amounts could be
significant.
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CMGI may not be able to successfully address these problems. Moreover,
CMGI's future operating results will depend to a significant degree on its
ability to successfully manage growth and integrate acquisitions. In addition,
many of CMGI's investments are in early-stage companies with limited operating
histories and limited or no revenues. CMGI may not be able to successfully
develop these young companies.
Growing concerns about the use of "cookies" and data collection may limit
CMGI's ability to develop user profiles.
Web sites typically place small files of information commonly known as
"cookies" on a user's hard drive, generally without the user's knowledge or
consent. Cookie information is passed to the Web site through the Internet
user's browser software. CMGI's technology currently uses cookies to collect
information about an Internet user's movement through the Internet. Most of the
currently available Internet browsers allow users to modify their browser
settings to prevent cookies from being stored on their hard drive, and a small
minority of users currently choose to do so. Users can also delete cookies from
their hard drive at any time. Some Internet commentators and privacy advocates
have suggested limiting or eliminating the use of cookies, and recently, the
FTC initiated an informal inquiry into the data collection practices of Double
Click, Inc., a competitor of ours. The effectiveness of CMGI's technology could
be limited by any reduction or limitation in the use of cookies. If the use or
effectiveness of cookies is limited, CMGI would likely have to switch to other
technology that allows it to gather demographic and behavioral information.
This could require significant reengineering time and resources, might not be
completed in time to avoid negative consequences to CMGI's business, financial
condition or results of operations, and might not be possible at all.
If the United States or other governments regulate the Internet more closely,
CMGI's business may be harmed.
Because of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
privacy, pricing, taxation and content. The enactment of any additional laws or
regulations may impede the growth of the Internet and CMGI's Internet-related
business and could place additional financial burdens on CMGI's business.
To succeed, CMGI must respond to the rapid changes in technology and
distribution channels related to the Internet.
The markets for CMGI's Internet products and services are characterized by:
. rapidly changing technology; . shifting distribution channels;
and
. evolving industry standards;
. changing customer demands.
. frequent new product and service
introductions;
CMGI's success will depend on its ability to adapt to this rapidly evolving
marketplace. CMGI may not be able to adequately adapt its products and services
or to acquire new products and services that can compete successfully. In
addition, CMGI may not be able to establish and maintain effective distribution
channels.
CMGI is subject to intense competition.
The market for Internet products and services is highly competitive.
Moreover, the market for Internet products and services lacks significant
barriers to entry, enabling new businesses to enter this market relatively
easily. Competition in the market for Internet products and services may
intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with CMGI's products and
services. In addition, many of CMGI's current and potential competitors have
greater financial, technical, operational, and marketing
12
<PAGE>
resources. CMGI may not be able to compete successfully against these
competitors in selling its goods and services. Competitive pressures may also
force prices for Internet goods and services down and such price reductions may
reduce CMGI's revenues.
CMGI's strategy of selling assets of or investments in the companies that CMGI
has acquired and developed presents risks.
One element of CMGI's business plan involves raising cash for working
capital for its Internet business by selling, in public or private offerings,
some of the companies, or portions of the companies, that it has acquired and
developed. Market and other conditions largely beyond CMGI's control affect:
. CMGI's ability to engage in such sales;
. the timing of such sales; and
. the amount of proceeds from such sales.
As a result, CMGI may not be able to sell some of these assets. In addition,
even if CMGI is able to sell, it may not be able to sell at favorable prices.
If CMGI is unable to sell these assets at favorable prices, its business will
be harmed.
The value of CMGI's business may fluctuate because the value of some of its
assets fluctuates.
A portion of CMGI's assets includes the equity securities of both publicly
traded and non-publicly traded companies. In particular, CMGI owns a
significant number of shares of common stock of Chemdex Corporation, Critical
Path, Inc., Engage Technologies, Inc., Hollywood Entertainment Corporation,
Lycos, Inc., MotherNature.com, Inc., NaviSite, Inc., Pacific Century CyberWorks
Limited, Silknet Software, Inc. and Yahoo!, Inc., which are publicly traded
companies. The market price and valuations of the securities that CMGI holds in
these and other companies may fluctuate due to market conditions and other
conditions over which CMGI has no control. Fluctuations in the market price and
valuations of the securities that CMGI holds in other companies may result in
fluctuations of the market price of CMGI's common stock and may reduce the
amount of working capital available to CMGI.
CMGI's growth places strains on its managerial, operational and financial
resources.
CMGI's rapid growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources.
Further, as the number of CMGI's users, advertisers and other business partners
grows, CMGI will be required to manage multiple relationships with various
customers, strategic partners and other third parties. Further growth of CMGI
or increase in the number of its strategic relationships will increase this
strain on CMGI's managerial, operational and financial resources, inhibiting
CMGI's ability to achieve the rapid execution necessary to successfully
implement its business plan. In addition, CMGI's future success will also
depend on its ability to expand its sales and marketing organization and its
support organization commensurate with the growth of CMGI's business and the
Internet.
CMGI must develop and maintain positive brand name awareness.
CMGI believes that establishing and maintaining its brand names is essential
to expanding its Internet business and attracting new customers. CMGI also
believes that the importance of brand name recognition will increase in the
future because of the growing number of Internet companies that will need to
differentiate themselves. Promotion and enhancement of CMGI's brand names will
depend largely on CMGI's ability to provide consistently high-quality products
and services. If CMGI is unable to provide high-quality products and services,
the value of its brand names may suffer.
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<PAGE>
CMGI's quarterly results may fluctuate widely.
CMGI's operating results have fluctuated widely on a quarterly basis during
the last several years, and CMGI expects to experience significant fluctuation
in future quarterly operating results. Many factors, some of which are beyond
CMGI's control, have contributed to these quarterly fluctuations in the past
and may continue to do so. These factors include:
. specific economic conditions in
. demand for CMGI's products and the Internet and direct marketing
services; industries; and
. payment of costs associated with . general economic conditions.
CMGI's acquisitions, sales of
assets and investments;
. timing of sales of assets;
. market acceptance of new products
and services;
The emerging nature of the commercial uses of the Internet makes predictions
concerning CMGI's future revenues difficult. CMGI believes that period-to-
period comparisons of its results of operations will not necessarily be
meaningful and should not be relied upon as indicative of CMGI's future
performance. It is also possible that in some future fiscal quarters, CMGI's
operating results will be below the expectations of securities analysts and
investors. In such circumstances, the price of CMGI's common stock may decline.
The price of CMGI's common stock has been volatile.
The market price of CMGI's common stock has been, and is likely to continue
to be, volatile, experiencing wide fluctuations. In recent years, the stock
market has experienced significant price and volume fluctuations which have
particularly impacted the market prices of equity securities of many companies
providing Internet-related products and services. Some of these fluctuations
appear to be unrelated or disproportionate to the operating performance of such
companies. Future market movements may adversely affect the market price of
CMGI's common stock.
CMGI faces security risks.
The secure transmission of confidential information over public
telecommunications facilities is a significant barrier to electronic commerce
and communications on the Internet. Many factors may cause compromises or
breaches of the security systems used by CMGI or other Internet sites to
protect proprietary information, including advances in computer and software
functionality or new discoveries in the field of cryptography. A compromise of
security on the Internet would have a negative effect on the use of the
Internet for commerce and communications and could negatively impact CMGI's
business. Security breaches of the activities of CMGI, its customers and
sponsors involving the storage and transmission of proprietary information,
such as credit card numbers, may expose CMGI to a risk of loss or litigation
and possible liability. CMGI cannot assure you that its security measures will
prevent security breaches.
Ownership of CMGI is concentrated.
David S. Wetherell, CMGI's chairman, president, and chief executive officer,
beneficially owned approximately 12.6% of CMGI's outstanding common stock as of
March 1, 2000. As a result, Mr. Wetherell possesses significant influence over
CMGI on matters, including the election of directors. Additionally, Compaq
Computer Corporation owned approximately 15% of CMGI's outstanding common stock
as of March 1, 2000. The concentration of CMGI's share ownership may:
. delay or prevent a change in control of CMGI;
. impede a merger, consolidation, takeover or other business involving CMGI;
or
. discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of CMGI.
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<PAGE>
CMGI's business will suffer if any of its products or systems, or the products
or systems of third parties on which CMGI relies, experience year 2000 related
problems.
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
need to accept four digit entries in order to distinguish 21st century dates
from 20th century dates. CMGI's products and systems and those of third parties
on whom CMGI relies may experience year 2000 related problems. If any equipment
or software used in CMGI's business causes year 2000 related problems, CMGI may
incur significant unanticipated expenses to remedy such problems.
As of December 31, 1999, CMGI estimates it has incurred approximately $7.0
million in connection with year 2000 readiness efforts. Because of CMGI's
recent acquisitions of a number of companies in varying stages of year 2000
compliance assessment, and unforeseeable year 2000 expenses, CMGI's year 2000
costs may exceed this estimate.
CMGI relies on NaviSite for network connectivity.
CMGI and many of its majority owned subsidiaries rely on NaviSite for
network connectivity and hosting of servers. If NaviSite fails to perform such
services, CMGI's internal business operations may be interrupted, and the
ability of CMGI's majority owned subsidiaries to provide services to customers
may also be interrupted. Such interruptions may have an adverse impact on the
business and revenues of CMGI and its majority owned subsidiaries.
The success of CMGI's global operations is subject to special risks and costs.
CMGI has begun, and intends to continue, to expand its operations outside of
the United States. This international expansion will require significant
management attention and financial resources. CMGI's ability to expand its
offerings of products and services internationally will be limited by the
general acceptance of the Internet and intranets in other countries. In
addition, CMGI has limited experience in such international activities.
Accordingly, CMGI expects to commit substantial time and development resources
to customizing its products and services for selected international markets and
to developing international sales and support channels.
CMGI expects that its export sales will be denominated predominantly in
United States dollars. As a result, an increase in the value of the United
States dollar relative to other currencies may make CMGI's products and
services more expensive and, therefore, potentially less competitive in
international markets. As CMGI increases its international sales, its total
revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
CMGI could be subject to infringement claims.
From time to time, CMGI has been, and expects to continue to be, subject to
third party claims in the ordinary course of business, including claims of
alleged infringement of intellectual property rights by CMGI. Any such claims
may damage CMGI's business by:
. subjecting CMGI to significant liability for damages;
. resulting in invalidation of CMGI's proprietary rights;
. being time-consuming and expensive to defend even if such claims are not
meritorious; and
. resulting in the diversion of management's time and attention.
CMGI may have liability for information retrieved from the Internet.
Because materials may be downloaded from the Internet and subsequently
distributed to others, CMGI may be subject to claims for defamation,
negligence, copyright or trademark infringement, personal injury, or other
theories based on the nature, content, publication and distribution of such
materials.
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CMGI litigation.
Neil Braun, the former president of iCast Corporation, a majority owned
subsidiary of CMGI, filed a complaint in the United States District Court,
Southern District of New York, on December 22, 1999 against CMGI, iCast, and
David S. Wetherell, chief executive officer and chairman of CMGI, alleging
certain claims arising out of the termination of Mr. Braun's employment with
iCast. As set forth in the complaint, Mr. Braun is seeking, among other things,
monetary damages in excess of $50 million and specific performance of certain
contractual obligations that would require iCast to deliver to Mr. Braun an
equity interest in iCast. On January 31, 2000, an answer to the complaint was
filed on behalf of CMGI, iCast and Mr. Wetherell. CMGI plans to vigorously
defend against these claims. If CMGI does not prevail in this proceeding, the
outcome could adversely affect CMGI's financial condition and results of
operations.
On February 9, 2000, International Merchandising Corporation and
International Managements, Inc. (collectively, "IMG") filed a complaint in the
United States District Court for the Northern District of Ohio, Eastern
Division, against Signatures Network, Inc., a subsidiary of iCast and CMGI,
CMGI and iCast. The complaint asserts claims against Signatures for breach of
contract, promissory estoppel, in quantum meruit and against CMGI and iCast for
tortious interference with contract and tortious interference with prospective
contractual relations. The complaint seeks damages of not less than $15,000,000
plus stock options against Signatures, as well as the value of alleged services
performed by IMG. The complaint also seeks damages against CMGI and iCast in an
amount of not less than $15,000,000, as well as punitive damages. If CMGI does
not prevail in this proceeding, the outcome could adversely affect CMGI's
financial condition and results of operations. On March 10, 2000, IMG
voluntarily withdrew its motion to compel arbitration and the parties agreed in
principle to submit all claims they may have against each other to private,
binding arbitration. On March 22, 2000, the parties filed a joint motion with
the court requesting that IMG's motion be taken off the court's calendar. The
defendants have not yet filed a response to IMG's complaint.
On or about March 15, 2000, CMGI and certain of its officers and directors,
as well as certain officers and directors of Engage Technologies, Inc., a
publicly traded majority-owned subsidiary of CMGI, were sued by a shareholder
of Engage in what purports to be a derivative action on behalf of Engage. The
lawsuit is captioned Doris B. Sollod, plaintiff, v. Edward A. Bennett,
Christopher A. Evans, Craig D. Goldman, Andrew J. Hajducky, III, Frederic D.
Rosen, Paul L. Schaut, David S. Wetherell and CMGI, Inc., Defendants and Engage
Technologies, Inc., Nominal Defendant, Civil Action No. 17886-NC, Court of
Chancery, New Castle County, Delaware. The complaint arises out of the intended
sale by CMGI of its subsidiaries, Flycast and Adsmart, to Engage, as announced
on or about January 20, 2000. The plaintiff alleges, inter alia, that CMGI and
the individual defendants violated their fiduciary duties, duties of loyalty
and good faith, and engaged in self-dealing with regard to the transaction,
which the complaint alleges is unfair to Engage. The complaint requests, inter
alia, that the court (1) enjoin the defendants from taking any steps in
furtherance of the transaction; (2) award recissory damages to Engage and
rescind the transaction if it is consummated; (3) direct the defendants to
account to Engage for its damages and CMGI's profits; and (4) award the
plaintiff her costs, disbursements, and fees. The defendants have not yet
responded to the complaint.
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Risks Relating to uBid's Business
uBid has a limited operating history and may experience risks encountered by
early-stage companies.
uBid began conducting auctions on the Internet in December 1997.
Accordingly, uBid has a very limited operating history for you to use in
evaluating its business. uBid's business and prospects must be considered in
light of the risks, expenses and difficulties that companies encounter in the
early stages of development, particularly companies in new and rapidly evolving
markets like the Internet. These risks include uBid's ability to do the
following:
. offer products for auction that
. manage its growth effectively; will meet consumer demand;
. anticipate and adapt to the rapid . expand its supplier network;
changes that characterize the on-
line auction market; . respond to competitive
developments in its market; and
. maintain and increase levels of
traffic to uBid's Website; . continue to identify, attract,
retain and motivate qualified
. continue to develop and upgrade personnel.
its technology and customer
service;
uBid is subject to restrictions on its ability to issue equity securities,
which may limit its ability to grow its business and compete effectively.
In June 1999, Creative Computers Inc. completed a distribution of uBid's
common stock to Creative Computers stockholders, which was intended to be a
tax-free spin-off under Section 355 of the Internal Revenue Code. Section
355(e) generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the parent or the subsidiary is subsequently acquired by one or more
persons acting pursuant to a plan or series of related transactions that
include the spin-off. To ensure that any future sale by uBid of equity
securities would not disqualify the spin-off from its tax-free status for
federal income tax purposes, uBid agreed to various restrictions on its ability
to issue or repurchase its equity securities until three years after the spin-
off that are more limiting than the 50% restriction imposed under Section
355(e). In particular, uBid agreed not to take the following actions without
Creative Computers' consent or without obtaining a favorable IRS letter ruling
that such actions would not affect the tax-free status of the spin-off:
. until June 8, 2001, issue uBid common stock or other equity securities that
would decrease the number of shares of common stock distributed by Creative
Computers in the spin-off to less than 60% of uBid's then outstanding common
stock;
. from June 8, 2001 until June 8, 2002, issue additional shares of uBid common
stock or other equity securities that decrease the number of shares of its
common stock distributed by Creative Computers in the spin-off to less than
55% of uBid's then outstanding common stock; and
. until June 8, 2002, approve or permit any business combination, tender offer
or other transaction resulting in the acquisition of more than 50% of uBid's
common stock.
Creative Computers has consented to the merger as required by uBid's
agreements with Creative Computers. While uBid does not believe the merger
should cause the spin-off to be taxable to Creative Computers, the absence of
final IRS regulations under Section 355(e) has created some uncertainty as to
the application of these regulations to uBid's actions after the spin-off,
including agreeing to the merger. As a result, uBid requested and has received
an opinion from uBid's outside tax advisors, PricewaterhouseCoopers LLP, that
the merger should not result in an adverse application of Section 355(e) with
respect to the spin-off. If the merger does not occur, uBid is limited in its
ability to issue additional equity securities and to raise capital, acquire
other companies or retain or recruit key employees. These same restrictions
apply to any proposed repurchases of uBid's common stock, but would not
preclude uBid from issuing debt securities that are not convertible into common
stock or other equity securities. A copy of the opinion of
PricewaterhouseCoopers LLP has been filed as an exhibit to the registration
statement of which this proxy statement/prospectus is a part.
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uBid has agreed to indemnify Creative Computers for any tax liability
incurred by Creative Computers arising out of actions by uBid after the spin-
off, including transactions similar to the merger, that would disqualify the
spin-off as a tax-free distribution or make the spin-off taxable to Creative
Computers for federal income tax purposes. If the spin-off were taxable due to
uBid's actions, for example, as a result of the merger, uBid would face an
indemnity obligation to Creative Computers of approximately $100 million. This
indemnity obligation would have a significant material adverse effect on uBid's
business and financial condition and would exceed all of uBid's
available capital resources. The existence of this contingent indemnity
obligation, particularly because it may be affected by any material corporate
transaction involving uBid, may make uBid a less attractive acquisition or
merger candidate until the uncertainties of Section 355 are resolved or the
restrictions described above expire.
uBid also has agreed to indemnify Creative Computers from all liabilities
relating to:
. uBid's failure, or the failure of any other person to pay, perform or
otherwise promptly discharge any of uBid's liabilities or obligations;
. any breach by uBid of any of the agreements entered into with Creative
Computers relating to the spin-off; and
. any misstatements of material fact contained in the prospectus used in
connection with uBid's initial public offering.
If uBid is required to indemnify Creative Computers based on any of these
claims, uBid may have to make substantial payments, which could adversely
impact its business and financial condition.
uBid anticipates continued losses and uBid may never become profitable.
uBid has invested heavily in its technology, Website development,
advertising, hiring of personnel and startup costs. As a result, uBid has
incurred significant net losses since its inception and uBid expects to
continue to incur losses for the foreseeable future. uBid had an accumulated
deficit of approximately $36.0 million at December 31, 1999. uBid intends to
expend significant financial and management resources on:
. developing uBid's brand;
. building and maintaining
. marketing and advertising uBid's strategic relationships; and
business;
. developing uBid's Website;
. developing and improving uBid's
technology and operating
infrastructure.
uBid also expects to incur additional losses as a result of its significant
increase in marketing and promotional expenses. Because it historically has
operated at a loss, uBid's ability to achieve profitability given its planned
investment levels depends upon its ability to generate and sustain
substantially increased levels of net revenue. In addition, uBid plans to
continue to increase its operating expenses significantly to:
. increase its customer base;
. purchase larger volumes of
. increase the size of its staff, merchandise to be sold at
auction;
. expand its marketing efforts to
enhance its brand image;
. increase its software development
efforts; and
. increase its visibility on other . support its growing
companies' high-traffic Websites; infrastructure.
uBid must generate significantly increased revenues to achieve
profitability, particularly if uBid is unable to adjust expenses and increase
profit margins. In particular, computer products have been vulnerable to
decreased margins as a result of competitive pressures. uBid derived 71% of its
revenues from the sale of computers and related products in 1999. uBid cannot
assure you that it will ever achieve or sustain profitability.
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uBid has made and expects to continue to make significant investments in
infrastructure and personnel in advance of levels of revenue necessary to
offset these expenditures. As a result, these expenditures are based on uBid's
operating plans and estimates of future revenues. uBid's sales and operating
results generally depend, among other things, on the volume and timing of
orders it receives, which are difficult to forecast. uBid may be unable to
adjust its spending to compensate for any unexpected revenue shortfall.
uBid requires substantial working capital to fund its business. uBid's
working capital requirements and cash flow from operating activities vary from
quarter to quarter, depending on revenues, operating expenses, capital
expenditures and other factors. uBid has experienced negative cash flow from
operations and expects this to continue for the foreseeable future. uBid
believes that its current working capital, together with its existing capital
resources, will be sufficient to meet its capital requirements through at least
the next 12 months. If uBid's capital requirements vary materially from those
currently planned, uBid may require additional financing sooner than
anticipated. If uBid is unable to obtain financing in the amounts desired and
on acceptable terms, or at all, uBid may be required to reduce significantly
the scope of its presently anticipated advertising and other expenditures,
which could harm its growth prospects and adversely affect the price of its
stock.
Beginning in October 1997, uBid granted stock options that were exercisable
only in the event of a successful initial public offering of uBid's stock or
sale of the company. uBid expects to record a non-cash compensation charge of
$13.3 million over the five-year vesting period of the options. uBid recorded
$5.3 million of this charge in the fourth quarter of 1998 and $3.5 million for
the year ended December 31, 1999.
Revenue growth in prior periods may not be indicative of uBid's future growth.
uBid has achieved significant revenue growth since its inception in 1997.
However, uBid's limited operating history makes it difficult to predict future
growth. In addition, uBid's operating results may fluctuate significantly in
the future, which prevents the meaningful use of period-to-period comparisons
of its financial results. Accordingly, you should not rely on past revenue
growth rates as a prediction of uBid's future growth, if any.
uBid's financial results fluctuate and may be difficult to forecast.
uBid's quarterly revenues, expenses and operating results are unpredictable.
uBid expects that its operating results will continue to fluctuate in the
future due to a number of factors, some of which are beyond uBid's control.
These factors include:
. the amount and timing of costs
. uBid's ability to increase its relating to expansion of uBid's
customer base; operations, including sales and
marketing expenditures;
. uBid's ability to sell products
at auction at the price targets . uBid's ability to introduce new
it sets; types of merchandise, service
offerings or customer services in
. uBid's ability to control its a competitive environment;
gross margins;
. technical difficulties consumers
. uBid's ability to sell its might encounter in using uBid's
inventory in a timely manner and Website;
maintain customer satisfaction;
. delays in shipments as a result
. the availability and pricing of of computer systems failures,
merchandise from suppliers; strikes or other problems with
uBid's delivery service or credit
. product obsolescence and price card processing providers;
erosion;
. the amount of returns of uBid's
. consumer confidence in encrypted merchandise; and
transactions on the Internet;
. general economic conditions and
. uBid's ability to obtain cost economic conditions specific to
effective advertising on other the Internet and electronic
entities' Websites; commerce.
. the effectiveness of off-line
advertising in generating
additional traffic to uBid's
Website;
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<PAGE>
To respond to competitive pressures in its market, uBid may from time to
time make service, marketing or supply decisions or acquisitions that could
adversely affect its quarterly operating results. Like other retailers, uBid
may experience seasonality in its business. Due to all of these factors, uBid's
operating results may fall below the expectations of securities analysts and
investors. This could cause a decline in the trading price of uBid's stock.
uBid may not be successful in developing brand awareness, and the failure to
do so could significantly harm its business and financial condition.
uBid believes that the importance of brand recognition will increase as more
companies engage in commerce over the Internet. Development and awareness of
the uBid brand will depend largely on uBid's ability to increase its customer
base. If suppliers do not perceive uBid as an effective marketing and sales
channel for their merchandise, or if consumers do not perceive uBid as offering
an entertaining and desirable way to purchase merchandise, uBid will be
unsuccessful in promoting and maintaining its brand. In order to attract and
retain customers and promote its brand, uBid expects to increase its marketing
and advertising budgets. If uBid is unable to successfully promote its brand or
achieve a leading position in Internet commerce, uBid's business could be
significantly harmed.
uBid's business model is unproven and evolving.
uBid is continuing to expand the breadth and depth of products and services
offered on its Website. In addition, in 1999 uBid entered into agreements to
expand its auction model to include the business-to-business market. uBid has
expanded its business model and the use of its Website as an advertising medium
for services and products of other companies and for promoting new or
complementary products and sales formats. uBid continues to offer credit to
some of its business customers that have been pre-qualified as having
appropriate credit ratings. As its business model evolves, uBid risks diluting
its brand, confusing customers and decreasing interest from suppliers. In
addition, uBid could be exposed to additional or new risks associated with
these new opportunities. If uBid is unable to address these risks, uBid's
business will be harmed.
uBid's failure to remain competitive may significantly hinder its growth.
The electronic commerce market is rapidly evolving and intensely
competitive, and uBid expects competition to intensify in the future. uBid
competes with a variety of other companies based on the type of merchandise and
the sales format they offer to customers. These competitors include:
. companies that offer merchandise
. various Internet auction houses similar to uBid's through
such as Amazon.com Auctions, physical auctions, with which
eBay, ONSALE, Yahoo! Auctions, uBid competes for sources of
First Auction, Surplus Auction, supply;
Bid.com, Mercata, TradeOut.com,
WebAuction and Insight Auction; . personal computer manufacturers
with direct distribution channels
. a number of indirect competitors for their excess inventory or
that specialize in electronic refurbished products; and
commerce or derive a substantial
portion of their revenue from . companies with substantial
electronic commerce, including customer bases in the computer
Internet Shopping Network, AOL, and peripherals catalog business,
Cendant, BUY.COM and including CDW Computer Centers,
Shopping.com; PC Connection and Creative
Computers, some of which already
sell online or may devote more
resources to Internet commerce in
the future.
Some of uBid's current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition,
there has been consolidation in uBid's industry, which may continue in the
future. Accordingly, it is possible that new competitors or alliances among
competitors and suppliers may emerge and rapidly acquire market share. In
addition, manufacturers may elect to sell their products directly. Increased
20
<PAGE>
competition is likely to reduce uBid's operating margins, cause uBid to lose
market share or diminish uBid's brand. If any of these things occur, uBid's
business would be significantly harmed.
Many of uBid's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than uBid
has. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than uBid. They may be able to respond more
quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
uBid's former parent company, Creative Computers, agreed not to engage in
the online Internet auction business in the same format in which uBid conducts
its business until March 2000. Consequently, Creative Computers is now
permitted to compete directly or indirectly with uBid, including by way of
acquiring other companies or businesses. Competition from Creative Computers
could adversely affect uBid's business and financial condition.
uBid relies on its relationships with other online companies to drive traffic
to its Website and promote its brand.
uBid depends to some extent on relationships with other online companies and
expects that its dependence on these relationships will increase in the future.
These relationships include:
. sponsorships; and
. portal arrangements and
agreements for anchor tenancy on . banner advertisements.
other companies' Websites;
. promotional placements;
Generally, these arrangements have terms for up to three years, are not
exclusive, do not provide for guaranteed renewal and may be terminated by uBid
without cause. The risks created by uBid's dependence on these relationships
include:
. competitors may purchase . uBid's online partners might be
exclusive rights to attractive unable to deliver a sufficient
space on one or more key sites; number of customer visits or
impressions; and
. significant spending on these
relationships may not increase . uBid's online partners could
uBid's revenues in the time compete with uBid for limited
periods uBid expects or at all; online auction revenues.
. space on Websites may increase
in price or cease to be
available to uBid on reasonable
terms or at all;
If any of uBid's arrangements with other online companies is terminated, or
if uBid fails to continue to acquire similar arrangements in the future, its
business could be materially harmed.
uBid's growth and future success depend on its ability to generate traffic to
its Website.
uBid's ability to sell products through its Internet auctions depends
substantially on its ability to attract user traffic to its Website. uBid has
traditionally spent significant amounts of money for online advertising to
attract users to and retain users on its Website. uBid expects its sales and
marketing expenses, including advertising expenditures, to increase
significantly as it attempts to generate increased traffic to its Website. If
uBid is unable to generate traffic to its Website cost effectively, or if
uBid's efforts to promote its auctions using both online and off-line media are
not successful, uBid's growth and business prospects will be substantially
limited.
uBid's purchased inventory model subjects it to risks of decreased or negative
gross margins.
uBid currently purchases most of the merchandise to be sold at auction, and
in doing so assumes the inventory and price risks of these products. These
risks are especially significant because much of the
21
<PAGE>
merchandise uBid auctions is subject to rapid technological change,
obsolescence and price erosion. Since uBid relies heavily on purchased
inventory, uBid's success will depend on its ability to sell its inventory
rapidly through its auctions. uBid also relies heavily on the ability of uBid's
buying staff to purchase inventory at attractive prices relative to resale
value and uBid's ability to manage customer returns and the shrinkage resulting
from theft, loss and misrecording of inventory.
Due to the inherently unpredictable nature of auctions, it is impossible for
uBid to determine with certainty whether any item will sell for more than the
price uBid pays for it. Further, because minimum opening bid prices for the
merchandise listed on uBid's Website generally are lower than the acquisition
costs for the merchandise, uBid cannot be certain that uBid will achieve
positive gross margins on any given sale. If uBid is unable to liquidate its
purchased inventory rapidly, if uBid's buying staff fails to purchase inventory
at attractive prices relative to resale value at auction, or if uBid fails to
predict with accuracy the resale prices for its purchased merchandise, uBid may
be forced to sell its inventory at a discount or at a loss, which would
adversely affect uBid's financial condition and results of operations.
If uBid fails to maintain satisfactory relationships with its suppliers, or is
unable to obtain sufficient quantities of merchandise, uBid's business would be
materially harmed.
uBid depends upon its suppliers to provide merchandise for sale through
uBid's Internet auctions. The availability of merchandise can be unpredictable.
Since its inception, uBid has sourced merchandise from over 430 suppliers.
Merchandise acquired from 20 of these suppliers represented approximately 51%
of uBid's gross merchandise sales for the fourth quarter of 1999. uBid does not
have long-term supply contracts with any of its suppliers. uBid cannot be
certain that its current suppliers will continue to sell or otherwise provide
merchandise for sale in uBid's auctions. uBid also cannot be certain that it
will be able to establish new supplier relationships that ensure merchandise
will be available for auction on its Website.
A limited number of uBid's suppliers process and ship merchandise directly
to uBid's customers. uBid has limited control over their shipping procedures,
and shipments by these suppliers could be delayed by factors beyond uBid's
control. Most merchandise uBid sells carries a warranty supplied either by the
manufacturer or the supplier. Although uBid is not obligated to accept
merchandise returns, uBid could be compelled to accept returns from customers
without receiving reimbursements from the suppliers or manufacturers if their
warranties are not honored. uBid's business will be significantly harmed if it
is unable to develop and maintain satisfactory relationships with suppliers on
acceptable commercial terms, if uBid is unable to obtain sufficient quantities
of merchandise, if the quality of service provided by these suppliers falls
below a satisfactory standard or if uBid's level of returns exceeds its
expectations.
uBid relies on third parties to maintain its critical systems and, if these
third parties fail to adequately perform their services, uBid could experience
disruptions in its operations.
uBid relies on a number of third parties for Internet and telecommunications
access, delivery services, credit card processing and software services. uBid
has limited control over these third parties and no long-term relationships
with any of them. For example, uBid does not own a gateway onto the Internet.
From time to time, uBid has experienced temporary interruptions in its Website
connection and its telecommunications access. Slow Internet transmissions or
prolonged interruptions in uBid's Website connection or telecommunications
access would materially harm uBid's business.
uBid uses UPS and Federal Express delivery services for substantially all of
its products. Should either or both be unable to deliver uBid's products for a
sustained time period as a result of a strike or other reason, uBid's business
would be harmed. In addition, uBid could experience delays in shipment due to
computer systems failures or other problems related to third-party service
providers.
uBid's internally developed auction software depends on operating system,
database and server software that was developed and produced by and licensed
from third parties. uBid has from time to time discovered errors and defects in
the software from these third parties and uBid relies to some extent on these
third parties to correct
22
<PAGE>
errors and defects in a timely manner. If uBid is unable to develop and
maintain satisfactory relationships with these third parties on acceptable
commercial terms, or if the quality of products and services provided by these
third parties falls below a satisfactory standard, uBid could experience
disruptions in its operations.
uBid's business may suffer from capacity constraints or system interruptions.
A key element of uBid's strategy is to generate a high volume of traffic to
its Website. uBid's revenues depend substantially on the number of customers
who use its Website to purchase merchandise. Accordingly, the satisfactory
performance, reliability and availability of uBid's Website, transaction-
processing systems, network infrastructure and delivery and shipping systems
are critical to uBid's operating results, as well as to uBid's reputation and
ability to attract and retain customers and maintain adequate customer service
levels.
Periodically, uBid has experienced minor systems interruptions, including
Internet disruptions, which uBid believes may continue to occur from time to
time. Any systems interruptions, including Internet disruptions, that make
uBid's Website inaccessible or reduce uBid's order fulfillment performance
would reduce the volume of goods uBid is able to sell, which could harm uBid's
business. uBid is continually enhancing and expanding its transaction
processing systems, network infrastructure, delivery and shipping systems and
other technologies to accommodate a substantial increase in the volume of
traffic on uBid's Website. uBid cannot assure you that it will be successful in
these efforts or that it will be able to accurately project the rate or timing
of increases, if any, in the use of its Website or timely expand and upgrade
its systems and infrastructure to accommodate these increases. uBid cannot
assure you that its network or its suppliers' networks will be able to timely
achieve or maintain a sufficiently high capacity of data transmission,
especially if uBid's Website traffic increases. If uBid fails to achieve or
maintain its capabilities for high capacity data transmission, consumer demand
for its services could decline.
uBid's failure to manage growth effectively could adversely affect uBid's
business and financial condition.
uBid has rapidly expanded its operations in a short period of time and
anticipates that it will have to continue this expansion to capture potential
market opportunities. uBid's rapid growth has significantly strained its
management, operational and financial resources. uBid has expanded from two
employees at its inception to 281 employees and 61 full-time equivalent
contract personnel at December, 31, 1999. uBid's revenues have increased from
approximately $9,000 in the period from uBid's inception to December 31, 1997
to over $204.9 million in the year ended December 31, 1999. uBid expects to
continue to add additional key personnel in the future. Increases in the number
of employees and the volume of merchandise sales have placed significant
demands on uBid's management.
To manage its expected growth, uBid will have to expand existing operations,
particularly customer service and merchandising, and improve existing and
implement new operational, financial and inventory systems, procedures and
controls. uBid also will have to maintain relationships with the following
parties to control uBid's strategic direction in a rapidly changing
environment:
. merchandise suppliers;
. other Websites; and
. freight companies;
. Internet service providers.
. warehouse operators;
uBid cannot assure you that its current personnel, systems, procedures and
controls will be adequate to support its future operations. uBid also cannot
assure you that its management will be able to identify, hire, train, retain,
motivate and manage required personnel or that its management will be able to
manage and exploit existing and potential market opportunities successfully. If
uBid is unable to manage uBid's growth effectively, uBid's business will be
harmed.
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<PAGE>
uBid may not be able to sustain or grow its business unless it keeps up with
rapid technology changes.
The Internet and electronic commerce industries are characterized by:
. rapidly changing technology; . evolving industry standards and
practices that could render
. changes in consumer demands; uBid's Website and proprietary
technology obsolete.
. frequent introductions of new
services or products that embody
new technologies; and
uBid's future performance will depend, in part, on its ability to license or
acquire leading technologies, enhance its existing services and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. Developing Website and other proprietary
technology involves significant technical and business risks. uBid also cannot
assure you that it will be able to successfully use new technologies or adapt
its Website and proprietary technology to emerging industry standards. uBid may
not be able to remain competitive or sustain growth if it does not adapt to
changing market conditions or customer requirements.
Increasing governmental regulation of the Internet could adversely affect
uBid's business.
uBid is currently not regulated by any government agency, other than
regulations applicable to businesses generally, laws applicable to auction
companies and auctioneers, and laws or regulations directly applicable to
Internet commerce. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing,
sales tax, and characteristics and quality of products and services.
Furthermore, the growth and development of Internet commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business over the Internet. New laws or regulations may
decrease the growth of the Internet, which, in turn, could decrease the demand
for uBid's Internet auctions and increase uBid's cost of doing business. The
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, auction regulation, sales tax,
libel and personal privacy is uncertain and may take years to resolve.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by some foreign governments that could impose taxes on the sale of
goods and services and other Internet activities. In October 1998, the Internet
Tax Freedom Act imposed a three-year moratorium on new state and local taxes on
Internet commerce. However, it is possible that future laws imposing taxes or
other regulations on commerce over the Internet could substantially impair the
growth of electronic commerce and as a result have a negative effect on uBid's
business.
In addition, because its service is available over the Internet in multiple
states and because it sells merchandise to consumers resident in multiple
states, uBid could be required to qualify to do business as a foreign
corporation in each state in which its services are available. uBid is
qualified to do business in only three states, and its failure to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject uBid to taxes and penalties for the failure to qualify. Any new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to uBid's business, could have
a material adverse effect on uBid's business.
uBid's business may be adversely affected if uBid loses key personnel.
uBid's future performance depends substantially on the continued service of
its senior management and other key personnel. In particular, uBid's success
depends upon the continued efforts of its management personnel, including chief
executive officer and president Gregory K. Jones and other members of uBid's
senior management team. uBid has a long-term employment agreement with only one
of its key personnel, Mr. Jones, and has no key person life insurance.
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<PAGE>
uBid's business will suffer if uBid does not attract and retain additional
highly skilled personnel.
To meet its expected growth, uBid believes that its future success will
depend upon its ability to hire, train and retain other highly-skilled
personnel. Competition for quality personnel is intense. uBid cannot be sure
that it will be successful in hiring, assimilating or retaining the necessary
personnel, and uBid's failure to do so could adversely affect its business and
financial condition.
uBid may suffer disruption in its business because of changes in its systems,
facilities and fulfillment activities.
uBid believes that its success is dependent in large part upon its ability
to provide prompt and efficient service to its customers. As a result, any
disruption of uBid's day-to-day operations could have a material adverse
effect on its business, and any failure of uBid's information management
systems or distribution capabilities could impair its ability to receive and
process customer orders and ship products on a timely basis.
uBid expects to upgrade its software and hardware systems on a continuing
basis. uBid is considering outsourcing warehouse and fulfillment
responsibilities for some of its products. The transition to, or upgrading of,
uBid's hardware and software systems, the relocation of uBid's servers and the
outsourcing of some of uBid's fulfillment activities could result in delays,
failures or execution difficulties that could impair uBid's ability to receive
and process orders and ship products in a timely manner.
To date, uBid has had various interruptions to its service as a result of
loss of power and telecommunications connections. uBid's insurance coverage
may not be adequate to compensate for all losses that may occur as a result of
any future service interruptions. Although uBid has implemented network
security measures and firewall security, its servers are also vulnerable to
computer viruses, physical or electronic break-ins, attempts by third parties
to overload uBid's systems and similar disruptive problems. Any of these
problems could cause interruptions, delays, loss of data or cessation in
service to uBid's users. If any of these events occur, uBid's business,
prospects and financial condition could be significantly harmed.
Concerns about transaction security on the Internet may hinder uBid's
business.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. uBid
relies on encryption and authentication technology licensed from third parties
to provide the required security and authentication to ensure the privacy of
Internet transactions. Advances in computer capabilities, new discoveries in
the field of cryptography or other events or developments may result in a
compromise or breach of the algorithms uBid uses to protect customer
transaction data. Any breaches in security could cause a significant decrease
in the use of uBid's Website, which would materially harm uBid's business.
A person successfully circumventing uBid's security measures could
misappropriate proprietary information or cause interruptions in uBid's
operations. uBid could be required to expend significant capital and other
resources to protect against the threat of security breaches or to alleviate
problems caused by these breaches. Consumer concerns about the security of
electronic commerce and user privacy may also inhibit the growth of the
Internet as a means of conducting commercial transactions. To the extent that
uBid's activities or the activities of third party contractors involve storing
and transmitting proprietary information, such as credit card numbers,
security breaches could expose uBid to a risk of loss or litigation and
possible liability. uBid's security measures may not effectively prevent
security breaches, and uBid's failure to prevent security breaches could
significantly disrupt its operations.
uBid's business could be adversely affected if uBid is unable to adequately
protect its proprietary technology.
uBid's proprietary technology is one of the keys to its performance and
ability to remain competitive. uBid relies on a combination of trademark,
copyright and trade secret laws to establish and protect its proprietary
rights. uBid also uses technical measures, confidentiality agreements and non-
compete agreements to protect its proprietary rights. uBid's uBid service mark
is registered in the United States. However, uBid may not be able to secure
significant protection for its service marks or trademarks. uBid's competitors
or others could adopt
25
<PAGE>
product or service names similar to "uBid" or uBid's other service marks or
trademarks. Any of these actions by others might impede uBid's ability to build
brand identity and could lead to customer confusion. uBid's inability to
protect the name uBid adequately could adversely affect its business and
financial condition.
uBid relies on copyright laws to protect its proprietary software and trade
secret laws to protect the source code for its proprietary software. uBid
generally enters into agreements with its employees and consultants and limits
access to and distribution of its software, documentation and other proprietary
information. The steps uBid takes to protect its proprietary information may
not prevent misappropriation of its technology, and the agreements uBid enters
into for that purpose might not be enforceable. A third party might obtain and
use uBid's software or other proprietary information without authorization or
develop similar software independently. It is difficult for uBid to police for
unauthorized use of its technology, particularly because the global nature of
the Internet makes it difficult to control the ultimate destination or security
of software or other transmitted data. The laws of other countries may not
provide uBid with adequate or effective protection of uBid's intellectual
property.
uBid may infringe on third party intellectual property rights and could become
involved in costly intellectual property litigation.
uBid could be sued by other parties claiming infringement by uBid's software
or other aspects of uBid's business. uBid is not currently involved in any suit
that would have a material effect on its business.
However, any future claims, with or without merit, could impair uBid's
business and financial condition because they could:
. result in significant litigation
costs;
. divert the attention of
management; or
. divert resources; . require uBid to enter into
royalty and licensing agreements
which may not be available on
terms acceptable to it or at all.
In the future, uBid may also file lawsuits to enforce its intellectual
property rights, to protect its trade secrets, or to determine the validity and
scope of the proprietary rights of others. Litigation over these issues,
whether successful or unsuccessful, could result in substantial costs and
diversion of resources, which could adversely affect uBid's business and
financial condition.
uBid may experience unexpected expenses or delays in service enhancements if
uBid is unable to license third party technology on commercially reasonable
terms.
uBid relies on a variety of technology that it licenses from third parties.
These third-party technology licenses might not continue to be available to
uBid on commercially reasonable terms or at all. If it is unable to obtain or
maintain these licenses on favorable terms, or at all, uBid could experience
delays in completing and developing its proprietary software. These delays
could significantly harm uBid's business and financial condition.
uBid may encounter barriers to international expansion, which could limit its
future growth and adversely impact its business and financial condition.
uBid intends to continue to expand its operations internationally. uBid does
not currently have any Website content that has been localized for foreign
markets, and may not be able to establish a global presence. uBid's expansion
into international markets will require significant management attention and
financial resources.
26
<PAGE>
Engaging in business on a global level carries inherent risks which could
adversely impact uBid's business and financial condition, such as:
. differing regulatory
requirements;
. longer payment cycles;
. export restrictions;
. problems in collecting accounts
. tariffs and other trade barriers; receivable;
. difficulties in staffing and . political instability;
managing foreign operations;
. fluctuations in currency exchange
. difficulties in protecting uBid's rates; and
intellectual property rights;
. potentially adverse tax
consequences.
In addition, some types of software that contain encryption technology are
restricted by export laws and uBid could become subject to liability for any
violations of these export restrictions. uBid may not be able to successfully
market, sell and distribute its products in foreign markets. One or more of
these factors could have a material adverse effect on uBid's future global
operations, and consequently, on uBid's business and financial condition as a
whole.
uBid's stock price is volatile, which could lead to losses by investors and
costly securities litigation.
The trading price of uBid's common stock has been and is likely to continue
to be highly volatile and could fluctuate in response to factors such as:
. actual or anticipated variations
in uBid's quarterly operating
results; . changes in the market valuations
of other Internet or online
. announcements of technological service companies;
innovations by uBid or its
competitors; . announcements by uBid or its
competitors of significant
. adoption of new accounting acquisitions, strategic
standards affecting the retail partnerships, joint ventures or
industry; capital commitments;
. introduction of new services by . additions or departures of key
uBid or its competitors; personnel;
. changes in financial estimates by . sales of uBid's common stock or
securities analysts; other securities in the open
market; and
. conditions or trends in the
Internet and online commerce . other events or factors, many of
industries; which are beyond uBid's control.
The stock market has experienced significant price and volume fluctuations,
and the market prices of stock in technology companies, particularly Internet-
related companies, have been highly volatile. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against these companies. Litigation
initiated against uBid, whether or not successful, could result in substantial
costs and diversion of uBid's management's attention and resources, which would
have a material adverse effect on uBid's business and financial condition.
27
<PAGE>
Potential year 2000 problems may involve significant time and expense and
could disrupt uBid's operations.
Failure of uBid's internal computer systems or third party hardware or
software, or of systems maintained by third parties, to operate properly with
regard to the year 2000 and thereafter could cause systems interruptions or
loss of data. uBid cannot reasonably estimate the duration and extent of any
such interruption, or quantify the effect such interruption may have on its
future revenue. uBid has developed and finalized contingency plans to address
the potential failure of its systems and third party systems to be year 2000
compliant. If any hardware, software or systems used in uBid's business cause
year 2000 problems, uBid may incur significant unexpected expenses to remedy
such problems, and uBid's operating results and financial condition could be
substantially harmed.
In addition, some of the products uBid has sold may prove to be year 2000
non-compliant. While uBid does not expect to have any material product
liability associated with the sale of these products, as the seller uBid
cannot be certain that it will not incur some expenses to remediate these
products.
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<PAGE>
SELECTED HISTORICAL CONDENSED CONSOLIDATED AND
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following tables present selected historical condensed consolidated
financial information, selected unaudited pro forma condensed combined
financial information and comparative per share data for CMGI and uBid. This
information has been derived from their respective financial statements and
notes, certain of which are included or incorporated by reference in this proxy
statement/prospectus.
CMGI Selected Historical Condensed Consolidated Financial Information
(In thousands, except per share data)
The following selected historical condensed consolidated financial
information should be read in conjunction with CMGI's consolidated financial
statements and related notes and with CMGI's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which are
incorporated by reference in this proxy statement/prospectus. The consolidated
statement of operations data for each of the years in the five years ended July
31, 1999, and the six month periods ended January 31, 2000 and 1999 and the
consolidated balance sheet data as of July 31, 1999, 1998, 1997, 1996 and 1995
and January 31, 2000 and 1999 have been derived from CMGI's consolidated
financial statements. Historical results are not necessarily indicative of the
results to be expected in the future. No cash dividends have been declared or
paid on CMGI common stock.
<TABLE>
<CAPTION>
Unaudited
Six months ended
Fiscal Year ended July 31, January 31,
------------------------------------------------- ----------------------
1999 1998 1997 1996 1995 2000 1999
---------- -------- -------- -------- ------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data
Net revenues............ $ 175,666 $ 81,916 $ 60,056 $ 17,735 $11,091 $ 277,200 $ 76,377
Cost of revenues........ 168,830 72,740 34,866 11,215 7,259 229,922 72,744
Research and development
expenses............... 22,253 19,108 17,767 5,412 -- 51,612 10,502
In-process research and
development expenses... 6,061 10,325 1,312 2,691 -- 4,717 --
Selling, general and
administrative
expenses............... 89,071 46,909 45,777 16,812 2,722 253,463 31,191
Amortization of
intangible assets and
stock-based
compensation........... 16,110 3,093 1,254 -- -- 423,870 3,137
---------- -------- -------- -------- ------- ---------- ----------
Operating income
(loss)................. (126,659) (70,259) (40,920) (18,395) 1,110 (686,384) (41,197)
Interest income
(expense), net......... 269 (870) 1,749 2,691 225 2,990 (926)
Gains on issuance of
stock by subsidiaries
and affiliates......... 130,729 46,285 -- 19,575 -- 51,939 48,767
Other gains, net........ 758,312 96,562 27,140 30,049 4,781 214,498 94,692
Other income (expense),
net.................... (13,406) (12,899) (769) (746) (292) 49,435 (9,344)
Income tax benefit
(expense).............. (325,402) (31,555) (2,034) (17,566) (2,113) 64,535 (40,454)
---------- -------- -------- -------- ------- ---------- ----------
Income (loss) from
continuing operations.. 423,843 27,264 (14,834) 15,608 3,711 (302,987) 51,538
Discontinued operations,
net of income tax...... 52,397 4,640 (7,193) (1,286) 24,504 -- (279)
---------- -------- -------- -------- ------- ---------- ----------
Net income (loss)....... 476,240 31,904 (22,027) 14,322 28,215 (302,987) 51,259
Preferred stock
accretion.............. (1,662) -- -- -- -- (7,163) --
---------- -------- -------- -------- ------- ---------- ----------
Net income (loss)
available to common
stockholders........... $ 474,578 $ 31,904 $(22,027) $ 14,322 $28,215 $ (310,150) $ 51,259
========== ======== ======== ======== ======= ========== ==========
Diluted earnings (loss)
per share:
Income (loss) from
continuing operations.. $ 2.05 $ 0.15 $ (0.10) $ 0.10 $ 0.03 $ (1.31) $ 0.25
Discontinued
operations............. 0.25 0.03 (0.05) (0.01) 0.16 -- --
---------- -------- -------- -------- ------- ---------- ----------
Net income (loss)....... $ 2.30 $ 0.18 $ (0.15) $ 0.09 $ 0.19 $ (1.31) $ 0.25
========== ======== ======== ======== ======= ========== ==========
Shares used in computing
diluted earnings (loss)
per share.............. 206,832 180,120 150,864 154,912 150,436 237,519 202,600
========== ======== ======== ======== ======= ========== ==========
<CAPTION>
Unaudited
July 31, January 31,
------------------------------------------------- ----------------------
1999 1998 1997 1996 1995 2000 1999
---------- -------- -------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data
Working capital......... $1,381,005 $ 12,784 $ 38,554 $ 72,009 $47,729 $2,147,881 $ 651,768
Total assets............ 2,404,594 259,818 146,248 106,105 77,803 8,266,815 1,251,348
Long-term obligations... 34,867 5,801 16,754 514 415 273,806 5,322
Redeemable preferred
stock.................. 411,283 -- -- -- -- 415,739 50,030
Stockholders' equity.... 1,062,461 133,136 29,448 53,992 55,490 5,820,450 683,456
</TABLE>
29
<PAGE>
uBid Selected Historical Condensed Financial Information
(In thousands, except share data)
The following selected historical condensed financial information should be
read in conjunction with, and are qualified by reference to, the financial
statements and the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
document. The statement of operations data for the period from April 1, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and
1999, and the balance sheet data at December 31, 1997, 1998 and 1999, are
derived from uBid's financial statements, which have been audited by Ernst &
Young LLP, independent auditors, and, except for the balance sheet at December
31, 1997, are included elsewhere in this document. Historical results are not
necessarily indicative of future results. No cash dividends have been declared
or paid on uBid common stock.
<TABLE>
<CAPTION>
Period from
April 1, 1997
(Inception)
to Years Ended
December 31, December 31,
1997 1998 1999
------------- ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Net revenues........................... $ 9 $ 48,232 $ 204,925
Cost of revenues ...................... 8 44,257 185,798
---------- ---------- ----------
Gross profit........................... 1 3,975 19,127
Operating expenses:
Sales and marketing .................. 10 2,829 22,154
Technology and development............ 66 1,022 4,092
General and administrative............ 212 4,856 16,073
Stock option compensation............. -- 5,267 3,508
---------- ---------- ----------
Total operating expenses............. 288 13,974 45,827
---------- ---------- ----------
Loss from operations................... (287) (9,999) (26,700)
Interest income........................ -- 74 1,475
Interest expense....................... (26) (244) (270)
---------- ---------- ----------
Net loss............................... $ (313) $ (10,169) $ (25,495)
========== ========== ==========
Basic and diluted net loss per share
(1)................................... $ (0.04) $ (1.36) $ (2.61)
========== ========== ==========
Shares used in computing basic and
diluted net loss per share(1)......... 7,329,883 7,461,061 9,765,366
========== ========== ==========
<CAPTION>
As of December 31,
------------------------------------
1997 1998 1999
------------- ---------- ----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash................................... $ -- $ 26,053 $ 51,544
Working capital........................ 31 21,445 40,719
Total assets........................... 358 34,625 79,266
Note payable to Creative............... -- 3,331 --
Stockholders' equity (deficit) ........ (312) 18,633 45,262
</TABLE>
- --------
(1) Computed by dividing loss attributable to common stockholders by shares
used in basic and diluted net loss per share. See Note 1 of Notes to
Financial Statements for an explanation of the determination of the number
of shares used in computing basic and diluted net loss per share.
30
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
CMGI and uBid believe this proxy statement/prospectus and the documents
incorporated by reference herein contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of management of CMGI and uBid, based on information currently
available to each company's management. When we use words such as "believes,"
"expects," "anticipates," "intends," "plans," "estimates," "should," "likely,"
"potential" or similar expressions, we are making forward-looking statements.
Forward-looking statements include the information concerning possible or
assumed future results of operations of CMGI or uBid set forth under:
. "Summary," "Selected Historical Condensed Consolidated and Unaudited Pro
Forma Financial Information," "Risk Factors," "The Merger--Background of the
Merger," "The Merger--CMGI's Reasons for the Merger," "The Merger--uBid's
Reasons for the Merger; Recommendation of the uBid Board of Directors," "The
Merger--Opinion of Financial Advisor to uBid," "Unaudited Pro Forma
Condensed Combined Financial Statements," "Description of uBid's Business"
and "uBid Management's Discussion and Analysis of Financial Condition and
Results of Operations;" and
. "Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in CMGI's Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q incorporated by reference into this proxy
statement/prospectus.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of CMGI and/or uBid may differ materially from those expressed in the forward-
looking statements. Many of the factors that will determine these results and
values are beyond our ability to control or predict. Stockholders are cautioned
not to put undue reliance on any forward-looking statements. For those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
For a discussion of some of the factors that may cause actual results to
differ materially from those suggested by the forward-looking statements,
please read carefully the information under "Risk Factors" beginning on page 7.
In addition to the risk factors and other important factors discussed elsewhere
in the documents which are incorporated by reference into this proxy
statement/prospectus, you should understand that the following important
factors could affect the future results of CMGI and could cause results to
differ materially from those suggested by the forward-looking statements:
. changes in United States and
. increased competitive pressures, global financial and equity
both domestically and markets, including significant
internationally, including interest rate fluctuations, which
pressures that result from the may increase the cost of external
issuance of patents or other financing for CMGI's operations,
intellectual property to and currency fluctuations, which
competitors of CMGI, which may may negatively impact CMGI's
affect sales of CMGI's services reportable income;
and impede CMGI's ability to
maintain its market share and . changes in laws or regulations,
pricing goals; including increased government
regulation of the Internet and
. changes in United States, global privacy related issues, third
or regional economic conditions party relations and approvals,
which may affect sales of CMGI's decisions of courts, regulators
products and services and and governmental bodies which may
increase costs associated with adversely affect CMGI's business
distributing such products; or ability to compete;
. CMGI may encounter greater than . CMGI may be unable to retain
expected costs and difficulties certain customers of uBid who may
related to combining uBid's terminate their relationship with
technology with the technology of uBid as a result of the merger
CMGI's current network of because they deem themselves
Internet marketing and competitors of CMGI; and
advertising companies;
31
<PAGE>
. other risks and uncertainties as
may be detailed from time to time
in CMGI's public announcements
and Securities and Exchange
Commission filings.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
32
<PAGE>
PRO FORMA FINANCIAL INFORMATION
On August 18, 1999, CMGI acquired an 81.495% equity stake in the former
AltaVista division of Digital Equipment Corporation, referred to as the
AltaVista Business, from Compaq Computer Corporation and its wholly-owned
subsidiary Digital Equipment Corporation. Consideration for the acquisition was
valued at approximately $2.4 billion, including $4 million of direct costs of
the acquisition. The AltaVista Business includes the assets and liabilities
constituting the AltaVista Internet search service, referred to as AltaVista
Search , which was a division of Digital, and also includes former
Compaq/Digital wholly-owned subsidiaries Zip2 Corporation and Shopping.com. In
consideration for the acquisition, CMGI issued 37,989,950 shares of its common
stock valued at approximately $1.8 billion, 18,090.45 shares of its Series D
Preferred Stock (which were converted into 3,618,090 shares of CMGI common
stock in October 1999) valued at approximately $173 million and promissory
notes with an aggregate principal amount of $220 million. Additionally,
AltaVista Business and CMGI stock options issued in the transaction, valued at
approximately $175 million and $4 million, respectively, have been included in
CMGI's purchase consideration.
On December 14, 1999, CMGI entered into a merger agreement to acquire
yesmail.com, Inc. for consideration preliminarily valued at $671 million,
consisting of: CMGI common stock valued at approximately $555 million, options
and warrants to purchase CMGI common stock valued at approximately $110 million
and estimated direct acquisition costs of $6 million. The acquisition of
yesmail was completed on March 10, 2000. Since the acquisition accounting has
not yet been completed, the actual consideration for the acquisition of yesmail
has not yet been determined. For the purpose of the pro forma financial
information included herein, the number of shares of CMGI common stock assumed
issued in the acquisition of yesmail is approximately 5.1 million. This amount
is based on the number of shares of yesmail common stock outstanding as of
December 14, 1999, the date the parties entered into the merger agreement.
Similarly, the estimated value of the options and warrants to purchase CMGI
common stock to be issued in the acquisition of yesmail is based on the
outstanding options and warrants to purchase yesmail common stock as of
December 14, 1999. The final purchase price will be based on the actual
outstanding yesmail common shares, stock options and warrants as of March 10,
2000. The estimated acquisition related costs consist primarily of investment
banker, legal and accounting fees to be incurred by CMGI directly related to
the acquisition of yesmail.
On February 10, 2000, CMGI entered into a merger agreement to acquire uBid
inc. for consideration preliminarily valued at $380 million, consisting of:
CMGI common stock valued at approximately $357.7 million, options to purchase
CMGI common stock valued at approximately $18.4 million and estimated direct
acquisition costs of $3.9 million. Since the acquisition has not yet been
completed, the actual consideration for the acquisition of uBid can not yet be
determined. For the purpose of the pro forma financial information included
herein, the number of shares of CMGI common stock assumed issued in the
acquisition of uBid is approximately 3.0 million. This amount is based on the
number of shares of uBid common stock outstanding as of February 10, 2000, the
date the parties entered into the merger agreement. Similarly, the estimated
value of the options to purchase CMGI common stock to be issued in the
acquisition of uBid is based on an estimate of the options to purchase uBid
common stock outstanding on February 10, 2000 that are expected to convert into
options to purchase CMGI common stock. The actual number of CMGI common shares
and stock options to be issued will be based on the actual outstanding uBid
common shares and stock options as of the completion of the merger. The
estimated acquisition related costs consist primarily of investment banker,
legal and accounting fees to be incurred by CMGI directly related to the
acquisition of uBid.
On February 14, 2000, CMGI entered into a stock purchase agreement to
acquire approximately 94.1% of Tallan, Inc. for consideration preliminarily
valued at $921.4 million, consisting of: $20 million of cash, approximately
$300 million in notes payable, bearing interest at 6.5%, maturing twenty days
from closing, approximately $395 million in notes payable, bearing interest at
6.5%, maturing six to nine months after closing and payable in cash or CMGI
stock at the option of CMGI, options to purchase CMGI common stock valued at
approximately $200.9 million and estimated direct acquisition costs of $5.5
million. Since the acquisition has not yet been completed, the actual
consideration for the acquisition of Tallan can not yet be determined. The
estimated value of the options to purchase CMGI common stock to be issued in
the acquisition of Tallan is
33
<PAGE>
based on an estimate of the options to purchase Tallan common stock outstanding
as of February 14, 2000 that are expected to convert into options to purchase
CMGI common stock. The actual number of CMGI stock options to be issued will be
based on the actual outstanding options to purchase Tallan common stock as of
the completion of the merger. The estimated acquisition related costs consist
primarily of investment banker, legal and accounting fees to be incurred by
CMGI directly related to the acquisition of Tallan.
The following unaudited pro forma condensed combined financial statements
give effect to CMGI's acquisitions of the AltaVista Business, yesmail, uBid and
Tallan, each of which have been or will be accounted for under the purchase
method of accounting. The unaudited pro forma condensed combined statements of
operations for the six months ended January 31, 2000 and the year ended July
31, 1999 give effect to the acquisitions of the AltaVista Business, yesmail,
uBid, and Tallan by CMGI as if each had occurred on August 1, 1998. The pro
forma statement of operations for the six months ended January 31, 2000 is
based on historical results of operations of CMGI for the six months ended
January 31, 2000 (which include the results of the AltaVista Business from
August 19, 1999 through January 31, 2000), the historical results of operations
of yesmail, uBid, and Tallan for the six months ended December 31, 1999 and the
historical results of operations for the AltaVista Business for the period from
August 1, 1999 through August 18, 1999. The pro forma statement of operations
for the twelve months ended July 31, 1999 is based on historical results of
operations of CMGI for the twelve months ended July 31, 1999, the historical
results of operations of yesmail, uBid, and Tallan for the twelve months ended
June 30, 1999 and the historical results of operations of the components of the
AltaVista Business as follows: the carve-out historical results of AltaVista
Search and the historical results of Zip2 Corporation for the twelve months
ended June 30, 1999 and the historical results of Shopping.com for the twelve
months ended July 31, 1999. The unaudited pro forma condensed combined balance
sheet as of January 31, 2000 gives effect to the acquisitions of yesmail, uBid,
and Tallan as if these transactions had occurred on that date. The pro forma
balance sheet is based on the historical balance sheet of CMGI as of January
31, 2000 and the historical balance sheets of yesmail, uBid, and Tallan as of
December 31, 1999. The following pro forma financial information, consisting of
the pro forma statements of operations, the pro forma balance sheet and the
accompanying notes, should be read in conjunction with and are qualified by the
historical financial statements and notes of CMGI, which are incorporated by
reference in this pro forma financial information.
The pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the future financial position or
future results of operations of the consolidated company after the acquisitions
of the AltaVista Business, yesmail, uBid and Tallan, or of the financial
position or results of operations of the consolidated company that would have
actually occurred had the acquisitions of the AltaVista Business, yesmail,
uBid, and Tallan been effected as of the dates described above.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
January 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments Adjustments Pro Forma
CMGI yesmail Tallan (A) Subtotal uBid (A) As Adjusted
---------- ------- ------- ----------- ---------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash
equivalents............ $ 880,695 $12,771 $ 9,789 $ (20,000) $ 883,255 $51,544 $ -- $ 934,799
Available-for-sale
securities............. 2,378,703 15,794 303 -- 2,394,800 -- -- 2,394,800
Other current assets.... 228,415 7,150 11,066 -- 246,631 23,179 -- 269,810
---------- ------- ------- ---------- ---------- ------- -------- -----------
Total current assets... 3,487,813 35,715 21,158 (20,000) 3,524,686 74,723 -- 3,599,409
Goodwill and other
intangible assets, net
of accumulated
amortization........... 4,002,394 1,119 -- 650,169 5,565,251 -- 337,538 5,902,789
911,569
Other non-current
assets................. 776,608 2,758 2,993 782,359 4,543 -- 786,902
---------- ------- ------- ---------- ---------- ------- -------- -----------
Total assets........... $8,266,815 $39,592 $24,151 $1,541,738 $9,872,296 $79,266 $337,538 $10,289,100
========== ======= ======= ========== ========== ======= ======== ===========
Liabilities and
Stockholders' Equity
Deferred income taxes... $ 835,528 $ -- $ -- $ -- $ 835,528 $ -- $ -- $ 835,528
Other current
liabilities............ 504,404 10,386 4,267 12,000 545,657 34,004 6,700 586,361
14,600
---------- ------- ------- ---------- ---------- ------- -------- -----------
Total current
liabilities........... 1,339,932 10,386 4,267 26,600 1,381,185 34,004 6,700 1,421,889
Non-current
liabilities............ 273,806 2,375 336 695,000 971,517 -- -- 971,517
Minority interest....... 416,888 -- -- 617 417,505 -- -- 417,505
Convertible, redeemable
preferred stock........ 415,739 -- 16,663(P) (16,663) 415,739 -- -- 415,739
Stockholders' equity.... 5,820,450 26,831 2,885 638,169 6,686,350 45,262 330,838 7,062,450
198,015
---------- ------- ------- ---------- ---------- ------- -------- -----------
Total liabilities and
stockholders' equity.. $8,266,815 $39,592 $24,151 $1,541,738 $9,872,296 $79,266 $337,538 $10,289,100
========== ======= ======= ========== ========== ======= ======== ===========
</TABLE>
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Six Months Ended January 31, 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
AltaVista
Business
(August 1,
1999
through
August 18, Pro Forma Pro Forma Pro Forma
CMGI 1999) yesmail Tallan Adjustments Subtotal uBid Adjustments As Adjusted
--------- ---------- ------- ------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 277,200 $ 7,198 $11,993 $33,531 $ -- $ 329,922 $125,018 $ (491)(L) $ 454,449
Operating
expenses:
Cost of revenues 229,922 4,104 7,874 19,149 -- 261,049 112,836 (491)(L) 373,394
Research and
development..... 51,612 1,891 2,067 -- -- 55,570 2,516 -- 58,086
In-process
research and
development..... 4,717 -- -- -- -- 4,717 -- -- 4,717
Selling......... 185,238 7,361 7,360 1,115 -- 201,074 15,547 -- 216,621
General and
administrative.. 68,225 2,400 3,443 5,323 -- 79,391 10,202 -- 89,593
Amortization of
intangible
assets and
stock-based
compensation.... 423,870 30,117 1,111 -- 26,337 (B) 665,390 1,689 56,256 (M) 723,335
108,348 (C)
91,157 (D)
(15,550)(E)
--------- -------- ------- ------- --------- --------- -------- -------- -----------
Total operating
expenses......... 963,584 45,873 21,855 25,587 210,292 1,267,191 142,790 55,765 1,465,746
--------- -------- ------- ------- --------- --------- -------- -------- -----------
Operating income
(loss)........... (686,384) (38,675) (9,862) 7,944 (210,292) (937,269) (17,772) (56,256) (1 ,011,297)
Other income
(expense):
Interest income
(expense), net 2,990 (35) 607 90 (1,139)(F) 2,513 791 -- 3,304
Equity in losses
of affiliates... (5,429) -- -- -- -- (5,429) -- -- (5,429)
Minority
interest 54,864 -- -- -- 4,066 (H) 58,930 -- -- 58,930
Non-operating
gains (losses),
net............. 266,437 -- -- (39) 266,398 -- -- 266,398
--------- -------- ------- ------- --------- --------- -------- -------- -----------
318,862 (35) 607 51 2,927 322,412 791 -- 323,203
--------- -------- ------- ------- --------- --------- -------- -------- -----------
Income (loss)
from continuing
operations before
income taxes..... (367,522) (38,710) (9,255) 7,995 (207,365) (614,857) (16,981) (56,256) (688,094)
Income tax
expense (
benefit)......... (64,535) -- -- 3,359 (17,802)(I) (78,978) -- (5,352)(N) (84,330)
--------- -------- ------- ------- --------- --------- -------- -------- -----------
Income (loss)
from continuing
operations....... (302,987) (38,710) (9,255) 4,636 (189,563) (535,879) (16,981) (50,904) (603,764)
Deemed preferred
dividend,
preferred stock
accretion and
amortization of
discount......... (7,163) -- -- (4,822) 4,822 (J) (7,163) -- -- (7,163)
--------- -------- ------- ------- --------- --------- -------- -------- -----------
Income (loss)
from continuing
operations
available to
common
stockholders..... $(310,150) $(38,710) $(9,255) $ (186) $(184,741) $(543,042) $(16,981) $(50,904) $ (610,927)
========= ======== ======= ======= ========= ========= ======== ======== ===========
Basic loss from
continuing
operations per
share........... $ (1.31) $ (2.19)(K) $ (2.44)(O)
========= ========= ===========
Diluted loss
from continuing
operations per
share........... $ (1.31) $ (2.19)(K) $ (2.44)(O)
========= ========= ===========
Shares used in
computing loss
from continuing
operations per
share:
Basic........... 237,519 247,848 (K) 250,892 (O)
========= ========= ===========
Diluted......... 237,519 247,848 (K) 250,892 (O)
========= ========= ===========
</TABLE>
36
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Twelve Months Ended July 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
AltaVista Pro Forma Pro Forma
CMGI Business yesmail Tallan Adjustments Subtotal uBid Adjustments
-------- --------- ------- ------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues....... $175,666 $ 97,838 $ 6,179 $33,013 $ -- $ 312,696 $119,313 $ (188) (L)
Operating expenses:
Cost of revenues.. 168,830 64,155 4,038 19,080 -- 256,103 109,073 (188) (L)
Research and
development....... 22,253 27,105 1,747 -- -- 51,105 2,193 --
In-process
research and
development....... 6,061 -- -- -- -- 6,061
Selling and
marketing......... 45,505 79,210 4,175 1,121 -- 130,011 8,879 --
General and
administrative.... 43,566 31,823 2,331 7,050 -- 84,770 9,208 --
Amortization of
intangible assets
and stock-based
compensation...... 16,110 171,925 211 145 682,337 (B) 1,261,232 7,086 112,513 (M)
217,096 (C)
182,314 (D)
(8,906)(E)
-------- --------- ------- ------- ---------- ---------- -------- ---------
Total operating
expenses........ 302,325 374,218 12,502 27,396 1,072,841 1,789,282 136,439 112,325
-------- --------- ------- ------- ---------- ---------- -------- ---------
Operating income
(loss)............. (126,659) (276,380) (6,323) 5,617 (1,072,841) (1,476,586) (17,126) (112,513)
Other income
(expense):
Interest income
(expense), net.... 269 (7,555) (133) (128) (23,100)(F) (46,262) 331 --
(15,615)(G)
Equity in losses
of affiliates..... (15,737) -- -- -- -- (15,737) -- --
Minority
interest.......... 2,331 -- (35) -- 76,541 (H) 78,837 -- --
Non-operating
gains (losses),
net............... 889,041 -- (230) -- -- 888,811 -- --
-------- --------- ------- ------- ---------- ---------- -------- ---------
875,904 (7,555) (398) (128) 37,826 905,649 331 --
-------- --------- ------- ------- ---------- ---------- -------- ---------
Income (loss) from
continuing
operations before
income taxes....... 749,245 (283,935) (6,721) 5,489 (1,035,015) (570,937) (16,795) (112,513)
Income tax expense
( benefit)......... 325,402 -- -- 2,344 (298,881)(I) 28,865 (3,398)(N)
-------- --------- ------- ------- ---------- ---------- -------- ---------
Income (loss) from
continuing
operations......... 423,843 (283,935) (6,721) 3,145 (736,134) (599,802) (16,795) (109,115)
Preferred stock
accretion and
amortization of
discount........... (1,662) -- -- -- -- (1,662) --
-------- --------- ------- ------- ---------- ---------- -------- ---------
Income (loss) from
continuing
operations
available to common
stockholders....... $422,181 $(283,935) $(6,721) $ 3,145 $ (736,134) $ (601,464) $(16,795) $(109,115)
======== ========= ======= ======= ========== ========== ======== =========
Basic loss from
continuing
operations per
share............. $ 2.26 $ (2.59)(K)
======== ==========
Diluted loss from
continuing
operations per
share............. $ 2.05 $ (2.59)(K)
======== ==========
Shares used in
computing loss from
continuing
operations per
share:
Basic............. 186,532 232,525 (K)
======== ==========
Diluted........... 206,832 232,525 (K)
======== ==========
<CAPTION>
Pro Forma
As Adjusted
---------------
<S> <C>
Net revenues....... $ 431,821
Operating expenses:
Cost of revenues.. 364,988
Research and
development....... 53,298
In-process
research and
development....... 6,061
Selling and
marketing......... 138,890
General and
administrative.... 93,978
Amortization of
intangible assets
and stock-based
compensation...... 1,380,831
---------------
Total operating
expenses........ 2,038,046
---------------
Operating income
(loss)............. (1,606,225)
Other income
(expense):
Interest income
(expense), net.... (45,931)
Equity in losses
of affiliates..... (15,737)
Minority
interest.......... 78,837
Non-operating
gains (losses),
net............... 888,811
---------------
905,980
---------------
Income (loss) from
continuing
operations before
income taxes....... (700,245)
Income tax expense
( benefit)......... 25,467
---------------
Income (loss) from
continuing
operations......... (725,712)
Preferred stock
accretion and
amortization of
discount........... (1,662)
---------------
Income (loss) from
continuing
operations
available to common
stockholders....... $ (727,374)
===============
Basic loss from
continuing
operations per
share............. $ (3.09)
===============
Diluted loss from
continuing
operations per
share............. $ (3.09)
===============
Shares used in
computing loss from
continuing
operations per
share:
Basic............. 235,569 (O)
===============
Diluted........... 235,569 (O)
===============
</TABLE>
37
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(1) Pro Forma Adjustments and Assumptions
(A) CMGI completed its acquisition of an 81.495% equity stake in the
AltaVista Business for consideration valued at approximately $2.4 billion on
August 18, 1999. Accordingly, the assets and liabilities of the AltaVista
Business are included in CMGI's consolidated balance sheet as of January 31,
2000 and no pro forma adjustments are necessary to the pro forma balance sheet
related to the acquisition of the AltaVista Business. The following represents
the allocation of the purchase price for CMGI's acquisition of the
AltaVista Business over 81.495% of the fair values of the acquired assets and
assumed liabilities of the AltaVista Business as of August 18, 1999:
<TABLE>
<S> <C>
(in thousands)
Working capital deficit, including cash acquired................... $ (39,604)
Other non-current assets........................................... 62,979
Non-current liabilities............................................ (2,733)
Goodwill and other intangible assets............................... 2,368,129
----------
Purchase price..................................................... $2,388,771
==========
</TABLE>
The purchase price allocation for the acquisition of the AltaVista Business
is preliminary and is subject to adjustment upon finalization of the purchase
accounting.
The pro forma financial information also reflects the acquisition of yesmail
and the pending acquisitions of uBid and Tallan, for consideration
approximately valued at $671 million, $380 million and $921.4 million,
respectively. The acquisition of yesmail was completed on March 10, 2000. Since
the acquisition accounting for yesmail has not yet been completed, the actual
consideration for the acquisition of yesmail has not yet been determined. Since
the acquisitions of uBid and Tallan have not yet been completed, the actual
consideration for the acquisitions of uBid and Tallan cannot yet be determined.
For the purpose of the pro forma financial information, the number of shares
of CMGI common stock assumed issued in the acquisition of yesmail is
approximately 5.1 million. This amount is based on the number of shares of
yesmail common stock outstanding as of December 14, 1999, the date the parties
entered into the merger agreement. Similarly, the estimated value of the
options and warrants to purchase CMGI common stock to be issued in the
acquisition of yesmail is based on the outstanding options and warrants to
purchase yesmail common stock as of December 14, 1999. The final purchase price
will be based on the actual outstanding yesmail common shares, stock options
and warrants as of March 10, 2000.
For the purpose of the pro forma financial information, the number of shares
of CMGI common stock assumed issued in the acquisition of uBid is approximately
3.0 million. This amount is based on the number of shares of uBid common stock
outstanding as of February 10, 2000, the date the parties entered into the
merger agreement. Similarly, the estimated value of the options to purchase
CMGI common stock to be issued in the acquisition of uBid is based on the
outstanding options to purchase uBid common stock as of February 10, 2000 that
would convert into options to purchase CMGI common stock if the acquisition was
completed on February 10, 2000. The actual number of CMGI common shares and
stock options to be issued will be based on the actual outstanding uBid common
shares and options as of the completion of the merger.
For the purpose of the pro forma financial information, the estimated value
of the options to purchase CMGI common stock to be issued in the acquisition of
Tallan is based on the outstanding options to purchase Tallan common stock as
of February 14, 2000, the date the parties entered into the agreement, that
would convert into options to purchase CMGI common stock if the acquisition was
completed on February 14, 2000. The actual number of CMGI stock options to be
issued will be based on the actual number of outstanding Tallan options as of
the completion of the merger.
38
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(Continued)
The following represents the allocation of the estimated purchase price for
CMGI's acquisitions of yesmail and uBid over the historical net book values of
the acquired assets and assumed liabilities of yesmail and uBid as of the date
of the pro forma balance sheet, and the allocation of the purchase price for
CMGI's acquisition of Tallan over 94.1% of the historical values of the
acquired assets and assumed liabilities of Tallan as of the date of the pro
forma balance sheet, and is for illustrative purposes only. The actual purchase
price allocations will be based on fair values of the acquired assets and
assumed liabilities as of the actual acquisition dates. Assuming the
transactions occurred on January 31, 2000, the allocations for the acquisition
of yesmail, Tallan and uBid would have been as follows:
<TABLE>
<CAPTION>
yesmail Tallan uBid
(in thousands) -------- -------- --------
<S> <C> <C> <C>
Working capital, including cash acquired.......... $ 19,329 $ 7,331 $ 37,919
Other non-current assets.......................... 2,758 2,816 4,543
Non-current liabilities........................... (2,375) (316) --
Goodwill and other intangible assets.............. 651,288 911,569 337,538
-------- -------- --------
Purchase price.................................... $671,000 $921,400 $380,000
======== ======== ========
</TABLE>
The pro forma adjustments reconcile the historical balance sheets of
yesmail, uBid, and Tallan to the allocated purchase prices, which include the
accrual by CMGI of approximately $ 6.0 million, $5.5 million and $3.9 million
of CMGI's estimated acquisition costs directly related to the acquisitions of
yesmail, Tallan, and uBid, respectively. Working capital, including cash
acquired for yesmail and uBid, is equal to the historical balance sheet amount
less a pro forma accrual of $6 million and $2.8 million, representing the
estimated acquisition costs to be incurred directly by yesmail and uBid,
respectively, as a result of the acquisitions. Working capital, including cash
acquired for Tallan is equal to 94.1% of the historical balance sheet amount
adjusted for an accrual of $9.1 million, representing an estimate of the
acquisition costs expected to be incurred directly by Tallan as a result of the
acquisition.
(B) The pro forma adjustments include an incremental $38.2 million and
$789.4 million in amortization of goodwill and other intangible assets (per the
allocation in "(A)" above) that would have been recorded during the six months
ended January 31, 2000 and the twelve months ended July 31, 1999 related to the
acquisition of the AltaVista Business. The amounts identified as goodwill and
other intangible assets in CMGI's acquisition of the AltaVista Business are
being amortized on a straight-line basis over a three-year period. The
adjustment amounts also include a net reduction of $11.9 million and $107.1
million in amortization of goodwill and other intangible assets for the six
months ended January 31, 2000 and the twelve months ended July 31, 1999,
respectively. These amounts relate to the reduction in historical amortization
expense to reflect only the 18.505% carry-over basis in the historical goodwill
and other intangible assets of the AltaVista Business. The historical financial
statements of the AltaVista Business represented in the pro forma statemenst of
operations include amortization of goodwill and other intangible assets
relating to Compaq's acquisition of Digital in June 1998 and Compaq/Digital's
acquisitions of Shopping.com and Zip2 Corporation in January 1999 and April
1999, respectively.
(C) The pro forma adjustments represent amortization of goodwill and other
intangible assets (per the allocation in "(A)" above) that would have been
recorded during the periods covered by the pro forma statements of operations
related to the acquisition of yesmail. The pro forma adjustments are based on
the assumption that the entire amounts identified as goodwill and other
intangible assets in CMGI's acquisition of yesmail will be amortized on a
straight-line basis over a three-year period. The valuation of the actual
intangible assets acquired has not yet been completed. When completed, certain
amounts identified as intangible assets may be amortized over periods other
than the three-year period represented in the pro forma statement of
operations. Additionally, a portion of the purchase price may be identified as
in-process research and development. This amount, if any, will be charged to
operating results in CMGI's fiscal year 2000 financial
39
<PAGE>
statements when the acquisition accounting and valuation amounts are finalized.
The pro forma statements of operations do not give effect to any potential in-
process research and development charge related to the acquisition of yesmail.
(D) The pro forma adjustments represent amortization of goodwill and other
intangible assets (per the allocation in "(A)" above) that would have been
recorded during the periods covered by the pro forma statements of operations
related to Tallan. The pro forma adjustments are based on the assumption that
the entire amounts identified as goodwill and other intangible assets in CMGI's
acquisition of Tallan will be amortized on a straight-line basis over a five-
year period. The valuation of the actual intangible assets will not be
completed until the acquisition of Tallan is complete. When completed, certain
amounts identified as intangible assets may be amortized over periods other
than the five-year period represented in the pro forma statement of operations.
Additionally, a portion of the purchase price may be identified as in-process
research and development. This amount, if any, will be charged to operating
results in CMGI's fiscal year 2000 financial statements when the acquisition
accounting and valuation amounts are finalized. The pro forma statements of
operations do not give effect to any potential in-process research and
development charge related to the acquisition of Tallan.
(E) The pro forma adjustments relate to stock-based compensation charges
recorded in the historical financial statements of the AltaVista Business. The
value of the stock options to which these charges related are included in the
calculation of the purchase consideration. Accordingly, on a pro forma basis,
these expenses have been eliminated.
(F) The pro forma adjustments reflect the incremental interest expense that
would have been recorded by CMGI related to the $220 million of aggregate
principal amounts of notes payable issued in the acquisition of the AltaVista
Business. The notes bear interest at an annual rate of 10.5%.
(G) The pro forma adjustments reflect the incremental interest expense that
would have been recorded by CMGI related to the $695 million of aggregate
principal amounts of notes payable that will be issued in the acquisition of
Tallan. Each of the four separate notes issued bear interest at 6.5%. Three of
the four notes have a duration stated in a number of days from issuance. The
fourth note is set to mature on December 31, 2000, which is approximately 270
days subsequent to the anticipated closing of the transaction. For purposes of
the pro forma financial information, interest was calculated on the fourth note
as if it would mature 270 days subsequent to August 1, 1998. The duration of
each of the four notes is less than one year and as a result there is no pro
forma interest expense adjustment for the six month period ended January 31,
2000.
(H) The pro forma adjustment reflects the 18.505% minority interest in the
results of operations of the AltaVista Business assuming that CMGI's
acquisition of 81.495% of the AltaVista Business occurred on August 1, 1998 and
the 5.9% minority interest in the results of operations of Tallan, assuming
that CMGI's acquisition of 94.1% of Tallan occurred on August 1, 1998.
(I) The pro forma adjustments reflect the income tax benefit that would have
been recorded by CMGI in its consolidated statements of operations related to
the AltaVista Business'and yesmail's historical losses for the comparable
periods presented and the income tax effect, if any, of the other pre-tax pro
forma adjustments related to the AltaVista Business, yesmail and Tallan. The
pro forma adjustments assume that CMGI would recognize a federal tax benefit
for the amortization of goodwill and other intangible assets related to the
acquisition of the AltaVista Business, but would not recognize a federal tax
benefit for the amortization of goodwill and other intangible assets related to
the acquisitions of yesmail and Tallan. The pro forma adjustments also assume
that CMGI would record a valuation allowance for all state tax benefits
associated with the AltaVista Business and yesmail. Actual effective tax rates
may differ from pro forma rates reflected in this pro forma financial
information.
(J) The pro forma adjustment reflects the elimination of preferred stock
accretion recorded in Tallan's historical financial statements. Assuming the
acquisition of Tallan occurred on August 1, 1998, the preferred stock, to which
this accretion relates, would not have been outstanding during the period
covered by the pro forma statement of operations
40
<PAGE>
(K) Since the pro forma statements of operations each result in a loss from
continuing operations, the pro forma basic and diluted loss from continuing
operations per common share are computed by dividing the loss from continuing
operations available to common stockholders by the weighted average number of
common shares outstanding. The calculations of the weighted average number of
common shares outstanding assume that the 37,889,950 shares of CMGI's common
stock issued in the acquisition of the AltaVista Business and the 5.1 million
shares of CMGI's common stock estimated to be issued in the acquisition of
yesmail, were outstanding for the entire period. The calculations of the
weighted average number of common shares outstanding also assume that the
18,090.45 shares of CMGI's Series D preferred stock were converted into
3,618,090 shares of CMGI common stock on October 11, 1998 (the 71st day after
the assumed acquisition date of August 1, 1998) and that such common shares
were outstanding for the entire period thereafter. The Series D preferred
shares were converted into common stock on October 28, 1999 (the 71st day after
the actual acquisition date of August 18, 1999). The notes payable that will be
issued as a component of the Tallan purchase consideration can be settled in
either cash or CMGI common stock, at the option of CMGI. For purposes of the
pro forma financial information, it has been assumed that the notes will be
settled in cash. The effect of the additional CMGI common stock shares that
would be outstanding if it was assumed that the notes were settled in CMGI
common stock rather than cash would be antidilutive.
(L) The pro forma adjustment reflects the elimination of transactions
between uBid and CMGI owned companies during the periods reflected in the pro
forma financial information.
(M) The pro forma adjustments represent amortization of goodwill and other
intangible assets (per the allocation in "(A)" above) that would have been
recorded during the periods covered by the pro forma statements of operations
related to uBid. The pro forma adjustments are based on the assumption that the
entire amounts identified as goodwill and other intangible assets in CMGI's
acquisition of uBid will be amortized on a straight-line basis over a three-
year period. The valuation of the actual intangible assets will not be
completed until the acquisition of uBid is complete. When completed, certain
amounts identified as intangible assets may be amortized over periods other
than the three-year period represented in the pro forma statement of
operations. Additionally, a portion of the purchase price may be identified as
in-process research and development. This amount, if any, will be charged to
operating results in CMGI's fiscal year 2000 financial statements when the
acquisition accounting and valuation amounts are finalized. The pro forma
statements of operations do not give effect to any potential in-process
research and development charge related to the acquisition of uBid.
(N) The pro forma adjustments reflect the income tax benefit that would have
been recorded by CMGI in its consolidated statements of operations related to
uBid's historical losses for the comparable periods presented and the income
tax effect, if any, of the other pre-tax pro forma adjustments related to uBid.
The pro forma adjustments assume that CMGI would not recognize a federal tax
benefit for the amortization of goodwill and other intangible assets related to
the acquisition of uBid. The pro forma adjustments also assume that CMGI would
record a valuation allowance for all state tax benefits associated with uBid.
Actual effective tax rates may differ from pro forma rates reflected in this
pro forma financial information.
(O) Since the pro forma statements of operations each result in a loss from
continuing operations, the pro forma basic and diluted loss from continuing
operations per common share are computed by dividing the loss from continuing
operations available to common stockholders by the weighted average number of
common shares outstanding. The calculations of the weighted average number of
common shares outstanding assume that the 3.0 million shares of CMGI's common
stock estimated to be issued in the acquisition of uBid, were outstanding for
the entire period.
(P) Comprised of approximately $10,479,000 redeemable preferred stock of
Tallan and approximately $6,184,000 convertible preferred stock of Tallan.
41
<PAGE>
CMGI and uBid
Selected Unaudited Pro Forma Condensed Combined Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months
ended Year ended
Pro Forma Condensed Combined Statement of January 31, 2000 July 31, 1999
Operations: ---------------- -------------
<S> <C> <C>
Net Revenue.................................... $ 454,449 $ 431,821
Operating loss................................. (1,011,297) (1,606,225)
Loss from continuing operations available to
common shareholders........................... (610,927) (727,374)
Loss from continuing operations per share--
basic and diluted............................. (2.44) (3.09)
<CAPTION>
Pro Forma Condensed Combined Balance Sheet January 31, 2000
Data: ----------------
<S> <C> <C>
Working capital................................ $ 2,177,520
Total assets................................... 10,289,100
Long-term obligations and convertible,
redeemable preferred stock.................... 1,387,256
Stockholders' equity........................... 7,062,450
</TABLE>
42
<PAGE>
COMPARATIVE PER SHARE DATA
The following table summarizes certain unaudited per share information for
CMGI and uBid on a historical, pro forma combined and equivalent pro forma
combined basis. The following information should be read in conjunction with
the audited consolidated financial statements of CMGI and uBid, the unaudited
interim consolidated financial statements of CMGI, the selected historical
condensed consolidated financial data and the unaudited pro forma condensed
combined financial information included elsewhere or incorporated by reference
herein, including the forms 8-K and 8-K/A filed by CMGI related to its August
18, 1999 acquisition of AltaVista and the form 8-K filed on March 9, 2000 that
includes the historical financial statements of Tallan and yesmail. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that
would have occurred if the acquisitions of AltaVista, yesmail, Tallan, and uBid
had been consummated as of the beginning of the respective periods presented,
nor is it necessarily indicative of the future operating results or financial
position of the combined companies. The historical book value per share is
computed by dividing total stockholders' equity by the number of common shares
outstanding at the end of the period. The pro forma per share loss from
continuing operations is computed by dividing the pro forma loss from
continuing operations available to common stockholders by the pro forma
weighted average number of shares outstanding. The pro forma combined book
value per share is computed by dividing total pro forma stockholders' equity by
the pro forma number of common shares outstanding at the end of the period. The
uBid equivalent pro forma combined per share amounts are calculated by
multiplying the CMGI pro forma combined per share amounts by the common stock
exchange ratio of 0.2628.
<TABLE>
<CAPTION>
Six months Ended Year ended
January 31, 2000 July 31, 1999
---------------- -------------
<S> <C> <C>
CMGI
- ----
Historical Per Common Share Data:
Income (loss) from continuing operations--
basic......................................... $ (1.31) $ 2.26
Income (loss) from continuing operations--
diluted....................................... (1.31) 2.05
Book value..................................... 20.80 5.56
Pro Forma Combined Per Common Share Data:
Loss from operations--basic and diluted........ $ (2.44) $(3.09)
Book value..................................... 24.52 30.18
uBid
- ----
Historical Per Common Share Data:
Loss from continuing operations--basic and
diluted....................................... $ (1.64) $(2.01)
Book value..................................... 3.92 1.31
Equivalent Pro Forma Combined Per Common Share
Data:
Loss from continuing operations--basic and
diluted....................................... $ (0.64) $(0.81)
Book value..................................... 6.44 7.93
</TABLE>
43
<PAGE>
MARKET PRICE INFORMATION
CMGI Market Price Information
CMGI common stock has traded on the Nasdaq National Market under the symbol
"CMGI" since January 25, 1994.
The table below sets forth, for the periods indicated, the high and low
sales prices of CMGI common stock as reported on the Nasdaq National Market, as
adjusted for 2-for-1 stock splits effected on each of May 11, 1998, January 11,
1999, May 27, 1999 and January 11, 2000.
<TABLE>
<CAPTION>
CMGI
Common Stock
---------------
High Low
------- -------
<S> <C> <C>
Fiscal 1998
Quarter ended October 31, 1997................................. $ 1.78 $ 0.92
Quarter ended January 31, 1998................................. $ 2.32 $ 1.20
Quarter ended April 30, 1998................................... $ 6.72 $ 2.29
Quarter ended July 31, 1998.................................... $ 11.47 $ 4.16
Fiscal 1999
Quarter ended October 31, 1998................................. $ 11.25 $ 4.32
Quarter ended January 31, 1999................................. $ 38.75 $ 7.27
Quarter ended April 30, 1999................................... $ 82.50 $ 20.50
Quarter ended July 31, 1999.................................... $ 64.60 $ 35.75
Fiscal 2000
Quarter ended October 31, 1999................................. $ 57.60 $ 33.13
Quarter ended January 31, 2000................................. $163.50 $ 48.09
Quarter ending April 30, 2000 (through March 24, 2000)......... $151.50 $102.00
</TABLE>
uBid Market Price Information
uBid common stock has traded on the Nasdaq National Market under the symbol
"UBID" since December 4, 1998.
The table below sets forth, for the periods indicated, the high and low
sales prices per share of uBid common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
uBid
Common Stock
--------------
High Low
------- ------
<S> <C> <C>
Fiscal 1998
Quarter ended December 31, 1998................................. $189.00 $30.00
Fiscal 1999
Quarter ended March 31, 1999.................................... $138.06 $51.56
Quarter ended June 30, 1999..................................... $ 76.00 $20.50
Quarter ended September 30, 1999................................ $ 35.44 $15.63
Quarter ended December 31, 1999................................. $ 48.00 $26.06
Fiscal 2000
Quarter ending March 31, 2000 (through March 24, 2000).......... $ 38.81 $21.00
</TABLE>
44
<PAGE>
Recent Closing Prices
The following table sets forth the closing prices per share of CMGI common
stock and uBid common stock as reported on the Nasdaq National Market on (1)
February 9, 2000, the last full trading day prior to the public announcement
that CMGI and uBid had entered into the merger agreement, and (2) March 24,
2000, the most recent practicable date prior to the printing of this proxy
statement/prospectus. This table also sets forth the equivalent price per share
of uBid common stock on those dates. The equivalent price per share is equal to
the closing price of a share of CMGI common stock on that date multiplied by
0.2628, the number of shares of CMGI common stock to be issued in the merger in
exchange for each share of uBid common stock.
<TABLE>
<CAPTION>
CMGI uBid Equivalent
Common Common per
Stock Stock Share Price
Date ------- ------ -----------
<S> <C> <C> <C>
February 9, 2000..................................... $120.50 $26.69 $31.67
March 24, 2000....................................... $121.31 $31.44 $31.88
</TABLE>
uBid and CMGI believe that uBid common stock presently trades on the basis
of the value of CMGI common stock expected to be issued in exchange for the
uBid common stock in the merger, discounted primarily for the uncertainties
associated with the merger.
uBid stockholders are advised to obtain current market quotations for CMGI
common stock and uBid common stock. No assurance can be given as to the market
prices of CMGI common stock or uBid common stock at any time before the
consummation of the merger or as to the market price of CMGI common stock at
any time after the merger. Because the exchange ratio is fixed, the exchange
ratio will not be adjusted to compensate uBid stockholders for decreases in the
market price of CMGI common stock which could occur before the merger becomes
effective. In the event the market price of CMGI common stock decreases or
increases prior to the consummation of the merger, the value of the CMGI common
stock to be received in the merger in exchange for uBid common stock would
correspondingly decrease or increase.
Dividends
CMGI has never declared or paid cash dividends on its common stock. CMGI
currently intends to retain earnings, if any, to support its growth strategy
and does not anticipate paying cash dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the CMGI
board of directors after taking into account various factors, including CMGI's
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
uBid has never declared or paid cash dividends on its common stock. uBid
currently intends to retain all available funds and any future earnings for use
in the operation of its business and does not anticipate declaring or paying
any cash dividends for the foreseeable future.
45
<PAGE>
THE SPECIAL MEETING
We are furnishing this proxy statement/prospectus to holders of uBid common
stock in connection with the solicitation of proxies by the uBid board of
directors for use at the special meeting of uBid stockholders to be held on
April 28, 2000, and any adjournment of the meeting.
This proxy statement/prospectus is first being mailed to uBid stockholders
on or about March 29, 2000. This proxy statement/prospectus is also furnished
to uBid stockholders as a prospectus in connection with the issuance by CMGI of
shares of CMGI common stock as contemplated by the merger agreement.
Date, Time and Place
The special meeting will be held on April 28, 2000 at 10:00 a.m., local
time, at the Chicago O'Hare Westin Hotel, 6100 River Road, Rosemont, Illinois
60018.
Matters to be Considered at the Special Meeting
At the special meeting of uBid stockholders, and any adjournment of the
special meeting, uBid stockholders will be asked:
. to consider and vote upon a proposal to approve and adopt the agreement and
plan of merger and reorganization, dated as of February 9, 2000, by and
among CMGI, Senlix Corp. and uBid, and their merger, pursuant to which uBid
will become a wholly owned subsidiary of CMGI and each outstanding share of
uBid common stock will be converted into the right to receive 0.2628 shares
of CMGI common stock; and
. to transact such other matters which may properly come before the special
meeting or any and all adjournment(s) thereof.
Record Date
Only stockholders of record of uBid common stock at the close of business on
March 22, 2000 are entitled to notice of and to vote at the special meeting.
Voting and Revocation of Proxies
We request that uBid stockholders complete, date and sign the accompanying
proxy and promptly return it in the accompanying postage-paid envelope to
Morrow & Co., Inc., or otherwise mail it to Morrow & Co., Inc., at 445 Park
Avenue, 5th Floor, New York, New York 10022. Brokers holding shares in "street
name" may vote the shares only if the beneficial stockholder provides
instructions on how to vote. Brokers will provide beneficial owners
instructions on how to direct the brokers to vote the shares. All properly
executed proxies that uBid receives prior to the vote at the special meeting,
and that are not revoked, will be voted in accordance with the instructions
indicated on the proxies. If no direction is indicated, the proxies will be
voted to approve the merger agreement and the merger. The uBid board of
directors does not currently intend to bring any other business before the
special meeting and, so far as the uBid board of directors knows, no other
matters are to be brought before the special meeting. If other business
properly comes before the special meeting or any adjournment, the proxies will
vote in accordance with uBid's management's own judgment.
uBid stockholders may revoke their proxies at any time prior to its use:
. by delivering to the secretary of uBid a signed notice of revocation or a
later-dated, signed proxy; or
. by attending the special meeting and voting in person.
Attendance at the special meeting is not sufficient to revoke a proxy.
46
<PAGE>
Vote Required
As of the close of business on March 22, 2000, the record date, there were
11,628,066 shares of uBid common stock outstanding and entitled to vote. As of
the close of business on the record date, there were approximately 20,000
stockholders of record. The holders of a majority of the outstanding shares of
uBid common stock must approve the merger agreement and the merger. uBid
stockholders have one vote per share of uBid common stock owned on the record
date.
As of March 1, 2000, the directors and officers of uBid and their affiliates
owned an aggregate of 4,000 shares of uBid common stock (excluding any shares
issuable upon the exercise of options or warrants) or approximately less than
1% of the shares of uBid common stock outstanding on that date. Certain
principal stockholders holding an aggregate of 2,589,184 shares as of March 1,
2000 of uBid common stock, have agreed to vote their shares in favor of the
merger. See "The Merger--Interests of Executive Officers and Directors of uBid
in the Merger" on page 58.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is a majority of the shares of uBid common stock issued and outstanding on the
record date. Abstentions and broker non-votes each will be included in
determining the number of shares present and voting at the meeting for the
purpose of determining the presence of a quorum. Because approval of the merger
agreement and the consummation of the merger requires the affirmative vote of a
majority of the outstanding shares of uBid common stock entitled to vote,
abstentions and broker non-votes will have the same effect as votes against the
merger agreement and the consummation of the merger. In addition, the failure
of a uBid stockholder to return a proxy or vote in person will have the effect
of a vote against the approval of the merger agreement and the merger. Brokers
holding shares for beneficial owners cannot vote on the actions proposed in
this proxy statement/prospectus without the beneficial owners' specific
instructions. Accordingly, uBid stockholders are urged to return the enclosed
proxy card marked to indicate their vote.
You Do Not Have Appraisal Rights
Holders of uBid common stock are not entitled to appraisal rights with
respect to the merger.
Solicitation of Proxies and Expenses
In addition to solicitation by mail, the directors, officers and employees
of uBid may solicit proxies from uBid stockholders by telephone, facsimile,
email or in person. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward proxy materials to beneficial owners
and will be reimbursed for their reasonable expenses incurred in sending the
proxy materials to beneficial owners. uBid will bear its own expenses in
connection with the solicitation of proxies for its special meeting of
stockholders, except that CMGI and uBid each will pay one-half of all printing
and filing costs, fees and expenses, other than attorneys' fees, incurred in
connection with the registration statement, of which this proxy
statement/prospectus is a part.
Board Recommendation
The uBid board of directors has determined that the merger agreement and the
merger are fair to, and in the best interests of, uBid and its stockholders.
Accordingly, the uBid board of directors has unanimously approved the merger
agreement and has unanimously recommended that the uBid stockholders vote for
approval of the merger agreement and the merger. In considering the
recommendation of the uBid board of directors, uBid stockholders should be
aware that uBid's directors and officers have interests in the merger that are
different from, or in addition to, those of uBid's other stockholders, and that
CMGI has agreed to provide employment, severance and/or indemnification
arrangements to the directors and senior officers of uBid. See "The Merger--
Interests of Executive Officers and Directors of uBid in the Merger" on page
58.
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The matters to be considered at the special meeting are of great importance
to uBid stockholders. Accordingly, uBid stockholders are urged to read and
carefully consider the information presented in this proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
uBid stockholders should not send any stock certificates with their proxy
cards. A transmittal form with instructions for the surrender of uBid common
stock certificates will be mailed to uBid stockholders promptly after
completion of the merger. For more information regarding the procedures for
exchanging uBid stock certificates for CMGI stock certificates, see "The Merger
Agreement--Exchange of Certificates" on page 64.
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THE MERGER
Background of the Merger
On a regular basis since uBid's initial public offering, Gregory K. Jones,
its president and chief executive officer, has contacted other internet and
non-internet companies concerning the possibility of establishing various
business and strategic relationships with uBid.
On January 12, 2000, Mr. Jones contacted David S. Wetherell, the president
and chief executive officer of CMGI, to explore potential mutually beneficial
business arrangements between their two companies. In the course of their
conversation, Mr. Wetherell indicated interest in acquiring more information
about uBid.
On January 14, 2000, CMGI and uBid executed a mutual confidentiality
agreement. On that date Adriaan M. Zur Muhlen, director of mergers and
acquisitions of CMGI's business development group, and Robert F. Greenhill and
Timothy J. Haddock of Greenhill and Co., CMGI's investment banker, met with
Mr. Jones to discuss certain uBid financial and operating issues. During this
meeting Mr. Zur Muhlen also conveyed to Mr. Jones CMGI's potential interest in
acquiring uBid.
During the week of January 17, 2000, Mr. Jones continued to speak with Mr.
Zur Muhlen, other members of CMGI's business development group and Mr.
Greenhill and Mr. Haddock from Greenhill & Co. During several of the
conversations between Mr. ZurMuhlen and Mr. Jones, Mr. ZurMuhlen continued to
express a potential interest by CMGI to purchase all of uBid's outstanding
capital stock through a merger. In one conversation, Mr. ZurMuhlen and Mr.
Jones discussed a framework for possible negotiations between CMGI and uBid for
the two companies to enter into a merger agreement. After this particular
conversation, Mr. Jones also discussed the potential merger combination and the
framework for negotiations with uBid outside directors, Norm Wesley and Howard
Tullman.
On January 19, 2000, Mr. Jones contacted Merrill Lynch, uBid's investment
banker for its two prior public offerings, to discuss CMGI's interest in uBid.
On January 20, 2000, CMGI presented Mr. Jones with a term sheet and proposed
standstill letter, pursuant to which uBid would not negotiate with any other
party relating to an acquisition of uBid until February 15, 2000. Mr. Jones
circulated the proposed standstill letter to each member of the uBid board of
directors.
On January 22, 2000, the uBid board of directors held a special meeting to
discuss the proposed structure of the business combination as outlined in the
term sheet. At that meeting, Merrill Lynch reviewed the potential transaction,
including the financial aspects, with the uBid board of directors and discussed
potential alternatives available to uBid, including remaining as a stand-alone
entity. After extensive discussion, the uBid board of directors scheduled
another meeting for January 26, 2000 to continue to review whether to negotiate
with CMGI toward a merger combination. The uBid board of directors also asked
management and Merrill Lynch to continue reviewing a potential transaction and
to provide additional material to the board of directors concerning CMGI and
uBid.
On January 26, 2000, the uBid board of directors held a special meeting to
consider whether to proceed with the negotiations with CMGI. CMGI
representatives Mr. Wetherell, David Andonian, president of corporate
development of CMGI, and Mr. ZurMuhlen attended the first half of the meeting.
At Mr. Jones' request, Mr. Wetherell described CMGI's history, its business and
current portfolio of companies, its business strategy and the benefits he
perceived from combining the two companies. After Mr. Wetherell's presentation
and questions from the uBid board of directors, Messrs. Wetherell, Andonian and
ZurMuhlen excused themselves from the meeting. The uBid board of directors
discussed with Merrill Lynch and Morrison & Foerster LLP, uBid's legal advisor,
the potential business combination with CMGI. In particular, the uBid board of
directors discussed with Merrill Lynch possible business alternatives and the
potential value of the merger combination
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with CMGI. The board of directors discussed the potential transaction,
including the potential value of the business combination, uBid's financial
position, strategic alternatives, business plans and prospects. At the
conclusion of the meeting, the uBid board of directors, with one director
dissenting, approved proceeding with formal negotiation discussions with CMGI
with a view toward a merger combination based on the term sheet provided by
CMGI. The uBid board of directors authorized the officers of uBid to sign the
standstill letter and to permit CMGI to conduct due diligence on uBid. The uBid
board of directors also appointed a special committee of Messrs. Jones, Tullman
and Wesley to handle the day-to-day negotiations with CMGI and agreed to
formally engage Merrill Lynch as its financial advisor for the proposed
business combination with CMGI.
From January 27, 2000 to January 31, 2000, uBid and CMGI each conducted
additional due diligence and each furnished KPMG LLP, tax advisor for CMGI, and
PricewaterhouseCoopers LLP, tax advisor for uBid, information required for
analyzing under Section 355(e) of the Internal Revenue Code the impact of the
proposed business combination with CMGI on the spinoff of uBid from Creative
Computers Inc. in 1999.
During the first week in February 2000, the parties continued due diligence
review and negotiated the definitive terms of the proposed merger transaction.
On February 3, 2000, uBid's board of directors held a special meeting to review
the status of the negotiations and the proposed terms in drafts of the merger
agreement and related ancillary documents. At the February 3, 2000 meeting,
members of uBid's senior management, together with Morrison & Foerster, and
Merrill Lynch, reviewed with the uBid board of directors various aspects of the
proposed merger transaction, including uBid's strategic alternatives and the
financial aspects of the proposed merger transaction, including valuation, the
terms of the merger agreement and the directors' fiduciary duties under
Delaware law. In addition, Morrison & Foerster and Merrill Lynch presented to
and discussed with the board of directors their preliminary views of various
aspects of the merger combination.
On January 30, 2000, the CMGI board of directors held a meeting at which the
proposed merger was introduced and the preliminary term sheet was discussed. At
that meeting, Mr. ZurMuhlen, together with Greenhill & Co., reviewed with the
CMGI board of directors various aspects of the proposed merger transaction,
including the terms of the merger agreement and the indemnification obligation
of uBid to Creative Computers in connection with the spinoff of uBid from
Creative Computers.
On or about February 1, 2000 PricewaterhouseCoopers LLP provided the uBid
board of directors with a draft opinion opining that, based on the assumptions
set forth in that opinion, uBid should be able to rebut the presumption under
Section 355(e) of the Internal Revenue Code that the proposed merger was part
of a "plan" that would cause the 1999 distribution of uBid shares by Creative
Computers to become taxable to Creative.
On February 4, 2000, the CMGI board of directors met to review the status of
the negotiations and the proposed terms of the transaction. In addition, the
board of directors discussed the possibility that Creative Computers might
require that CMGI guarantee any tax indemnification obligation that uBid may
have to Creative Computers in connection with the spin-off before Creative
Computers would consent to the merger.
On February 6, 2000, the uBid board of directors held a special meeting at
which Morrison & Foerster and Merrill Lynch updated the board of directors on
the status of the negotiations, the changes to the merger agreement since the
February 3, 2000 meeting, and the remaining open items between the parties.
Merrill Lynch again reviewed the financial aspects of the merger combination
with the uBid board of directors.
On or about February 8, 2000, KPMG LLP provided CMGI with a draft opinion
opining that, based on the assumptions set forth in that opinion, the proposed
merger should not result in an adverse impact under Section 355(e) of the
Internal Revenue Code which would cause the spin-off of uBid to become taxable
to Creative Computers.
On February 9, 2000, the uBid board of directors held a special meeting at
which Morrison & Foerster reviewed the terms of the final merger agreement and
Merrill Lynch delivered its oral opinion, subsequently confirmed by delivery of
a written opinion dated February 9, 2000, that as of such date and based on and
subject to the factors and assumptions stated in its written opinion, the
exchange ratio in the merger was fair from a financial point of view to the
holders of uBid common stock. After deliberation, the uBid board of
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directors unanimously approved the merger agreement and related ancillary
documents and authorized the execution of the merger agreement and related
ancillary documents, subject to obtaining the consent to the transaction by
Creative Computers. Later that evening, the Creative Computers board of
directors met and consented to the proposed merger.
On February 9, 2000, the CMGI board of directors held a special meeting at
which the board reviewed the status of the negotiations, the proposed terms of
the transactions and certain due diligence issues. After deliberation, the CMGI
board of directors unanimously approved, the merger agreement and related
ancillary documents and authorized the execution of the merger agreement and
related ancillary documents.
Prior to the opening of the stock market on February 10, 2000, CMGI and uBid
announced the execution of the merger agreement in a joint press release.
CMGI's Reasons for the Merger
The CMGI board of directors unanimously concluded that the merger was fair
to, and in the best interests of, CMGI and its stockholders.
The decision by the CMGI board of directors was based on several potential
benefits of the merger that it believes will contribute to the success of CMGI
through highly synergistic opportunities with other companies now in the CMGI
network. These potential benefits include:
. creating a new distribution channel for business-to-business and business-
to-consumer e-commerce companies in the CMGI network and new sources of
merchandise for uBid's auctions;
. utilizing CMGI's existing network of sites and its marketing and advertising
properties to drive traffic to uBid's Website;
. integrating uBid's auction and merchandising capabilities into the
enterprise arena through CMGI's extensive network of business-to-business
affiliates;
. leveraging uBid's merchandising and inventory management capabilities across
CMGI's e-commerce companies;
. increasing CMGI's customer base; and
. accelerating CMGI's growth rate.
The CMGI board of directors reviewed a number of factors in evaluating the
merger, including, but not limited to, the following:
. the consideration uBid
. historical information concerning stockholders will receive in the
CMGI's and uBid's respective merger in light of comparable
business focus, financial merger transactions;
performance and condition,
operations, technology and . the impact of the merger on
management; CMGI's customers and employees,
as well as CMGI's majority owned
. CMGI management's view of the subsidiaries within the CMGI
financial condition, results of group of Internet companies;
operations and businesses of CMGI
and uBid before and after giving . results of the due diligence
effect to the merger and the investigation conducted by CMGI's
determination by the CMGI board management, accountants and
of directors of the merger's counsel; and
effect on stockholder value;
. the expectation that the merger
. current financial market will be accounted for as a
conditions and historical stock purchase for accounting purposes.
market prices, volatility and
trading information;
. the terms of the merger agreement and
the related ancillary documents;
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The CMGI board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including the following:
. the risk that the merger will . loss of customers of uBid who may
disqualify Creative Computer's terminate their relationship with
spinoff of uBid as a tax-free uBid as a result of the merger
distribution, triggering an because they deem themselves
approximate $100 million competitors of CMGI;
indemnification obligation for
uBid; . loss of certain uBid employees if
after the merger some of the
. the risk that the 0.2628 exchange activities and management of uBid
ratio will not accurately reflect moves from the Midwest to the
the relative values of uBid East Coast; and
common stock and CMGI common
stock at the closing of the . other applicable risks described
merger; in this proxy
statement/prospectus under "Risk
. the risk that the potential Factors" beginning on page 7.
benefits of the merger may not be
realized;
. the possibility that the merger
may not be consummated, even if
approved by uBid stockholders;
. exposure to patents and other
intellectual property issued to
competitors of uBid that may
restrict uBid's ability to
conduct its business;
The CMGI board of directors concluded, however, that, on balance, the
merger's potential benefits to CMGI and its stockholders outweighed the
associated risks. The discussion of the information and factors considered by
the CMGI board of directors is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the merger,
the CMGI board of directors did not find it practicable to, and did not
quantify or otherwise assign relative weight to, the specific factors
considered in reaching its determination.
uBid's Reasons for the Merger; Recommendation of the uBid Board of Directors
The uBid board of directors has determined that the terms of the merger and
the merger agreement are fair to, and in the best interests of, uBid and its
stockholders. Accordingly, the uBid board of directors has approved the merger
agreement and the consummation of the merger and recommends that you vote FOR
approval of the merger agreement and the merger.
In reaching its decision, the uBid board of directors identified several
potential benefits of the merger, the most important of which included:
. a significant step forward in . the opportunity for uBid
uBid's strategy of becoming a stockholders as stockholders of
leading provider of online CMGI to diversify their
auctions; investment across the large
number of Internet-focused
. leveraging the uBid auction model companies in CMGI's portfolio;
across CMGI's portfolio of
companies; . opportunities for uBid to grow
its business through
. the ability of uBid stockholders relationships with CMGI
to continue to participate in the affiliates and customers;
future growth and success of uBid
through their receipt of shares . the potential to increase uBid's
of CMGI common stock in the ability to compete effectively in
merger; the rapidly emerging on-line
auction industry;
. the greater financial resources
available to uBid as a subsidiary
of CMGI than would be available
to it as a stand-alone company;
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. the implied offer price for uBid . the increased liquidity created
of $32.00 based on the exchange for uBid stockholders by
ratio in the merger and the receiving shares in a larger
average closing price of CMGI for publicly traded company; and
the five days ended on February
9, 2000 represented a 19.9% . the expectation that the merger
premium over the closing price of will be treated as a
uBid common stock as reported on reorganization to uBid and its
the Nasdaq National Market on stockholders.
February 9, 2000, the day on
which CMGI and uBid entered into
the merger agreement, and a 21.1%
premium over the average closing
price of uBid common stock for
the 1-month period ended on
February 9, 2000;
The uBid board of directors carefully considered a range of strategic
alternatives, including potential business combinations and relationships with
CMGI, before approving the merger agreement and the merger. In reaching its
decision to approve the merger, the uBid board of directors consulted with
senior management, as well as legal counsel, independent accountants and
financial advisors. The uBid board of directors considered various factors in
its deliberations, including:
. the current and prospective . the impact of the merger on
economic and industry environment uBid's customers and employees;
in which uBid operates, including
the trend of consolidation and . the results of due diligence
the ability of larger industry conducted by uBid's management
participants to increase market and financial advisors;
share;
. the complementary nature of the
. historical information concerning technology, products, services
CMGI's businesses, prospects, and customer base of uBid and
financial performance and CMGI;
condition, operations,
technologies, management and . uBid's prospects as an
competitive positions, including independent company;
public reports filed with the
SEC; . the current tax limitations on
uBid's ability to raise funds
. the belief that the terms of the through issuances of equity and
merger agreement are fair and convertible debt securities; and
reasonable;
. Merrill Lynch's opinion, more
. the potential for parties other fully described in "The Merger--
than CMGI to acquire or enter Opinion of Financial Advisor to
into strategic relationships with uBid," that as of the date of
uBid; such opinion and based on and
subject to the assumptions made,
. the fairness and reasonableness matters considered and limits of
to uBid of the terms of the review undertaken, the exchange
merger agreement and related ratio in the merger was fair,
agreements, which were negotiated from a financial point of view,
at arm's length; to the holders of uBid common
stock.
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The uBid board of directors also identified and considered a number of
uncertainties and risks concerning the merger, including:
. the risk that the per share value . the risk that the benefits sought
of consideration actually in the merger might not be
received by uBid stockholders achieved;
might be significantly less than
the price per share implied by
the exchange ratio immediately
prior to the announcement of the
merger because the exchange ratio
will not be adjusted for changes
in market price of either CMGI
common stock or uBid common
stock;
. the risk that uBid might suffer
employee attrition or fail to
attract key personnel due to
uncertainties associated with the
merger,
. the difficulty of and risks
associated with the integration
of a different management and
. the risk that the merger will organizational structure; and
disqualify Creative Computer's
spinoff of uBid as a tax-free . the other applicable risks
distribution, triggering an described in this proxy
approximate $100 million statement/prospectus under "Risk
indemnification obligation for Factors" beginning on page 7.
uBid;
. the risk that the merger might
not be consummated;
As a result of the foregoing considerations, the uBid board of directors
determined that the potential advantages of the merger outweighed the benefits
of remaining as a stand-alone company. The uBid board of directors believes
that the combined company will have a greater opportunity than uBid alone to
successfully compete in its industry.
In view of the variety of factors considered in connection with its
evaluation of the merger, the uBid board of directors did not find it
practicable to, and accordingly did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, many of the factors contained elements which may have both positive
and negative effects on the fairness of the merger. Except as described above,
the uBid board of directors, as a whole, did not analyze each individual factor
separately to determine its impact on the fairness of the merger. Consequently,
individual members of the uBid board of directors may have given different
weight to different factors and may have viewed differently each factor's
effect on the fairness determination.
For the reasons discussed above, the uBid board of directors has unanimously
approved the merger agreement and has determined that the merger is advisable
and fair to, and in the best interests of, uBid and its stockholders and
unanimously recommends that uBid stockholders vote for approval of the merger
agreement and the merger.
In considering the recommendation of the uBid board of directors with
respect to the merger agreement and the merger, uBid stockholders should be
aware that directors and officers of uBid have interests in the merger that are
different from, or are in addition to, the interests of uBid stockholders
generally. Please see "The Merger--Interests of Executive Officers and
Directors of uBid in the Merger" on page 58.
Opinion of Financial Advisor to uBid
uBid retained Merrill Lynch, Pierce, Fenner & Smith Incorporated to act as
its exclusive financial advisor in connection with the proposed merger. On
February 9, 2000, Merrill Lynch delivered to the uBid board of directors an
oral opinion, subsequently confirmed by delivery of a written opinion dated
February 9, 2000, to the effect that, as of the date of the opinion, and based
upon and subject to the factors and assumptions set forth in the opinion, the
exchange ratio was fair, from a financial point of view, to the holders of uBid
common stock.
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The full text of Merrill Lynch's opinion, dated February 9, 2000, which sets
forth the assumptions made, matters considered, and qualifications and
limitations on the review undertaken by Merrill Lynch, is attached as Appendix
B to this document and is incorporated into this document by reference. The
summary of Merrill Lynch's opinion set forth below is qualified in its entirety
by reference to the full text of the opinion. uBid stockholders are urged to
read the opinion carefully in its entirety.
Merrill Lynch's opinion was delivered to the uBid board of directors for its
information and is directed only to the fairness to the holders of uBid common
stock, from a financial point of view, of the exchange ratio, does not address
any other aspect of the proposed merger, including the merits of the underlying
decision by uBid to engage in the merger, and does not constitute a
recommendation to any uBid stockholder as to how the stockholder should vote as
to any matter relating to the merger.
In preparing its opinion to the uBid board of directors, Merrill Lynch
performed a variety of financial and comparative analyses, including those
described below. The summary set forth below does not purport to be a complete
description of the analyses underlying Merrill Lynch's opinion or the
presentation made by Merrill Lynch to the uBid board of directors. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Merrill
Lynch did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Merrill Lynch believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and factors, or focusing on information presented in tabular
format, without considering all the analyses and factors or the narrative
description of the analyses, would create a misleading or incomplete view of
the process underlying its opinion.
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Merrill Lynch, uBid or CMGI. Any estimates contained in the analyses performed
by Merrill Lynch are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the value of businesses or securities
do not purport to be appraisals or to reflect the prices at which such
businesses or securities might actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. In addition, as
described above, Merrill Lynch's opinion was among several factors taken into
consideration by the uBid board of directors in making its determination to
approve the merger agreement and the merger. Consequently, Merrill Lynch's
analyses should not be viewed as determinative of the decision of the uBid
board of directors or uBid's management with respect to the fairness of the
exchange ratio set forth in the merger agreement.
In arriving at its opinion, Merrill Lynch, among other things, did the
following:
(1) reviewed publicly available business and financial information
relating to CMGI and uBid that Merrill Lynch deemed to be relevant;
(2) reviewed information, including financial forecasts, relating to the
business, earnings, cash flows, assets, liabilities and prospects of uBid
and CMGI, furnished to Merrill Lynch by uBid and CMGI;
(3) conducted discussions with members of senior management and
representatives of uBid and CMGI concerning the matters described in
clauses (1) and (2) above, as well as their businesses and prospects both
before and after giving effect to the merger;
(4) reviewed the market prices for uBid's common stock and CMGI's common
stock and the valuation multiples for uBid's common stock and compared them
with those of publicly traded companies that Merrill Lynch deemed to be
relevant and also reviewed the valuation multiples of publicly traded
companies that Merrill Lynch deemed to be relevant to CMGI's operating
companies;
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(5) reviewed the results of operations of uBid and compared them with
those of publicly traded companies that Merrill Lynch deemed to be
relevant;
(6) compared the proposed financial terms of the merger with the
financial terms of other transactions that Merrill Lynch deemed to be
relevant;
(7) participated in discussions and negotiations among representatives
of uBid and CMGI and their respective legal advisors and, in the case of
CMGI, its financial advisors;
(8) reviewed the merger agreement; and
(9) reviewed other financial studies and analyses and took into account
other matters as Merrill Lynch deemed necessary, including Merrill Lynch's
assessment of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch or publicly
available, and has not assumed any responsibility for independently verifying
such information and Merrill Lynch has not undertaken an independent evaluation
or appraisal of any of the assets or liabilities of CMGI or uBid. In addition,
Merrill Lynch did not assume any obligation to conduct, nor did it conduct, any
physical inspection of the properties or facilities of CMGI or uBid. With
respect to the financial forecast information furnished to or discussed with
Merrill Lynch by uBid or CMGI, Merrill Lynch assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of the managements of uBid or CMGI as to the expected future
financial performance of uBid or CMGI, as the case may be. Merrill Lynch
further assumed that the merger will qualify as a tax-free reorganization for
United States federal income tax purposes.
Merrill Lynch's opinion is necessarily based upon market, economic and other
conditions as they existed on, and on the information made available to Merrill
Lynch as of, the date of the opinion. Merrill Lynch did not express any opinion
as to the prices at which the uBid common stock will trade subsequent to the
merger. In connection with the preparation of its opinion, Merrill Lynch was
not authorized by uBid or the uBid board of directors to solicit, nor did
Merrill Lynch solicit, third-party indications of interest for the acquisition
of all or any part of uBid. Although Merrill Lynch evaluated the fairness, from
a financial point of view, of the exchange ratio, Merrill Lynch was not
requested to, and did not, recommend the specific consideration payable in the
merger, which consideration was determined through negotiations between uBid
and CMGI and approved by the uBid board of directors. No other limitation was
imposed on Merrill Lynch with respect to the investigations made or procedures
followed by Merrill Lynch in rendering its opinion.
Financial Analysis. The following is a summary of the material analyses
performed by Merrill Lynch in connection with its opinion to the uBid board of
directors dated February 9, 2000. Some of the financial analyses summarized
below include information presented in tabular format. In order to fully
understand Merrill Lynch's financial analyses, the tables must be read together
with the text of the summary. The tables alone do not constitute a complete
description of the financial analyses. Considering the data set forth below
without considering the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Merrill Lynch's financial analyses.
uBid
Selected Companies Analysis. Merrill Lynch compared financial, operating and
stock market data of uBid to corresponding data of the following publicly
traded companies in the on-line auction and e-commerce industry:
. Egghead.com
. Value America
. Cyberian Outpost
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Merrill Lynch reviewed equity value (i) per unique visitor for December 1999
and per the average daily page views for December 1999 and per registered user
and (ii) as a multiple of estimated revenue for calendar years 1999 through
2001. All multiples were based on closing stock prices on February 8, 2000.
Estimated financial data for the selected companies was based on publicly
available research analysts' estimates and estimated financial data for uBid
was based on estimates from uBid's management and traffic statistics for the
selected companies and for uBid were from Media Metrix and company press
releases. This analysis indicated the following implied per share equity
values, as compared with $32.00 per uBid share price implied by the merger:
<TABLE>
<CAPTION>
Average
Daily Estimated Estimated Estimated
Unique Page Registered 1999 2000 2001
Visitors Views Users Revenue Revenue Revenue
-------- ------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Egghead.com.......... $19.12 $22.98 $31.19 $18.66 $24.64 $30.28
Value America........ $44.18 $56.69 $37.16 $25.25 $21.78 $22.43
Cyberian Outpost..... $19.59 $39.65 $35.45 $22.33 $25.55 NA
</TABLE>
None of the selected companies is directly comparable to uBid. Accordingly,
an analysis of the results of the Selected Companies Analysis involves complex
considerations of the selected companies and other factors that could affect
the public trading value of uBid and the selected companies.
Selected Merger and Acquisition Analysis. Using publicly available
information, Merrill Lynch analyzed Onsale's acquisition of Egghead.com, a
retailer of computer hardware and software. Merrill Lynch reviewed the implied
purchase price of the equity in the selected transaction per unique visitor and
as a multiple of latest twelve months and next twelve months sales. All
multiples were based on financial information available at the time the
transaction was announced. This analysis indicated the following implied
approximate per share equity values, as compared with $32.00 per uBid share
implied by the merger:
<TABLE>
<CAPTION>
Sales
---------------------------------------------------
Unique Visitors Latest Twelve Months Next Twelve Months
--------------- -------------------- ------------------
<S> <C> <C>
$24.90 $43.36 $31.08
</TABLE>
The companies and selected transaction are not identical to uBid or the
proposed merger. Accordingly, an analysis of the results of the Selected Merger
and Acquisition Analysis involves complex considerations of the companies
involved and the transaction and other factors that could affect the
acquisition value of the companies and uBid.
Discounted Cash Flow Analysis. Merrill Lynch estimated the stand-alone,
unlevered, after-tax free cash flows that uBid could produce based on two
scenarios. The first scenario, the management case, was based on estimates of
the management of uBid for the fiscal years 2000 through 2004 and the second
scenario, the research analysts' case, was based on publicly available research
analyst estimates for the fiscal years 2000 through 2003. Merrill Lynch then
estimated terminal values based on a range of multiples of net income of either
estimated fiscal year 2003 or 2004, as the case may be, of 30.0x to 35.0x. The
free cash flows and terminal values were then discounted to present value using
discount rates of 30% to 34%. This analysis indicated implied per share equity
values for uBid of approximately $27.82 to $37.13, using the management case,
and $17.07 to $22.08, using the research analyst case, as compared with $32.00
per uBid share implied by the merger.
CMGI
Sum-of-the-Parts Analysis. Merrill Lynch analyzed the aggregate equity value
of CMGI's fully diluted interests in its operating companies and CMGI's fully
diluted ownership interests in its private and public portfolio companies.
Estimated financial data for CMGI's operating companies and privately held
portfolio
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<PAGE>
companies was based on publicly available research analysts' estimates and
estimates of CMGI's management. Merrill Lynch reviewed equity value for CMGI's
operating companies as a multiple of estimated fiscal year 2000 revenue.
Merrill Lynch calculated the aggregate equity value of CMGI's interest in its
public portfolio companies based on the closing stock prices on February 8,
2000 and the cost-basis of CMGI's interest in the private portfolio companies.
This analysis indicated an implied equity reference range for CMGI of
approximately $108.72 to $134.25 per share.
Other Factors
In the course of preparing its opinion, Merrill Lynch also reviewed and
considered other information and data, including the following:
. the trading characteristics of CMGI and uBid;
. historical market prices and trading volumes for CMGI common stock and uBid
common stock;
. the relative exchange ratio of CMGI and uBid over the relevant period; and
. publicly available research analysts' estimates of the twelve-month price
per share targets for CMGI common stock.
Interests of Merrill Lynch in the Merger
Pursuant to the terms of Merrill Lynch's engagement, uBid has agreed to pay
Merrill Lynch for its financial advisory services in connection with the merger
an aggregate fee of $2.3 million payable in cash upon the closing of the
merger. uBid also has agreed to reimburse Merrill Lynch for the reasonable fees
and expenses of legal counsel provided, however, that except with regard to any
of the indemnification provisions or procedures contained in the engagement
letter, the fees and expenses of Merrill Lynch's legal counsel shall not exceed
$50,000 without uBid's prior consent, which consent shall not be unreasonably
withheld, and to indemnify Merrill Lynch and related persons and entities
against liabilities, including liabilities under the federal securities laws,
arising out of Merrill Lynch's engagement.
uBid retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm. Merrill Lynch, as part of its investment banking business,
is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
Merrill Lynch and its affiliates, from time to time, have provided financing
services to uBid for which they have received customary compensation, including
in connection with uBid's initial public offering on December 9, 1998, and its
follow-on offering on September 29, 1999. In connection with those offerings,
Merrill Lynch received aggregate underwriting commissions and fees of
approximately $2.1 million. In the ordinary course of business, Merrill Lynch
and its affiliates may actively trade uBid common stock, as well as CMGI common
stock and other securities of CMGI, for their own accounts and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
Interests of Executive Officers and Directors of uBid in the Merger
When considering the recommendation of the uBid board of directors, uBid
stockholders should be aware that the officers and directors of uBid have
interests in the merger that differ from, or are in addition to, those of uBid
stockholders. The uBid board of directors was aware of these potential
conflicts and considered them in reaching its decision to approve the merger
agreement and recommend that uBid stockholders vote for approval of the merger
agreement and the merger.
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<PAGE>
uBid Options
As of March 1, 2000, uBid's executive officers and directors, and their
respective affiliates, held options to purchase approximately 1,310,814
shares of uBid common stock, at exercise prices ranging from $.27 to $71.13 per
share, of which 1,061,497 options were unvested. As a result of the merger all
outstanding uBid options to purchase uBid common stock will terminate; provided
that CMGI will offer each holder of an outstanding uBid option the opportunity
to have the vested portion of any unexercised uBid option exchanged as of the
effective time for an option to acquire on the same terms and conditions as
were applicable under the uBid option immediately prior to the effective time
of the merger, the same number of shares of CMGI common stock as the holder of
the uBid option would have been entitled to receive pursuant to the merger if
the holder had exercised the vested portion of the option in full immediately
prior to the effective time (rounded down to the nearest whole number), at a
price per share (rounded up to the nearest whole cent) equal to (y) the
aggregate exercise price for the shares of uBid common stock purchasable
pursuant to the respective uBid option immediately prior to the effective time
divided by (z) the number of full shares of CMGI common stock deemed
purchasable pursuant to the uBid option in accordance with the foregoing.
Director Options
uBid has granted each of its non-employee directors options to purchase a
total of 30,325 shares of uBid common stock at exercise prices ranging from
$6.82 to $62.50 per share. These options will accelerate and become fully
vested immediately prior to the effective time of the merger and will
thereafter be treated as described above.
Employment Agreements
uBid entered into an employment agreement dated December 20, 1999, as
amended, with Gregory K. Jones, president and chief executive officer of uBid.
Pursuant to this agreement, Mr. Jones receives an annual base salary in the
amount of $250,000, subject to increase or decrease by mutual agreement or
pursuant to the board of directors' annual review policy and budgeting
procedures. Mr. Jones is also eligible to receive a pre-established annual
bonus, at a target amount of his then-current salary, based on the attainment
of objectives mutually agreed to by Mr. Jones and the uBid board of directors.
In the event his employment is terminated by uBid without cause or by him for
good reason at any time prior to the first anniversary of the consummation of
the merger, Mr. Jones is entitled to six months severance pay, continued
benefits coverage through the six month anniversary of the termination,
outplacement services not to exceed $10,000, and the bonus that would have been
paid at the later of the six month anniversary of his termination or the end of
the fiscal year. This bonus will be the higher of his previous year's bonus,
the target bonus for the year in which the termination occurs, or the actual
bonus attained for the fiscal year in which such termination occurs.
Pursuant to his employment agreement, in 1997, Mr. Jones was granted an
option to purchase 366,494 shares of uBid common stock at an exercise price of
$0.27 per share. In 1999, Mr. Jones was granted an option to purchase 200,000
shares of uBid common stock at an exercise price of $36.63 per share. Upon
consummation of the merger pursuant to his employment agreement with uBid, upon
a merger, sale of substantially all of the assets or similar transaction
involving uBid that results in a change of control, Mr. Jones' options will
become fully vested; however, Mr. Jones has agreed with uBid and CMGI to amend
the employment agreement to provide that, upon consummation of the merger, all
unvested options issued to Mr. Jones prior to the effective time of the merger
will vest only as to the next annual or next four quarterly installments (as
applicable), together with prorated additional vesting with respect to the
number of months that have elapsed since the last annual or quarterly
installment.
uBid has also entered into an employment agreement with Kenneth Dotson, vice
president of marketing, dated November 30, 1999. The agreement with Mr. Dotson
is terminable by either party at any time. Pursuant to this agreement, Mr.
Dotson receives base salary in the amount of $3,173/week in accordance with
uBid payroll practices. If Mr. Dotson's employment agreement is terminated
without cause, he will receive an amount equal to three months of his base
compensation as severance and his options that would have vested in that year
will accelerate if he is terminated.
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<PAGE>
Pursuant to his employment agreement, in 1999 Mr. Dotson was granted an
option to purchase 180,000 shares of uBid common stock at an exercise price of
$37.00 per share. Upon a merger, sale of substantially all of the assets or
similar transaction involving uBid that results in a change of control, Mr.
Dotson's option will become fully vested.
Thomas Werner, vice president and chief financial officer of uBid, has the
right to receive three months' salary if his employment is terminated by uBid
without cause. Upon a change of control of uBid, all outstanding options held
by Mr. Werner will become fully vested.
In addition, Timothy E. Takesue, vice president merchandising of uBid, has
the right to receive three months' salary if his employment is terminated by
uBid without cause at any time prior to the first anniversary of the
consummation of the merger. Pursuant to an agreement with uBid, upon a merger,
sale of substantially all of the assets or similar transaction involving uBid
that results in a change of control, Mr. Takesue's options will become fully
vested; however, Mr. Takesue has agreed with uBid and CMGI to amend the
agreement to provide that, upon consummation of the merger, all unvested
options issued to Mr. Takesue prior to the effective time of the merger will
vest only as to the next annual or next four quarterly installments (as
applicable), together with prorated additional vesting with respect to the
number of months that have elapsed since the last annual or quarterly
installment.
Additional Agreements
CMGI has offered to enter into an agreement with each of uBid's executive
officers pursuant to which the officer would receive options to purchase shares
of uBid common stock following the completion of the merger at an exercise
price of $8.25 per share, assuming a four-for-one stock split, which options
will vest as to 25% on the first anniversary of the closing of the merger and
1/48th per month thereafter until the options are fully vested on the fourth
anniversary of the effective time of the merger. In addition, the agreements
provide that such uBid officer would agree (i) to waive all existing severance
and post-employment benefits to which the officer was entitled prior to the
date of the merger, (ii) to enter into a lock-up agreement with respect to
shares of uBid owned by the officer, (iii) to enter into a non-competition and
non-disclosure agreement with CMGI, and (iv) that all unvested options issued
to the officer prior to the effective time of the merger will vest only as to
the next annual or quarterly installment, together with prorated additional
vesting with respect to the number of months that have elapsed since the last
annual or quarterly installment. As of March 1, 2000, CMGI had offered to enter
into the foregoing agreements with the following uBid officers and, subject to
the consummation of the merger, their continued employment through the closing
and certain other conditions, they would receive options to purchase the
following number of shares of uBid after the effective time of the merger:
Gregory K. Jones: 700,000 shares; Thomas E. Werner: 300,000 shares; Kenneth
Dotson: 300,000 shares; Joel Ludvigsen: 150,000 shares; Jason Maclean: 150,000
shares; Paul Stolarski: 250,000 shares; and Timothy Takesue: 300,000 shares.
Treatment of uBid Common Stock
In the merger, each share of uBid common stock will be exchanged for 0.2628
shares of CMGI common stock.
Holders of uBid common stock should not send their uBid common stock
certificates at this time. Following the effective time of the merger, holders
of uBid common stock will receive instructions for the surrender and exchange
of such stock certificates.
Accounting Treatment of the Merger
The merger will be accounted for by CMGI using the purchase method of
accounting for a business combination. Under this method of accounting, the
assets and liabilities of uBid, including intangible assets, will be recorded
at their fair market values and included in the financial statements of CMGI.
The aggregate merger consideration will be allocated based on the fair values
of the assets acquired and the liabilities
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<PAGE>
assumed. Any excess of cost over the fair value of the net tangible assets
acquired from uBid will be recorded as goodwill and other intangible assets and
will be amortized by charges to operations under generally accepted accounting
principles. These allocations will be made based upon valuations and other
studies that have not yet been finalized. The results of operations and cash
flows of uBid will be included in CMGI's financial statements prospectively as
of the consummation of the merger.
Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the
acquisition of shares of uBid common stock in the merger by CMGI may not be
consummated until notifications have been furnished to the Federal Trade
Commission and the Antitrust Division of the Department of Justice and
specified waiting period requirements have been satisfied. uBid and CMGI each
expects to file a pre-merger notification and report form with the FTC and the
Antitrust Division on or about March 10, 2000.
At any time before the effective time of the merger, the FTC, the Antitrust
Division or a private person or entity could seek under antitrust laws, among
other things, to enjoin the merger and, any time after the effective time of
the merger, to cause CMGI to divest itself, in whole or in part, of the
surviving corporation of the merger or of certain businesses conducted by the
surviving corporation. There can be no assurance that a challenge to the merger
will not be made or that, if such a challenge is made, CMGI will prevail.
Material United States Federal Income Tax Considerations
In the opinion of each of Hale and Dorr LLP, counsel to CMGI, and
PricewaterhouseCoopers LLP, tax advisor to uBid, the discussion below
summarizes certain material United States federal income tax considerations
generally applicable to United States holders of uBid common stock who,
pursuant to the merger, exchange their uBid common stock solely for CMGI common
stock and, if applicable, cash paid in lieu of a fractional share of CMGI
common stock. The opinions of Hale and Dorr LLP and PricewaterhouseCoopers LLP
described in the preceding sentence are included as exhibits to the
registration statement of which this proxy statement/prospectus forms a part.
The discussion below and the opinions of Hale and Dorr LLP and
PricewaterhouseCoopers LLP are based upon current provisions of the Internal
Revenue Code, currently applicable U.S. Treasury regulations promulgated
thereunder, and judicial and administrative decisions and rulings. The opinions
of Hale and Dorr LLP and PricewaterhouseCoopers LLP are subject to certain
limitations and qualifications and are based on the facts, representations and
assumptions set forth or referred to in such opinions, including
representations contained in certificates executed by officers of CMGI and
uBid. This discussion and the opinions are not binding on the Internal Revenue
Service or the courts, and there can be no assurance that the Internal Revenue
Service or the courts will not take a contrary view. No ruling from the
Internal Revenue Service has been or will be sought. Future legislative,
judicial or administrative changes or interpretations could alter or modify the
statements and conclusions set forth herein, and any such changes or
interpretations could be retroactive and could affect the tax consequences of
the merger to CMGI, uBid, or the stockholders of CMGI and uBid.
The discussion below does not purport to deal with all aspects of federal
income taxation that may affect particular stockholders in light of their
individual circumstances, and is not intended for stockholders subject to
special treatment under federal income tax law. Stockholders subject to special
treatment include, but are not limited to, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign persons,
stockholders who are subject to the alternative minimum tax provisions of the
Internal Revenue Code, stockholders who hold their stock as part of a hedge,
appreciated financial position, straddle or conversion transaction,
stockholders who do not hold their stock as capital assets and stockholders who
have acquired their stock upon the exercise of employee options or otherwise as
compensation. In addition, the discussion below and such opinions do not
consider the effect of any applicable state, local or foreign tax laws and
further do not consider any tax consequences of transactions effectuated prior
or subsequent to, or concurrently with, the merger, including without
limitation any transaction in which shares of uBid common stock are acquired or
shares of CMGI common stock are disposed of, or the tax consequences of the
exchange by CMGI of outstanding options and subscriptions to acquire uBid
common stock.
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Holders of uBid common stock are urged to consult their tax advisors as to
the particular tax consequences to them of the transactions described in this
proxy statement/prospectus, including the applicability and effect of any
state, federal, local or foreign tax laws, and of changes in applicable tax
laws.
Consummation of the merger is conditioned upon CMGI's receipt of an opinion
from Hale and Dorr LLP, CMGI's counsel, and uBid's receipt of an opinion from
PricewaterhouseCoopers LLP, uBid's tax advisor, based on facts, representations
and assumptions stated in such opinions, to the effect that the merger will
qualify for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code. If uBid or CMGI waives this
condition to consummation of the merger, uBid will resolicit proxies from its
stockholders with respect to the merger. In connection with this
resolicitation, uBid will inform its stockholders of any changes in the tax
consequences of the merger to uBid and its stockholders. As a result of the
merger being treated as a reorganization, subject to the limitations and
qualifications referred to herein, the following tax consequences will result:
. the aggregate tax basis of the
. no gain or loss will be CMGI common stock so received by
recognized by CMGI, uBid or the uBid stockholders in the merger
transitory subsidiary solely as a will be the same as the aggregate
result of the merger; tax basis of the uBid common
stock surrendered in exchange,
. no gain or loss will be reduced by any tax basis
recognized by the holders of uBid allocable to a fractional share
common stock upon the receipt of for which cash is received; and
CMGI common stock solely in
exchange for such uBid common . the holding period with respect
stock in the merger; to CMGI common stock received by
each uBid stockholder in the
. cash payments received by holders merger will include the holding
of uBid common stock in lieu of a period for the uBid common stock
fractional share of CMGI common surrendered in exchange, provided
stock will result in capital gain that the uBid common stock
(or loss) measured by the surrendered is held as a capital
difference between the cash asset at the effective time of
payment received and the tax the merger.
basis in the fractional shares of
CMGI common stock. Such gain (or
loss) will be long-term capital
gain (or loss) if the uBid
stockholder has held the shares
of uBid common stock for more
than one year at the effective
time of the merger;
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in a uBid stockholder recognizing gain or
loss with respect to each share of uBid common stock surrendered in the merger
equal to the difference between the uBid stockholder's basis in such share and
the fair market value, as of the effective time of the merger, of the CMGI
common stock received in exchange. In such event, a uBid stockholder's
aggregate tax basis in the CMGI common stock received would equal its fair
market value as of the effective time of the merger, and the uBid stockholder's
holding period for such stock would begin the day after the merger.
Nasdaq National Market Quotation
It is a condition to the closing of the merger that the shares of CMGI
common stock to be issued in the merger be listed on the Nasdaq National
Market. CMGI intends to file a notification form for listing of additional
shares promptly following the date of this proxy statement/prospectus.
Resales of CMGI Common Stock Issued in Connection with the Merger; Affiliate
Agreements; Lock-up Agreements
CMGI common stock issued in connection with the merger will be freely
transferable, except that shares of CMGI common stock received by persons who
are deemed to be "affiliates," as such term is defined in Rule 144 under the
Securities Act, of uBid at the effective time of the merger may be resold by
them only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act or as otherwise permitted
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<PAGE>
under the Securities Act. Each executive officer and director and those who
may be an affiliate of uBid is expected to execute a written affiliate
agreement providing, among other things, that such person will not offer,
sell, transfer or otherwise dispose of any of the shares of CMGI common stock
obtained as a result of the merger except in compliance with the Securities
Act and the related rules and regulations.
In addition, certain stockholders and optionholders of uBid have agreed to
certain limitations with respect to the timing and the amount of the shares of
CMGI common stock that they may sell or transfer that they are to be issued in
connection with the merger.
No Appraisal Rights
Appraisal rights under Delaware law are not available to stockholders of a
Delaware corporation if:
. the securities of the corporation are listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc.; and
. the stockholders of the corporation are not required to accept in
exchange for their stock anything other than (a) stock in another
corporation listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the NASD and (b) cash in lieu of fractional shares.
uBid stockholders will not have appraisal rights under Delaware law with
respect to the merger because:
. uBid common stock is traded on the Nasdaq National Market;
. uBid stockholders are being offered shares of CMGI common stock which is
traded on the Nasdaq National Market; and
. uBid stockholders are being offered cash in lieu of fractional shares.
Delisting and Deregistration of uBid's Common Stock Following the Merger
If the merger is consummated, uBid's common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Securities Exchange
Act of 1934, as amended.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement and the stockholder agreement, copies of which are attached as Annex
A to this proxy statement/prospectus and are incorporated by reference into
this summary. The summary descriptions are not complete and are qualified in
their entireties by reference to the merger agreement and the stockholder
agreement. We urge all uBid stockholders to read these agreements for a more
complete description of the terms and conditions of the merger and related
matters.
General
Following the adoption of the merger agreement and approval of the merger by
uBid stockholders and the satisfaction or waiver of the other conditions to the
merger, the transitory subsidiary, a wholly owned subsidiary of CMGI, will
merge into uBid. uBid will survive the merger as a wholly owned subsidiary of
CMGI. If all conditions to the merger are satisfied or waived, the merger will
become effective at the time of the filing by the surviving corporation of a
duly executed certificate of merger with the Delaware secretary of state.
The Exchange Ratio and Treatment of uBid Common Stock
At the effective time of the merger, generally, each issued and outstanding
share of uBid common stock will be converted into the right to receive 0.2628
shares of CMGI common stock. However, any shares owned by uBid and any shares
owned by CMGI or the transitory subsidiary will be cancelled without
conversion. CMGI will adjust the exchange ratio to reflect any
reclassification, stock split, stock dividend, reorganization or other similar
change with respect to CMGI common stock or uBid common stock occurring before
the effective time of the merger.
Based on the exchange ratio of 0.2628, and based on the number of shares of
uBid common stock and vested options to purchase uBid common stock, assuming a
May 11 close, a total of approximately 3,549,979 shares of CMGI common stock
and options to purchase shares of CMGI common stock will be issued in the
merger.
Treatment of uBid Stock Options
At the effective time of the merger, all outstanding uBid options to
purchase uBid common stock will terminate; provided that CMGI will offer each
holder of an outstanding uBid option the opportunity to have the vested portion
of any unexercised uBid option exchanged as of the effective time for an option
to acquire on the same terms and conditions as were applicable under the uBid
option immediately prior to the effective time of the merger the same number of
shares of CMGI common stock as the holder of the uBid option would have been
entitled to receive pursuant to the merger if the holder had exercised the
vested portion of the option in full immediately prior to the effective time
(rounded down to the nearest whole number), at a price per share (rounded up to
the nearest whole cent) equal to (y) the aggregate exercise price for the
shares of uBid common stock purchasable pursuant to the respective uBid option
immediately prior to the effective time divided by (z) the number of full
shares of CMGI common stock deemed purchasable pursuant to the uBid option in
accordance with the foregoing.
CMGI will reserve for issuance a sufficient number of shares of its common
stock for delivery upon a uBid optionholder's exercise of his or her option, as
described above. After the effective time of the merger, CMGI will file a
registration statement on Form S-8 with respect to the uBid stock options that
will be exchanged, if any, for CMGI stock options. During the period that any
options remain outstanding, CMGI will use its best efforts to maintain the
effectiveness of any registration statement on Form S-8.
Exchange of Certificates
Exchange Agent; Exchange Procedures; No Further Ownership Rights. As soon as
practicable after the effective time of the merger, CMGI's exchange agent will
mail to each record holder of uBid common stock a
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letter of transmittal and instructions for surrendering their certificates.
Only those holders who properly surrender their certificates in accordance with
the instructions will receive certificates representing shares of CMGI common
stock, cash in lieu of any fractional shares of CMGI common stock and any
dividends or distributions to which they are entitled. The surrendered
certificates representing shares of uBid common stock will be cancelled. After
the effective time of the merger, each certificate representing shares of uBid
common stock that have not been surrendered will only represent the right to
receive (1) shares of CMGI common stock, (2) cash in lieu of any fractional
shares of CMGI common stock and (3) dividends or distributions. Following the
effective time of the merger, uBid will not register any transfers of uBid
common stock on its stock transfer books.
No Fractional Shares. CMGI will not issue any fractional shares of CMGI
common stock in the merger. Instead, each holder of shares of uBid common stock
exchanged in the merger who would otherwise be entitled to receive a fraction
of a share of CMGI common stock will receive cash, without interest, in an
amount equal to the fractional share multiplied by the average closing price
per share of CMGI common stock on the Nasdaq National Market during the ten
consecutive trading days ending on and including the trading day immediately
preceding the closing of the merger. As of the effective time of the merger,
CMGI will deposit with its exchange agent the shares of CMGI common stock
issuable in the merger and cash in an amount sufficient to make payments in
lieu of the issuance of any fractional shares.
Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the closing of the merger with respect to
shares of CMGI common stock will be paid to the holder of any unsurrendered
uBid certificate and no cash payment in lieu of fractional shares will be paid
to any such holder until the holder surrenders its uBid certificate in
accordance with the letter of transmittal. Upon surrender, CMGI will issue and
pay to the recordholder of the certificate certificates representing whole
shares of CMGI common stock issued in exchange therefor, without interest, the
amount of cash payable in lieu of fractional shares to which the holder is
entitled, and any dividends or distributions with respect to the shares of CMGI
common stock to which the holder is entitled which have a record date after the
closing date of the merger but prior to the surrender of the certificate and a
payment date after the surrender of the certificate.
Lost Certificates. If any uBid common stock certificate is lost, stolen or
destroyed, a uBid stockholder must provide an appropriate affidavit of that
fact. CMGI may require a uBid stockholder to deliver a bond as indemnity
against any claim that may be made against CMGI with respect to any lost,
stolen or destroyed certificate.
Holders of uBid common stock should not send in their certificates until
they receive a letter of transmittal from the exchange agent.
Representations and Warranties
The merger agreement contains representations and warranties of CMGI, uBid
and the transitory subsidiary. These relate to each company's:
. organization, existence, good . the absence of certain changes in
standing, corporate power and their business;
similar corporate matters;
. absence of conflicts, violations
and defaults under their
corporate charters and by-laws
. capitalization; and other agreements and
documents;
. authorization, execution,
delivery, required filings and
consents and performance and the . absence of actions which may
enforceability of the merger jeopardize the "reorganization"
agreement and related matters; status of the merger;
. brokers and related fees;
. filings with the Securities and
Exchange Commission; . litigation; and
. accuracy of information provided
. tax matters; in connection with this proxy
statement/prospectus.
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uBid also represented and warranted as to:
. intellectual property;
. required governmental and third-
party consents; . labor matters;
. subsidiaries; . environmental matters;
. the absence of undisclosed . assets;
liabilities;
. no existing discussions with
. the absence of restrictions on other parties with respect to a
its business activities; merger proposal;
. owned and leased real properties; . transactions with affiliates;
. employee benefit plans; . the actions by its board of
directors that make Section 203
. material contracts; of the Delaware General
Corporation Law statute
. licenses and permits; inapplicable to the proposed
merger;
. insurance;
. year 2000 compliance; and
. financial statements;
. privacy issues.
. compliance with laws;
Certain Covenants
Conduct of uBid's Business Prior to the Merger. Except as contemplated by
the merger agreement, uBid has agreed to carry on its business in the ordinary
course in substantially the same manner as previously conducted. Specifically,
uBid has agreed that it will not, without the prior written consent of CMGI:
. declare, set aside or pay any . except as provided in the merger
dividends or other distributions agreement, amend its charter or
on its shares of capital stock; by-laws;
. split, combine or reclassify any
of its capital stock or authorize . acquire any business,
the issuance of any other corporation, partnership,
securities in substitution of its association, joint venture or
shares of capital stock; other business organization;
. with certain exceptions, purchase, . make any capital expenditure in
redeem or otherwise acquire any excess of an amount as specified
shares of its capital stock or any in, or otherwise consented to,
rights to acquire shares of its under the merger agreement;
capital stock;
. change its accounting methods or
. acquire any assets that are the assumptions underlying such
material, in the aggregate, to methods except as required by
uBid and its subsidiaries, taken United States generally accepted
as a whole, except purchases of accounting principles;
inventory in the ordinary course
of business consistent with past . pay, discharge, settle or satisfy
practice; any claim, liability or
obligation other than (1) in the
. sell, lease, license, pledge, or ordinary course of business
otherwise dispose of or encumber consistent with past practice or
any assets or property, other (2) as reserved against in uBid's
than in the ordinary course of most recent consolidated
business consistent with past financial statements included in
practice; any filings with the Securities
and Exchange Commission prior to
. whether or not in the ordinary February 9, 2000;
course of business or consistent
with past practice, sell or . modify, amend or terminate any
dispose of any assets material to material contract or agreement or
uBid, taken as a whole, including knowingly waive, release or
any accounts, leases, contracts assign any material rights or
or intellectual property or any claims, except in the ordinary
assets or the stock of any course of business;
subsidiaries, but excluding the
sale of products and services in
the ordinary course of business
consistent with past practice;
. issue, deliver, sell, grant,
pledge or otherwise dispose of
any shares of its capital stock
or other securities, except
pursuant to the exercise of
outstanding options or warrants;
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. adopt or implement any . enter into any material contract
stockholder rights plan; or agreement except in the
ordinary course of business
. except for an unsolicited, consistent with past practice;
superior acquisition proposal,
enter into an agreement with . license any material intellectual
respect to any merger, property rights to or from any
consolidation, liquidation or third party;
business combination, or any
acquisition or disposition of all . except as required to comply with
or substantially all of the applicable law, plans or
assets or securities of uBid or agreements existing on
any of its subsidiaries; February 9, 2000, or as
contemplated by the merger
. except as set forth below, create agreement, take any action with
or incur indebtedness other than regard to any plans or agreements
indebtedness which existed on the related to employee matters
unaudited balance sheet of uBid including, adopting or
as of November 30, 1999, or terminating any employee benefit
guarantee any such indebtedness; plan or employment or severance
arrangement, materially
. issue or sell any debt securities increasing the compensation or
or warrants or other rights to fringe benefits of, or pay any
acquire any debt securities of bonus to, any director, officer
uBid or any of its subsidiaries, or key employee, or accelerating
guarantee any debt securities of the payment or vesting of any
another person or enter into any compensation or benefits;
"keep well" or other agreement to
maintain any financial statement . make or rescind any tax election
condition of another person other or settle or compromise any tax
than the incurrence of accounts liability;
payable in the ordinary course of
business; . initiate, compromise or settle
any material litigation or
. make any loans, advances (other arbitration proceeding;
than routine advances to uBid
employees in the ordinary course . close any facility or office; and
of business consistent with past
practice) or capital . take or agree to take any action
contributions to, or investment which would materially impair or
in, any other person; prevent the conditions of the
merger set forth in the merger
agreement from being satisfied.
CMGI and uBid have each agreed to use reasonable efforts to:
. take all appropriate action to consummate the transactions contemplated by
the merger agreement as promptly as practicable;
. obtain any consents, licenses, permits, waivers, approvals, authorizations
or orders from governmental entities or other third parties required in
connection with the transactions contemplated by the merger agreement; and
. make all necessary filings and submissions with respect to the transactions
contemplated by the merger agreement under federal and state securities
laws, antitrust laws and other applicable laws as promptly as practicable.
CMGI and uBid have also each agreed to use reasonable efforts to obtain any
governmental clearances or approvals required under antitrust laws for the
closing of the merger. CMGI has the right to direct any governmental
proceedings or negotiations relating to those governmental clearances, provided
that uBid has a reasonable opportunity to participate in the proceedings.
Neither CMGI nor any of its subsidiaries is required either to divest any of
its businesses, product lines or assets, or to take any other action that could
reasonably be expected to have a material adverse effect on CMGI or, if the
merger is consummated, CMGI as combined with uBid, or to take any action with
respect to any government clearances or approvals if the Department of Justice
or the Federal Trade Commission authorizes its staff to seek a preliminary
injunction or restraining order to enjoin consummation of the merger.
CMGI has agreed to waive the covenant which prohibits uBid from issuing or
granting any rights to obtain any shares of its capital stock so that uBid may
grant up to 200,000 options to purchase uBid common stock.
uBid is Restricted from Trying to Sell Itself to Another Party. uBid has
agreed that it will not, directly or indirectly through its officers,
directors, employees, financial advisors or agents, (1) solicit, initiate, or
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encourage any proposal that could reasonably be expected to lead to an
acquisition proposal, (2) enter into discussions or negotiations concerning,
or provide any information relating to, any acquisition proposal, or (3) agree
to or recommend any acquisition proposal. The merger agreement defines an
acquisition proposal to mean a proposal or offer for a merger, consolidation,
business combination, sale of substantial assets, tender offer, sale of shares
of capital stock (excluding sales pursuant to existing uBid stock plans or
warrants) or a similar transaction involving uBid or any of its subsidiaries.
However, uBid and the uBid board of directors may, so long as uBid has not
breached the provisions in the merger agreement with respect to the
nonsolicitation of acquisition proposals and uBid stockholders have not
already approved the adoption of the merger agreement:
. furnish information to, or enter into discussions or negotiations with, a
third party in connection with an unsolicited bona fide written acquisition
proposal or recommend an unsolicited bona fide written acquisition proposal
to uBid stockholders, if and only to the extent that (1) the uBid board of
directors believes in good faith after consultation with its financial
advisor that the acquisition proposal is reasonably capable of being
completed on the terms proposed and would, if consummated, result in a
transaction more favorable than the proposed merger, and the uBid board of
directors determines in good faith after consultation with outside legal
counsel that such action is necessary in order for the uBid board of
directors to fulfill its fiduciary duties, (2) prior to furnishing the
information to, or entering into discussions or negotiations with such a
third party, the uBid board of directors receives from such third party an
executed confidentiality agreement no less favorable than the
confidentiality agreement between CMGI and uBid, and (3) prior to
recommending a superior proposal or terminating the merger agreement in
connection with a superior proposal, uBid gives CMGI at least five business
days' prior notice of its intent to do so in order to provide CMGI an
opportunity to make a counterproposal which uBid and its advisors must
negotiate with CMGI during that period; or
. comply with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act,
with respect to such an acquisition proposal.
uBid has agreed to notify CMGI in reasonable detail (orally and in writing)
within one business day of receipt of any acquisition proposal or request for
non-public information in connection with any acquisition proposal. uBid has
agreed to continue to keep CMGI promptly informed of any change in the status
of any discussions or negotiations and the terms being discussed or
negotiated.
Director and Officer Indemnification. The merger agreement provides that
for a period of six years after the effective time of the merger, CMGI will
cause the surviving corporation to honor all of uBid's obligations to
indemnify each present and former director and officer of uBid against any
costs or expenses pertaining to matters existing or occurring at or prior to
the effective time of the merger. If the surviving corporation consolidates or
merges with another entity or transfers all or substantially all of its
assets, CMGI has agreed to either guaranty this indemnification obligation or
cause proper provision to be made for the assignment of this obligation to the
surviving corporation's successors.
Conditions to Obligations to Effect the Merger
The obligations of CMGI and uBid to effect the merger are subject to the
satisfaction or waiver of the following conditions:
likely to have a material
. the uBid stockholders must have adverse effect on uBid or CMGI;
approved and adopted the merger
agreement and the merger;
. the registration statement, of
which this proxy
. the waiting period applicable to statement/prospectus is a part,
the consummation of the merger must have become effective and
under the Hart-Scott-Rodino Act not be subject to any stop order
must have expired or been or other similar proceeding; and
terminated;
. there must be no order, stay,
. the parties must have obtained decree, judgment or injunction,
all government authorizations or statute, rule or regulation
and consents other than those in effect that makes the merger
the failure of which to obtain illegal.
is not reasonably
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In addition, the obligations of CMGI and the transitory subsidiary to
effect the merger are subject to the satisfaction or waiver of the following
conditions:
. the representations and federal income tax purposes
warranties of uBid in the merger under Section 368(a) of the
agreement must be true and Internal Revenue Code;
correct as of February 9, 2000,
the date of the merger . uBid obtains all required third
agreement, and the closing date party consents;
of the merger, unless the
representations and warranties . CMGI receives copies of the
are made as of another date, in resignations of each uBid
which case they must be true and director;
correct as of such date, and,
with respect to the closing date . CMGI receives documentation in a
of the merger, except where the form reasonably satisfactory to
failure to be true and correct it concerning uBid's data center
has not had, and is not and technology systems;
reasonably likely to have, a
material adverse effect on uBid; . uBid gives each holder of a uBid
stock option notice to permit
. uBid must have performed in all the option holder to exercise
material respects all its option prior to its
obligations required to be termination in accordance with
performed by it under the merger the terms of uBid's stock plans
agreement at or prior to the and grants and awards under the
effective time of the merger; plans;
. CMGI receives an opinion from . uBid takes all actions
its counsel (or uBid's counsel concerning options contemplated
if CMGI's counsel does not by the merger agreement; and
provide such an opinion) to the
effect that the merger will be . uBid obtains amendments and
treated as a reorganization for terminations of specified
agreements in a form reasonably
satisfactory to CMGI.
In addition, the obligation of uBid to effect the merger is subject to the
satisfaction or waiver of the following conditions:
. the representations and warranties of CMGI and the transitory subsidiary in
the merger agreement must be true and correct as of February 9, 2000, the
date of the merger agreement, and the closing date of the merger, unless
the representations and warranties are made as of another date, in which
case they must be true as of such date, and, with respect to the closing
date of the merger, except where the failure to be true and correct has not
had, and is not reasonably likely to have, a material adverse effect on
CMGI;
. CMGI and the transitory subsidiary must have performed in all material
respects all obligations required to be performed by them under the merger
agreement at or prior to the effective time of the merger; and
. uBid receives an opinion from its counsel (or from CMGI's counsel if uBid's
counsel does not provide such an opinion) to the effect that the merger
will be treated as a reorganization for federal income tax purposes under
Section 368(a) of the Internal Revenue Code.
Termination; Expenses and Termination Fees
Termination
The merger agreement may be terminated by written notice by the terminating
party under the following circumstances at any time prior to the effective
time of the merger:
. by mutual written consent of the action, which permanently
parties; restrains, enjoins or otherwise
prohibits the merger;
. by either CMGI or uBid if the
merger has not closed by August . by either CMGI or uBid if the
31, 2000, unless the delay was requisite vote of uBid
due to the terminating party's stockholders in favor of the
failure to fulfill any merger agreement and the merger
obligation under the merger (unless the terminating party is
agreement; in breach of the merger
agreement) is not obtained at
. by either CMGI or uBid if a the special meeting of
governmental entity issues a stockholders;
nonappealable final order,
decree or ruling or taken any
other nonappealable final
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. by CMGI or uBid if there has tender offer or exchange offer
been a breach of or failure to for 20% or more of the
perform any representation, outstanding shares of uBid
warranty, covenant or agreement common stock and the uBid board
in the merger agreement by the of directors recommends that its
other party which causes stockholders tender their shares
specified conditions to the in the tender or exchange offer,
closing of the merger not to be or within ten days after the
satisfied and which is not cured tender or exchange offer is
within 20 days after the commenced, the uBid board of
breaching party receives a directors fails to recommend
written notice of the breach; against acceptance of the offer
or takes no position with
. by CMGI if (1) the uBid board of respect to the acceptance of the
directors fails to recommend offer; or
approval of the merger agreement
and the merger to uBid . by uBid if (1) it has received
stockholders or withdraws or an unsolicited acquisition
modifies its recommendation; (2) proposal that the uBid board of
the uBid board of directors directors believes in good faith
approves or recommends to uBid after consultation with its
stockholders an alternative financial advisor is a superior
transaction, as described below; proposal to the merger
(3) an alternative transaction agreement, (2) it has complied
has announced or is otherwise with the provisions of the
publicly known and the uBid merger agreement with respect to
board of directors has either the nonsolicitation of
failed to recommend against acquisition proposals, (3) its
acceptance of it by its board of directors has
stockholders within ten days of determined in good faith after
receiving a written request from consultation with its outside
CMGI to do so or it has failed legal counsel that termination
to reconfirm its approval of the of the merger agreement is
merger agreement and the merger necessary in order for the uBid
within ten days of receiving a board of directors to fulfill
written request from CMGI to do its fiduciary duties, and (4) it
so; or (4) a third party, other pays to CMGI the specified
than CMGI or an affiliate of termination fee and expenses.
CMGI, commences a
An alternative transaction is defined in the merger agreement as:
. a transaction where a party other than CMGI or its affiliates acquires more
than 20% of the outstanding shares of uBid common stock pursuant to a
tender offer or exchange offer or otherwise;
. a merger or other business combination in which a party other than CMGI or
its affiliates acquires more than 20% of the outstanding shares of uBid
common stock or of the surviving entity;
. any transaction in which a party other than CMGI or its affiliates acquires
control of assets of uBid having a fair market value equal to more than 20%
of the fair market value of all uBid assets immediately prior to such
transaction; or
. any public announcement by a party other than CMGI or its affiliates of a
proposal, plan or intention to enter into such a transaction.
If either CMGI or uBid terminates the merger agreement because of any of
the reasons above, all obligations of the parties under the merger agreement
will terminate (with certain exceptions) and there will be no liability,
except for any liability for willful breaches of the merger agreement or the
provisions of the stock option agreement, on the part of CMGI, uBid, the
transitory subsidiary or their respective officers, directors, stockholders or
affiliates. In addition, certain representations and warranties, as well as
the mutual confidentiality agreement dated January 14, 2000 between CMGI and
uBid will survive any termination of the merger agreement.
In addition to any termination fee described below which may be due, uBid
has agreed to pay up to a maximum of $500,000 to CMGI as reimbursement for its
fees and expenses paid in connection with the merger if the merger is not
consummated by August 31, 2000 because:
. CMGI terminates the merger agreement because the representations and
warranties of uBid fail to be true and correct, except to the extent that
such failure has not had, and is not reasonably likely to have, a material
adverse effect on uBid; or
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. either CMGI or uBid terminates the merger agreement because the requisite
vote of uBid stockholders at the special meeting to approve the merger
agreement and the merger is not obtained and the merger agreement is
terminated under circumstances in which the termination fee described below
is not owed by uBid to CMGI.
Expenses
Except as set forth in the previous section, CMGI and uBid will pay their
own expenses incurred in connection with the merger. However, CMGI and uBid
will share equally any expenses, other than attorney's fees, incurred with
respect to the printing and filing of this proxy statement/prospectus and the
registration statement of which this is a part.
Termination Fees
uBid agrees to pay CMGI a $20 million termination fee if the merger
agreement is terminated under the following circumstances:
. by CMGI because (1) the uBid board of directors fails to recommend the
merger agreement and the merger to uBid stockholders or withdraws or
modifies its recommendation; (2) the uBid board of directors recommends to
uBid stockholders an alternative transaction; (3) an alternative transaction
is announced or otherwise publicly known and the uBid board of directors
fails to recommend against acceptance of it by uBid stockholders within ten
days of receiving a written request from CMGI to do so or the uBid board of
directors fails to reconfirm its approval of the merger agreement and the
merger within ten days of receiving a written request from CMGI to do so; or
(4) a third party, other than CMGI or an affiliate of CMGI, commences a
tender offer or exchange offer for 20% or more of the outstanding shares of
uBid common stock and the uBid board of directors recommends that uBid
stockholders tender their shares in the tender or exchange offer, or within
ten days after the tender or exchange offer is commenced, the uBid board of
directors fails to recommend against acceptance of the offer or takes no
position with respect to the acceptance of the offer;
. by CMGI because uBid breaches the provisions in the merger agreement with
respect to nonsolicitation of acquisition proposals or it fails to call the
special meeting and to recommend the merger agreement and the merger to uBid
stockholders; or
. by uBid if (1) it has received an unsolicited acquisition proposal that the
uBid board of directors believes in good faith, after consultation with its
financial advisor, is a superior proposal to the merger agreement, (2) it
has complied with the provisions of the merger agreement with respect to
nonsolicitation of acquisition proposals, and (3) its board of directors has
determined in good faith after consultation with its outside legal counsel
that termination of the merger agreement is necessary in order for the uBid
board of directors to fulfill its fiduciary duties.
In addition, uBid has agreed to pay CMGI a $10 million termination fee if
the merger agreement is terminated by either CMGI or uBid because the requisite
vote of uBid stockholders at the special meeting to approve the merger
agreement and the merger is not obtained and, at or prior to terminating the
agreement, an alternative transaction with respect to uBid was publicly
announced. If such $10 million is due and uBid enters into a definitive
agreement with respect to an alternative transaction, or an alternative
transaction is consummated within 12 months of the termination of the merger
agreement, then uBid agrees to pay CMGI an additional $10 million. An
alternative transaction in the context of this paragraph is the acquisition, or
the public announcement of the intent to make an acquisition, by a party other
than CMGI or its affiliates, of more than 50% of the outstanding stock of
either uBid or an entity surviving a combination with uBid or more than 50% of
uBid's assets.
Amendment
Generally, the board of directors of each of CMGI and uBid may amend the
merger agreement at any time prior to the effective time. However, after
stockholders of uBid or the transitory subsidiary approve the merger agreement
and the merger, any amendment will be restricted by the Delaware corporation
statute. Amendments must be in writing and signed by all parties.
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OTHER AGREEMENTS
Stockholder Agreement
As an inducement to CMGI to enter into the merger agreement, some of the
uBid stockholders, who beneficially owned as of February 9, 2000 an aggregate
of 2,589,184 shares of uBid common stock, entered into a stockholder agreement
with CMGI, dated as of February 9, 2000, which is attached as Exhibit A to
Annex A of this proxy statement/prospectus, agreeing to vote their shares in
favor of the merger agreement and the merger and against specified alternative
transactions. The stockholders retain the right to vote their shares on all
other matters.
The stockholders also appointed CMGI, or any nominee of CMGI, as their
lawful attorney and proxy with the limited right to vote each of the 2,589,184
shares of uBid common stock at every uBid stockholders meeting and every
written consent in lieu of such meeting, in favor of approval of the merger and
the merger agreement. The stockholder agreement terminates upon the earlier of
the merger becoming effective in accordance with the terms and provisions of
the merger agreement and the termination of the merger agreement.
Amendment to Tax Indemnification Agreement
Prior to uBid's initial public offering, uBid was a wholly-owned, indirect
subsidiary of Creative Computers, Inc. In June 1999, Creative Computers
distributed to its stockholders all of the shares of uBid common stock owned by
Creative Computers in a transaction intended to qualify as a tax-free spin-off
under Section 355 of the Internal Revenue Code. Actions of uBid following the
spin-off could cause the spin-off to become taxable to Creative Computers
because, pursuant to Section 355(e) of the Code, there are limitations on the
amount of uBid stock that can be issued, acquired, or repurchased by uBid
following the spin-off.
Prior to the distribution, uBid and Creative Computers entered into several
agreements relating to the separation of the two companies, including a tax
indemnification agreement. The tax indemnification agreement
. provides that uBid will not take any action that would cause the spin-off to
become taxable to Creative Computers as a result of the application of
Section 355(e), including issuing or repurchasing any of its equity
securities, and approving or permitting certain business combinations,
including combinations such as the merger;
. provides that uBid will indemnify Creative Computers for any tax liability
suffered by Creative Computers arising out of actions taken by uBid
following the spin-off that cause the spin-off to become taxable to Creative
Computers;
. provides for the allocation and payment of taxes for periods during which
uBid and Creative Computers were included in the same consolidated group for
federal income tax purposes, or the same consolidated, combined or unitary
group for state tax purposes;
. provides for the allocation of responsibility for the filing of tax returns
before and after the spin-off;
. provides for the conduct of tax audits and the handling of tax
controversies; and
. addresses various related matters.
In connection with the merger agreement, Creative Computers, uBid and CMGI
entered into an amendment to the tax indemnification agreement which amendment
becomes effective only upon the closing of the merger. The amendment
. deletes from the tax allocation agreement all provisions that would prohibit
uBid from undertaking the merger,
. provides that neither the negotiation of the merger nor the consummation
thereof constitutes a breach of uBid's obligations under the agreement,
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. provides that CMGI agrees to unconditionally guarantee any indemnification
obligation that uBid may have under the tax indemnification agreement,
. provides that if a party to the amendment becomes aware of any proceeding,
such as a tax audit or tax controversy, that could give rise to an
obligation under the tax allocation agreement, such party must give notice
to all other parties to the amendment, and
. provides that in the event of such a proceeding, both the party subject to
the proceeding and any party who may have an indemnification obligation with
respect to such proceeding shall jointly control the proceeding.
While uBid does not believe that that the merger should cause the spin-off
to become taxable to Creative Computers, the absence of final Treasury
regulations under Section 355(e) has created some uncertainty as to the
consequences of the merger under these rules. As a result, uBid requested and
has received Creative Computers' consent to the merger. In addition, uBid
obtained an opinion from its outside tax advisor, PricewaterhouseCoopers LLP,
and CMGI obtained an opinion from its outside tax advisor, KPMG LLP, that the
merger should not result in an adverse application of Section 355(e) with
respect to the spin-off. Copies of the opinions have been filed as exhibits to
the registration statement of which this proxy statement/prospectus is a part.
If the spin-off were to be taxable to Creative Computers, uBid could face an
indemnification obligation to Creative Computers of approximately $100 million
which CMGI has guaranteed.
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DESCRIPTION OF UBID'S BUSINESS
Overview
uBid operates a leading online auction marketplace offering products to both
consumers and businesses. uBid provides a unique shopping experience by
offering buyers the opportunity to set their own prices on popular, brand name
products at significant discounts to prices found through traditional channels.
uBid's online auctions provide suppliers with an efficient and economical
channel for maximizing revenue on their merchandise while at the same time
moving excess or unique products and provide consumers and businesses with a
convenient method for obtaining this merchandise at substantial savings. uBid's
auctions currently feature a rotating selection of brand name computers,
consumer electronics, housewares, sporting goods and memorabilia, jewelry and
gifts, home improvement, appliances, clothing and apparel, home and leisure,
travel and events, and arts which typically sell at significant discounts to
prices at traditional retailers. uBid runs auctions 24 hours a day, seven days
a week, currently offering on average over 6,700 items in each of its daily
auctions. From uBid's first auction in December 1997 through December 31, 1999,
uBid has auctioned over 1,699,000 merchandise units, registered over 1,030,000
users and recorded more than 135 million visits to its Website.
uBid obtains merchandise directly from over 430 manufacturers, distributors
and retailers. In May 1999, uBid launched the uBid Auction Community, which
provides approved suppliers access to the uBid Website to place products for
direct auction to customers. uBid has recently expanded into the business-to-
business market and plans to offer a variety of products for auction to
business customers.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a medium for commerce enabling millions of
people to share information and conduct online business on a global basis.
Consumers and businesses typically use the Web to exchange products and
services that can be easily described with graphics and text such as computers,
consumer electronics, books, CDs and airline tickets. The Internet provides the
opportunity to develop one-to-one relationships with customers from a central
location without having to build the infrastructure associated with traditional
businesses. It also provides a direct channel for businesses to interactively
market and sell products to other businesses.
The Online Auction Market Opportunity
Online auctions are uniquely suited to the Internet because they leverage
the information collection abilities and interactive nature of the Internet.
Online auctions allow merchants to minimize their risk of price erosion on
unsold products. These products may include excess and unique items, which can
be new or refurbished. Suppliers traditionally have sold excess goods through
various liquidation channels such as factory outlets, catalogs, resellers and
mass merchants. These channels are highly inefficient for buyers and sellers
for the following reasons:
. sellers are unable to gather,
. the channels are fragmented and interpret and use information
multi-layered; effectively to minimize inventory
and maximize margins;
. buyers and sellers lack a
reliable and interactive . buyers have limited access to a
mechanism for setting prices that variety and breadth of goods; and
reflect the product's true market
value; . transactions must be completed
during pre-set hours.
. sellers may incur a high cost of
developing and maintaining the
physical infrastructure that must
be reflected in the price of
products and services;
. sellers are otherwise unable to
cost effectively reach a broad
consumer audience;
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Online auctions leverage the Internet infrastructure to solve many of these
inefficiencies by empowering buyers and suppliers. Suppliers can now maximize
revenue on merchandise through an alternative channel, while preserving their
primary distribution channel. Suppliers can test price points and demand on
new or limited supply items. Buyers can set their own price through dynamic
pricing and their specific requirements. In addition, the auction site can
collect valuable marketing and pricing information about the bidders and
sellers. As a result, a significant opportunity exists for a centralized
online marketplace that combines the unique attributes of the Internet with
the economic advantages of an auction format.
The uBid Solution
uBid's online auctions provide suppliers with an efficient and economical
channel for maximizing revenue on their merchandise while at the same time
moving excess merchandise and providing consumers and businesses with a
convenient method for obtaining these products at substantial savings.
uBid's online auctions offer:
. Compelling Value Proposition for Customers. Customers traditionally have
made purchase decisions based on static pricing models that assume the
value of a single product is the same for each customer. uBid provides a
unique buying experience, offering consumers and businesses the
opportunity to set their own prices on popular, brand name products at
significant discounts to prices found through traditional channels. uBid
believes that the compelling value proposition of this approach can be
extended to virtually all product categories.
. Broad Product Offering. Customers are attracted to uBid's auctions by
uBid's broad selection of over 6,700 total items available in each daily
auction. uBid has leveraged its auction experience, traffic information,
merchandising relationships and direct customer interface capabilities
to expand uBid's product offering to include housewares, sporting goods
and memorabilia, jewelry, apparel, appliances, art, travel and events,
home improvement products and office lease equipment.
. Highly Efficient Channel for Suppliers. uBid's online auctions provide
suppliers with an attractive distribution channel for their products.
Suppliers are attracted to uBid because of the large number of potential
buyers. The frequency of uBid's auctions and uBid's ability to
continuously add new items allow suppliers to dispose of inventory
quickly to minimize the risk of price erosion. In addition, uBid's
auctions provide suppliers the opportunity to optimize sales value while
at the same time liquidating excess merchandise directly to a nationwide
audience, without conflicting with their primary distribution channels.
. Extensive Merchandising Experience. uBid has developed a comprehensive
auction management process that allows uBid to capture detailed
information concerning where, when, how and to whom products are sold,
and helps uBid to predict customer preferences. uBid's auction
merchandising model allows uBid to maximize revenues on auctioned
products by using statistical software models. These models allow uBid
to project the price at which each product will ultimately be sold to
consumers based on current traffic and demand, and to determine the
price at which to purchase products from over 430 suppliers, the product
mix, and the number of products uBid should auction on a given day.
Business Strategy
uBid's objective is to become the online auction marketplace of choice for
suppliers and consumers. The key elements of uBid's strategy are:
. Increase Traffic to the uBid Site. uBid believes that a key component to
its success is increasing traffic to its Website. uBid will focus on the
following objectives to implement this strategy:
Strengthen the uBid Brand. uBid intends to strengthen its brand
through off-line advertising campaigns which may include traditional
media forms such as print, radio and television. uBid also
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plans to increase points of access by forming relationships with, and
advertising on, leading Websites, such as uBid's existing arrangements
with AOL, MSN, PCWorld Online, LookSmart and Prodigy. Premier
positioning on these sites drives traffic and gives uBid credibility to
users and suppliers who are unfamiliar with uBid's business.
Increase Repeat Visits. uBid believes that its auction format, regular
rotation of merchandise and user-friendly Website encourage bidders to
return on a frequent basis. Repeat orders accounted for approximately
79% of total customer orders for the three months ended December 31,
1999. uBid has instituted a variety of customer loyalty programs
designed to increase customer retention. In addition, uBid believes that
its Website features, which allow customers to track their complete
bidding history and quickly update customer information, increase user
loyalty.
Introduce Co-Branded Auction Sites. uBid has begun to construct
auction sites in cooperation with third parties and will provide them
with uBid's auction capabilities. These sites will be co-branded under
the uBid name and the name of the third party.
Provide Internet Portal Auction Capabilities. uBid believes
opportunities exist to partner with various Internet portals to provide
auction capabilities for both the business and consumer markets. uBid
intends to seek arrangements in which uBid would provide the auction
software and operate the auctions for the portal. In exchange, the
portal could provide traffic to the main uBid site or pay other
compensation.
. Expand Markets. uBid believes that significant opportunities exist to
leverage its auction technology, marketing and expertise into new
markets.
Business-to-Business. Business-to-business markets to date have seen
very little penetration by electronic commerce, and the current
distribution in many of these markets is concentrated in various
extremely inefficient broker-dealer networks. uBid believes
opportunities exist in various business-to-business equipment and
commodity product categories.
uBid Auction Community. In May 1999, uBid launched the uBid Auction
Community to allow suppliers to further benefit from the uBid
infrastructure. The Auction Community allows approved suppliers to place
products directly on the uBid Website for auction. It also provides
suppliers access to the site directly, allowing them to benefit from
uBid's marketing resources, call center operations, credit card
processing and auction software. Upon sale, uBid processes the credit
card transaction and receives a commission from the sale, and the
supplier ships the products directly to the customer. In December 1999,
the Auction Community had over 900 approved suppliers, with an average
of over 10,000 units being offered at auction each week. uBid believes
that the Auction Community will increase the number of products offered
on its Website and will expand the number of suppliers offering products
for auction.
International Opportunities. uBid intends to expand the uBid model
into international markets. Prior to uBid's June 1999 spin-off, uBid was
contractually restricted from selling its products overseas. Since then,
uBid has entered into an agreement with LibertyOne, an Australian media
company, to provide LibertyOne access to uBid's auction technology and
brand in exchange for a licensing fee and payments for future royalties
from its auction sales in certain East Asian countries, certain
Southeast Asian countries, as well as Australia and New Zealand. uBid
plans to enter other markets, such as Europe, either directly or through
alliances.
. Broaden Category Offerings. uBid is continuing to expand its lines of
merchandise to add categories that are well suited for the online
auction format. While uBid's initial focus was primarily on computer
products and consumer electronics, uBid has broadened its product
categories to include apparel, appliances, art, travel and events, home
improvement products and office lease equipment. In addition, uBid has
expanded its computer products category to include downloadable software
through its agreement with Digital River.
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. Increase Revenue Sharing and Commission Based Arrangements with
Suppliers. uBid believes revenue sharing arrangements increase margin
opportunity for suppliers and ensures uBid's gross margin percentage.
uBid has entered into a number of revenue sharing arrangements to split
the sales proceeds with suppliers on an agreed-upon percentage basis in
which title to the merchandise passes to uBid only after the sale. In
the fourth quarter of 1999, uBid generated approximately 12% of its
revenue from revenue sharing agreements and expects to increase this
percentage over time. In addition, uBid plans on expanding into product
categories and markets in which uBid will act as an auction agent and
record only a commission on the product sold.
The uBid Auction
uBid has designed its attractive, fast, and easy-to-use Website to provide a
compelling shopping experience for the user through an interactive auction
format. Customers enter the auction at the uBid home page, or through a link to
the home page, which displays a list of product categories and sub-categories
and showcases the auction's featured items. Within a specific sub-category,
uBid auctions a number of identical items at the same time. The minimum opening
bid for each item starts as low as $7. The product page for each item features
a concise product description, full-color image and detailed technical
specifications. In addition, a table lists the quantity available, the bid
range, the minimum incremental bid, the current winning bidders, the amount of
their bids and the time of auction close.
To participate in the auction, a first-time bidder must complete the simple
electronic registration form found on uBid's Website. The bidder is then given
an identification number and chooses a password. Once registered, the customer
can bid and buy at will in the same or future auctions. After a customer bids
on a product, the corresponding bidder list is updated to reflect the bid and
the customer's new position in the list of bidders. At the customers' option,
they may elect to receive an e-mail when outbid or use agent bidding to
automatically increase the bid up to a predetermined maximum dollar amount.
These functions increase the likelihood that the user will place an additional
bid.
When the auction closes, the highest bidders win at their actual bid prices.
Each winning bidder might pay a price that is different from the prices paid by
other winning bidders. When bidders' prices are equal, bids for larger
quantities and with earlier initial bid times prevail. Using its proprietary
software, uBid automatically determines the winning bidders and sends an e-mail
message to confirm their purchases the same day. After being screened by uBid's
anti-fraud software, the customer's credit card is charged and the merchandise
is shipped.
Products and Merchandising
uBid currently offers on average over 6,700 total items in each of its daily
auctions. For the quarter ended December 31, 1999, uBid's product mix based on
revenues consisted of approximately 58% new merchandise and 42% refurbished
products. This mix can fluctuate from quarter to quarter depending on the type
of products available for purchase at acceptable prices. Regardless of the
source of the merchandise, most merchandise uBid sells is covered by
manufacturer or refurbished warranties. For most products, the customer may
purchase an extended warranty provided by a third party, Independent Dealer
Services, a division of Aon, Inc. in those states where third-party warranties
are permitted by law. uBid believes that this extended warranty, combined with
uBid's emphasis on customer service, is an advantage over its competitors,
which generally rely solely on the warranties provided by the supplier.
uBid currently offers merchandise in the following categories:
Computer Products: Desktops, portable computers, computer accessories,
disk drives, modems, monitors/video equipment, components, printers,
scanners, digital cameras, software and home office products.
Consumer Electronics: Home theater equipment, home audio equipment,
speakers, televisions, camcorders, VCRs, DVD players, portable audio
players, security systems, cellular phones and automobile audio
equipment.
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Sporting Goods and Memorabilia: Sports memorabilia, golf and tennis,
health and fitness, outdoor sports, bicycles, water sports and team
sports equipment.
Jewelry and Gifts: Fine jewelry, including rings, earrings, watches,
bracelets and loose stones.
Home Improvement: Power tools, lawn and garden, outdoor and patio,
electrical, and plumbing products.
Appliances: Kitchen and cleaning appliances.
Clothing and Apparel: Menswear, Womenswear and Kidswear.
Home & Leisure: Cleaning products, furniture, home comfort products,
kitchen products, music, and personal care products.
Travel and Events: Business and corporate travel, cruises, events
lodging, transportation, luggage, and travel accessories.
Art: Prints, antiques, artifacts, and other art media.
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Supplier Relationships
uBid obtains merchandise from over 430 manufacturers, distributors and
retailers. uBid believes that it has substantial access to additional sources
of merchandise and is in a position to leverage its existing relationships and
add new suppliers to increase the breadth and number of products it offers.
Since merchandise availability can be unpredictable, a strong base of supplier
relationships is important to uBid's success. As a result, uBid's buying staff
maintains ongoing contact with suppliers to learn when new merchandise becomes
available.
uBid assumes the full inventory and price risk on most of its products. uBid
believes its ability to sell its inventory quickly through auctions justifies
the cost of and risk involved in carrying inventory. uBid has developed a
sophisticated auction management process to project the price at which each
product will ultimately be sold to consumers based on current traffic and
demand, and to determine at which price to purchase products from suppliers. If
left with excess inventory, uBid places this inventory up for auction
immediately through its auction site. To date, uBid's exposure to excess
inventory has not been material.
uBid also has entered into revenue sharing arrangements with several
suppliers to split the sales proceeds on an agreed-upon percentage basis. uBid
believes these revenue sharing arrangements are attractive to suppliers because
they allow the supplier to potentially realize more revenue than in the case
where uBid purchases the merchandise for a fixed price. uBid's avoidance of any
inventory carrying risk, the greater margin upside for the suppliers and
ensured gross margin percentage for us make revenue sharing agreements
attractive to both uBid and its suppliers. These agreements represented
approximately 12% of uBid's revenue for the quarter ended December 31, 1999. As
uBid enters into more of these arrangements, uBid believes that the percentage
of its revenues represented by revenue sharing arrangements will continue to
increase over the next 12 months.
Sales and Marketing
To achieve uBid's objective of becoming the Internet auction site of choice
for suppliers and consumers, uBid has developed a marketing strategy to
strengthen its brand name and increase customer traffic to its Website. This
marketing strategy consists of establishing relationships with leading online
companies, as well as employing a mix of media and promotional activities to
achieve these goals.
Relationships with Leading Online Companies. uBid has established
relationships with a number of Internet service and content providers to
increase its access to online customers and to build brand recognition. uBid
intends to complement uBid's existing relationships and establish a leading
brand name by pursuing additional agreements.
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Internet Advertising. uBid has taken a disciplined and selective approach in
its advertising strategy that primarily considers the costs of customer
acquisition. uBid attempts to maximize its return from promotional expenditures
by selecting advertising media based on the cost relative to the likely
audience and ability to generate increased traffic for its Website. uBid places
advertising on various high-profile and high-traffic conduit Websites including
AOL, Excite, ESPN, PCWorld, Hotmail and Broadcast.com, as well as Websites that
are targeted at a more focused audience. These advertisements usually take the
form of banner ads that encourage readers to click through directly to uBid's
Website.
Customer Electronic Mail Messaging. uBid actively markets to its own base of
customers through a variety of marketing techniques, including email messaging.
All bidders in uBid's auctions are automatically added to uBid's electronic
mailing list, which numbered over 1,030,000 registrants through December 31,
1999. uBid currently sends over 5 million e-mail messages each month announcing
new items available at each auction, special products available, site changes
and new features. uBid has a strict policy of sending only solicited e-mail,
and a customer can remove his or her name from its mailing list at any time.
Order Fulfillment
uBid obtains products from its supplier network shortly before the products
are put into auction. Although most products are held in inventory at uBid's
distribution facility, certain suppliers drop-ship products directly to
customers. However, drop-ship suppliers are generally required to use uBid
labeling and packaging standards and transmit shipment information to uBid to
provide a uniform customer experience.
The product fulfillment process, from receipt of products through shipment,
is largely automated, enabling uBid to capture real-time data on inventory
receiving, shipping and stock levels. Over 90% of the products shipped from
uBid's warehouse are shipped the next business day after an auction closes, and
uBid's tight shipping controls have historically kept shipping errors at
negligible levels. uBid believes that the speed and accuracy of its order
fulfillment process reinforces and enhances the customers' total purchase
experience.
Customer Support and Service
uBid believes that its ability to establish and maintain long-term
relationships with customers and encourage repeat visits and purchases is
dependent, in part, on the strength of uBid's customer support and service
operations and staff. uBid has established multiple channels for communicating
with its customers before and after the sale, including phone, e-mail and
online support. uBid currently employs a staff of customer support and service
personnel who are responsible for handling customer inquiries, tracking
shipments and investigating problems with merchandise. Although uBid sells
merchandise on an "as is" basis, most products are covered by manufacturers'
warranties or third party warranties purchased by the customer. Although uBid
may not be obligated to do so, uBid may in specific instances accept
merchandise returns if a product is defective or does not conform to the
specifications of the item sold at auction, and uBid works with its customers
to resolve complaints about merchandise. In addition, uBid has automated some
of its customer service functions, including providing users of the Website
with online access to information such as product shipping status. uBid is
committed to continue enhancing its customer support and service operations
through a variety of measures including improved customer reporting systems.
Technology
uBid has implemented a broad array of customer support, transaction-
processing and fulfillment systems using a combination of both proprietary and
commercially available, licensed technologies. These systems are
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designed to make both the customer experience and the transaction reporting and
tracking process as seamless and simple as possible. uBid's hardware and
software systems are designed to integrate seamlessly and manage real-time
transactions with limited human intervention. uBid's current strategy is to
license commercially available technology wherever possible rather than seek
internally-developed solutions and to focus uBid's internal software
development efforts on creating and enhancing the specialized, proprietary
software that is unique to its business.
Auction Processing and Auction Management Applications. uBid uses a set of
automated software applications for receiving and validating bids, registering
bidders, placing customers on uBid's mailing list, listing currently active and
recent winning and losing bids and reviewing and submitting customer service
requests. uBid's internally developed proprietary auction management software
continually tracks every bid posted on all auctions and utilizes regression
analysis to assist in determining the number of products to auction at any
given time. uBid believes that this system enables it to maximize margins in
each product category.
Order Processing Applications. uBid uses a set of applications for
processing successful bids as they are converted into customer orders. These
applications charge customer credit cards, print order information, transmit
order information electronically to uBid's contract warehouse and suppliers,
and deposit transaction information into uBid's accounting system. All credit
card numbers and financial and credit information are secured using the
Internet security protocol Secure Socket Layer, Version 3, an encryption
standard, and credit card numbers are maintained behind appropriate fire walls.
Marketing Applications. uBid has developed a set of applications for sending
automated e-mail messaging to customers on a frequent basis. This software
extracts e-mail addresses from uBid's mailing list, sends e-mails to the
designated recipients and automatically services requests from customers to
remove them from the mailing list.
Systems Operations
The continued uninterrupted operation of uBid's Website is critical to its
business, and uBid strives to maximize uptime of its Website. uBid uses the
services of Exodus and other Internet service providers to provide connectivity
to the Internet with redundant carriers. Qwest Communications provides frame
relay services for uBid's back office operations. uBid believes that these
telecommunication and Internet service facilities are essential to uBid's
operations. Most of uBid's back office operations are provided through uBid's
Internet/Telecommunications Agreement with Creative.
To date, uBid has had various interruptions to its service as a result of
loss of power and telecommunications connections. uBid's insurance coverage may
not be adequate to compensate for all losses that may occur as a result of any
future service interruptions. Although uBid has implemented network security
measures and firewall security, its servers are also vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties to
overload uBid's systems and similar disruptive problems. Any of these things
could lead to interruptions, delays, loss of data or cessation in service to
uBid's users.
uBid's hardware and software systems run in parallel on multiple servers,
which allows the system to balance the workload among the servers. The system
also includes redundant hardware on mission critical components, which uBid
believes would enable it to survive a potential failure of any single server
with minimal downtime. In addition, capacity can be quickly and easily expanded
by adding additional servers without incurring significant development costs.
In particular, uBid strives to maintain access to its Website and speed of use
during the most heavily trafficked times of day, which are the evening hours
around the time scheduled for auction close. In order to do this, uBid
anticipates expanding its system as usage increases to avoid any decrease in
system response time. In August 1999, uBid completed the transition to locate
its primary Website servers at Exodus Communications in the Chicago area and
plans to develop a fully redundant back-up site by the end of the second
quarter of 2000. Most of uBid's back office operations are provided through
agreements with Creative. Although uBid anticipates continuing to use its
current back office
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administrative systems in Torrance for the near term, uBid intends to purchase
and intends to implement its own hardware and software systems, by the end of
the second quarter of 2000, at an estimated cost of approximately $1.0 million.
In addition, uBid plans to install new database management software, purchase
new enterprise software and upgrade its existing systems over the next 12
months at a total estimated cost of approximately $3.3 million. uBid expects to
fund the purchase of this equipment with working capital.
The transition to, or upgrading of, uBid's hardware and software systems and
the relocation of its servers could result in delays, failures or execution
difficulties that could impair uBid's ability to receive and process orders and
ship products in a timely manner. Any disruption or interruption of uBid's
business or operations caused by such delays or failures could have a material
adverse effect on its business.
Competition
The electronic commerce market is rapidly evolving and intensely
competitive, and uBid expects competition to intensify in the future. uBid
competes with a variety of other companies depending on the type of merchandise
and sales format offered to customers. These competitors include:
. various Internet auction houses . personal computer manufacturers
such as Amazon.com Auctions, that have their own direct
eBay, ONSALE, Yahoo! Auctions, distribution channels for their
First Auction, Surplus Auction, excess inventory or refurbished
Bid.com, Mercata, TradeOut.com, products; and
WebAuction and Insight Auction;
. companies with substantial
customer bases in the computer
and peripherals catalog business,
including CDW Computer Centers,
PC Connection and Creative
Computers, some of which already
sell online or may devote more
resources to Internet commerce in
the future.
. a number of indirect competitors
that specialize in electronic
commerce or derive a substantial
portion of their revenue from
electronic commerce, including
Internet Shopping Network, AOL,
Cendant, BUY.COM and
Shopping.com;
. a variety of other companies that
offer merchandise similar to
uBid's through physical auctions,
with which uBid competes for
sources of supply;
uBid believes that the principal competitive factors affecting its market
are a company's ability to:
. attract customers at favorable . provide effective customer
customer acquisition costs; service; and
. operate a Website in an . obtain merchandise at
uninterrupted manner and with satisfactory prices.
acceptable speed;
uBid cannot assure you that it can maintain its competitive position against
its current and potential competitors, especially those with greater financial,
marketing, customer support, technical and other resources than uBid has.
Some of uBid's current and potential competitors have established or may
establish cooperative relationships among themselves or directly with suppliers
to obtain exclusive or semi-exclusive sources of merchandise. In addition,
there has been consolidation in uBid's industry, which may continue in the
future. Accordingly, it is possible that new competitors or alliances among
competitors and suppliers may emerge and rapidly acquire market share. In
addition, manufacturers may elect to liquidate their products directly.
Increased competition is likely to reduce uBid's operating margins, cause uBid
to lose market share or diminish uBid's brand. If any of these things occur,
uBid's business would be significantly harmed.
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Many of uBid's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than uBid
does. As a result, these competitors may be able to secure merchandise from
suppliers on more favorable terms than uBid can. They may be able to respond
more quickly to changes in customer preferences or devote greater resources to
developing and promoting their merchandise.
Intellectual Property and Other Proprietary Rights
uBid's performance and ability to compete are dependent to a significant
degree on its proprietary technology. uBid relies on a combination of
trademark, copyright and trade secret laws, confidentiality agreements and non-
compete agreements executed by each manager and technical measures to establish
and protect uBid's proprietary rights. The uBid service mark is registered in
the United States. uBid cannot assure you that it will be able to secure
significant protection for its service marks or trademarks. It is possible that
uBid's competitors or others will adopt product or service names similar to
uBid or other service marks or trademarks similar to uBid, thereby impeding
uBid's ability to build brand identity and possibly leading to customer
confusion. uBid's inability to protect the name "uBid" adequately could have a
material adverse effect on uBid's business, results of operations and financial
condition.
uBid's proprietary software is protected by copyright laws. The source code
for uBid's proprietary software also is protected under applicable trade secret
laws.
As part of its confidentiality procedures, uBid generally enters into
agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
uBid cannot assure you that the steps it has taken will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions uBid has taken, it
may be possible for a third party to copy or otherwise obtain and use uBid's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of uBid's technology
is difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford uBid little or no
effective protection of its intellectual property.
uBid may in the future receive notices from third parties claiming
infringement by uBid's software or other aspects of uBid's business. While uBid
is not currently subject to any such claim that would have a material effect on
uBid's business or financial condition, any future claim, with or without
merit, could result in significant litigation costs and diversion of resources
including the attention of uBid's management, and require uBid to enter into
royalty and licensing agreements, which could have a material adverse effect on
its business, results of operations and financial condition. Royalty and
licensing agreements, if required, may not be available on terms acceptable to
uBid, or at all. In the future, uBid may also need to file lawsuits to enforce
its intellectual property rights, to protect its trade secrets or to determine
the validity and scope of the proprietary rights of others. Litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on uBid's business,
results of operations and financial condition.
uBid also relies on a variety of technologies that it licenses from third
parties, including database and Internet server software, which is used on its
Website to perform key functions. uBid cannot be certain that these third-party
technology licenses will continue to be available on commercially reasonable
terms. uBid's inability to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing uBid's proprietary
software enhancements and new developments until equivalent technology could be
identified, licensed or developed and integrated. Any delays would materially
adversely affect uBid's business, results of operations and financial
condition.
Employees
As of December 31, 1999 uBid had 281 employees and 61 full-time equivalent
contract personnel. None of uBid's employees is represented by a labor union,
and uBid considers its employee relations to be good.
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Competition for qualified personnel in uBid's industry is intense, particularly
for software development and other technical staff. uBid believes that its
future success will depend in part on its continued ability to attract, hire
and retain qualified personnel.
Facilities
uBid's principal administrative, engineering, merchandising and marketing
facilities total approximately 25,000 square feet and are located in Chicago,
Illinois under a lease that expires in 2002. In January 2000, uBid entered into
an additional lease under the same terms at its principal facility in Chicago
for an additional 10,000 square feet. Until July 1998, uBid was dependent on
Creative for warehousing and distribution services. In July 1998, uBid became
responsible for its own warehousing and distribution and entered into a
sublease for 100,000 square feet of Creative's 325,000 square foot distribution
center in Memphis, Tennessee. In October 1999, uBid entered into a sublease
which provides for the continued use of Creative's inventory control and
shipping systems during the term of the sublease. The sublease is at a monthly
rate equal to Creative's obligation to the landlord, plus taxes and utilities,
and will expire in 2002. In December 1999, uBid subleased an additional 70,000
square feet at Creative's distribution center in Memphis that expires in 2002.
In February 2000, uBid entered into a lease for a 20,000 square feet Customer
Care Center located in Danville, IL that expires in 2003. uBid believes that it
has adequate space for its current needs. As it expands, uBid will have to find
suitable additional space, and uBid cannot be certain that suitable space will
be available on commercially reasonable terms. uBid is considering outsourcing
some of its warehouse and fulfillment responsibilities.
Legal Proceedings
From time to time uBid may be named in claims arising in the ordinary course
of business. Currently, no legal proceedings or claims are pending against or
involve uBid that, in the opinion of uBid's management, could reasonably be
expected to have a material adverse effect on uBid's business and financial
condition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations which follows contains forward-looking statements which involve
risks and uncertainties. As a result of certain factors, uBid's actual results
could differ materially from those anticipated in these forward-looking
statements. The following discussion should be read in conjunction with the
financial statements and notes thereto included in this proxy/prospectus. The
historical information included in this proxy/prospectus does not necessarily
reflect what uBid's financial condition and results of operations would have
been had uBid been operated as an independent entity during the periods
presented and may not be indicative of future performance. Dollar amounts are
in thousands, except per share data.
Overview
uBid operates a leading online auction marketplace offering products to
consumers and businesses. uBid's auctions currently feature a rotating
selection of brand name products that typically sell at significant discounts
to prices at traditional retailers. uBid currently runs auctions seven days a
week, offering on average over 6,700 items in each of its daily auctions. From
uBid's first auction in December 1997 through December 31, 1999, uBid auctioned
over 1.6 million merchandise units, registered over 1,030,000 users and
recorded more than 135.3 million visits to its website. uBid's net loss of
$36.0 million from its inception to December 31, 1999 was principally due to
investments in infrastructure, sales and marketing expenditures to support
future growth, and stock option compensation expense. uBid expects to continue
to experience losses for the foreseeable future as it continues to make
significant investments in building its customer base and operating
infrastructure including increased expenditures for sales and marketing.
uBid obtains merchandise directly from over 430 manufacturers, distributors
and retailers. In May 1999, uBid launched the uBid Auction Community, which
provides approved suppliers access to the uBid website to place products for
direct auction to customers.
In June 1999, uBid entered into an agreement, amended February 9, 2000, with
LibertyOne, an Australian media company, to provide LibertyOne access to uBid's
auction technology and brand name in exchange for a licensing fee, payments for
professional services and future royalties from its auction sales in certain
East Asian countries, certain Southeast Asian countries, Australia and New
Zealand. In September 1999, uBid completed its obligations to transfer its
auction technology software and in November 1999, uBid announced the launch of
uBid.com.au, its affiliated website in Australia.
uBid either purchases merchandise outright or acquires the right to sell the
merchandise under consignment-type relationships with suppliers on a revenue
sharing basis. When uBid purchases merchandise outright, uBid bears both
inventory and price risk. Under revenue sharing arrangements, uBid purchases
the inventory upon completion of the auction, takes title to the merchandise,
invoices the customer and bears the credit and return risks. Under both types
of transactions, whether purchased inventory or revenue sharing, uBid
recognizes the full sales amount as revenue after it verifies the credit card
transaction authorization and ships the merchandise. When the credit card
authorization has been received but the merchandise has not been shipped, uBid
defers revenue recognition until the merchandise is shipped. uBid offers credit
to some of its business customers that have been pre-qualified as having
appropriate credit ratings, and accordingly, uBid will have to manage the
associated risks of accounts receivable expansion and collection.
Through December 31, 1999, uBid has incurred expenses related to
establishing itself as an independent company of approximately $400,000 and
uBid has spent a total of approximately $1.8 million in capital expenditures to
fully establish itself as an independent company. These expenditures include
warehouse and distribution equipment, hardware and software for computer
systems and furniture and fixtures. uBid expects to fund its purchase of
capital equipment with working capital. As of the spin-off date, uBid
terminated a services
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agreement with Creative, pursuant to which Creative provided uBid with various
administrative services. Since that time, uBid has engaged third parties to
perform some of these services and has internally performed other services.
Due to uBid's historical dependence on Creative for funding and certain
services, uBid's ability to grow prior to its initial public offering was
constrained by the allocation of resources made by Creative. uBid's growth had
also been constrained by its inability to sell and ship products
internationally due to contractual restraints on Creative and because uBid had
been precluded from selling certain lines of merchandise as a result of
agreements to which Creative is subject. Following uBid's spinoff from
Creative, uBid was no longer subject to these restrictions.
uBid has an extremely limited operating history upon which to base an
evaluation of its business and prospects. uBid's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Although uBid has experienced significant growth in revenue since commencing
operations, there can be no assurance that uBid's revenue will continue at its
current level or rate of growth. uBid's revenue depends substantially upon the
level of auction activity on its website. In addition, uBid has relatively low
gross margins and plans to increase its operating expenses significantly by
increasing the size of its staff, expanding its marketing efforts, purchasing
larger volumes of merchandise to be sold at auction and building a larger
infrastructure to support planned growth. Increases in operating expenses
preceding or not subsequently followed by increased revenue, could have a
material adverse effect on uBid's business, results of operations and financial
condition.
Beginning in October 1997, uBid granted stock options to attract and retain
key employees. These options were exercisable only in the event of a successful
initial public offering or sale of uBid. The completion of uBid's initial
public offering on December 4, 1998 caused a new measurement date to occur,
requiring uBid to compute compensation expense based upon the difference
between the exercise price of the options and the IPO price. uBid recorded a
non-cash compensation expense charge of $13.3 million in connection with stock
options granted prior to the IPO at prices less than the initial public
offering price of its common stock. The compensation charge will be recognized
over the five-year vesting period of such options. Accordingly, uBid recorded a
compensation expense of $5.3 million in the fourth quarter of 1998 and $3.5
million for the year ended December 31, 1999.
Results of Operations
Years Ended December 31, 1998 and 1999
Net Revenues. Net revenues are comprised of gross merchandise sales plus
shipping revenue net of returns. uBid held its first auction the last week of
December 1997. For the year ended December 31, 1999, net revenues increased to
$204.9 million, an increase of 324.9%, from $48.2 million for the year ended
December 31, 1998. Growth in net revenues resulted from significant growth in
uBid's customer base, an expanded selection of merchandise offered and an
increase in the number of auctions per week. uBid intends to increase traffic
to its website, further allowing uBid to broaden its customer base, increase
the number of auctions per week and expand the selection and number of items
offered.
Gross Profits. Gross profits are comprised of net revenues minus the cost of
merchandise, shipping and shipping-related expenses, net of returns. Gross
profits are affected by uBid's ability to cost-effectively source merchandise
and attract sufficient traffic to its website to achieve a favorable balance
between the number of bidders and the amount of merchandise auctioned. In
addition, uBid's gross profits could be affected by its capability to continue
to expand into software licensing arrangements and similar commission and fee
based arrangements. Gross profits for the year ended December 31, 1999
increased to $19.1 million from $4.0 million for the year ended December 31,
1998. As a percent of net revenues, gross profit for the year ended December
31, 1999 was 9.3%, an increase from 8.2% for the year ended December 31, 1998.
The increase in gross profit percentage was due to the recognition of software
licensing and advertising revenues.
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Operating Expenses. Operating expenses have increased significantly since
uBid's inception. This trend is expected to continue as uBid expands its
operations to increase its customer base, enhance its brand name and increase
its market share, all of which will require significant increases in marketing
and advertising, additional personnel, enhancements to uBid's website and
further development of its infrastructure. Creative had provided uBid with
administrative services (accounting, human resources, legal) (through June
1999), warehousing and distribution services (through June 1998), and
Internet/telecom and joint marketing services (through September 1999). The
costs of these services as a percent of total operating expenses have declined
each year since uBid's inception. uBid expects that these costs will continue
to decline as a percent of total operating expenses and in absolute dollars in
the future. Since the spin-off, uBid has had to perform certain administrative
and transactional services or engage third parties to perform those services.
uBid does not expect that the costs associated with the transition to internal
and third party administration and transaction processing will be material.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for sales and marketing personnel. For the year ended December 31,
1999, sales and marketing expenses increased to $22.2 million from $2.8 million
for the year ended December 31, 1998. Sales and marketing expenses as a percent
of net revenues were 10.8% for the year ended December 31, 1999, an increase
from 5.9% for the year ended December 31, 1998. These expenses have increased
due to increasing advertising expenditures and personnel additions. uBid
expects sales and marketing expenses to increase significantly in absolute
dollars in order to increase its customer base.
uBid has established marketing relationships with a number of online
companies including AOL, MSN/LinkExchange, MSN/Hotmail, PCWorld Online,
LookSmart, Prodigy and Road Runner to increase uBid's access to online
customers and build brand recognition. Under these arrangements, uBid receives
portal positioning, anchor tenancy, promotional placements, sponsorships and/or
banner advertisements for a monthly fee. Generally, these agreements have terms
up to three years, do not provide for a guaranteed renewal and may be
terminated by uBid without cause. uBid's payments to these online companies for
the year ended December 31, 1999 were approximately $4.1 million and its
payments in 2000 under these agreements will be approximately $5.1 million,
which does not include certain additional fees such as payments for producing a
certain level of new registrations. uBid expects to enter into additional
marketing relationships with other online companies to increase its customer
base.
Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop
uBid's website and related systems, charges relating to hosting of its website
and Internet/telecom operations, and amortization of capitalized software
development costs. For the year ended December 31, 1999, technology and
development expenses increased to $4.1 million from $1.0 million for the year
ended December 31, 1998. Technology and development costs as a percent of net
revenues were 2.0% for the year ended December 31, 1999, a slight decrease from
2.1% for the year ended December 31, 1998. uBid expects technology and
development expenses to increase in absolute dollars in the future as uBid
expands its operations.
General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses, warehousing and distribution, credit
card processing, accounting and administration, customer service,
merchandising, and executive and other general corporate expenses. Until the
spin-off date, Creative provided certain general and administrative services
for credit card processing, accounting and benefits administration. For the
year ended December 31, 1999, general and administrative expenses increased to
$16.1 million from $4.9 million for the year ended December 31, 1998. General
and administrative expenses have increased primarily due to costs to support
increased sales such as credit card processing and distribution expenses and
the hiring of additional personnel. General and administrative expenses as a
percent of net revenues were 7.8% for the year ended December 31, 1999, a
decrease from 10.1% for the year ended December 31, 1998. uBid expects general
and administrative expenses to increase in absolute dollars in the future as
uBid expand its operations.
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Stock Option Compensation Expense. Prior to uBid's initial public offering,
uBid had granted 1,038,278 options to purchase common stock at prices less than
the $15.00 per share initial public offering price. These options were
exercisable only in the event of a successful initial public offering or sale
of uBid. The completion of uBid's initial public offering on December 4, 1998
caused a new measurement date to occur, requiring uBid to compute compensation
expense based upon the difference between the exercise price of the options and
the IPO price. Based upon the difference between the IPO price of $15.00 per
share and the exercise prices of the 1,038,278 options outstanding at December
4, 1998, the total stock option compensation charge was $13.3 million, which
will be amortized over the vesting periods of the outstanding options. uBid
recognized approximately $3.5 million of this charge in the year ended December
31, 1999 and $5.3 million of this charge in the year ended December 31, 1998.
Income Taxes. uBid has had a net loss since its inception in 1997 and expect
to incur losses for the foreseeable future. No benefit for income taxes was
provided in 1997, 1998 or 1999 due to the uncertainty of realization of these
benefits in future years.
Net Loss. Based on the foregoing information, uBid had a net loss of $25.5
million for the year ended December 31, 1999, compared to $10.2 million for the
year ended December 31, 1998. The loss in the year ended December 31, 1999 was
due in part to sales and marketing expenditures, investments in infrastructure
as uBid continued to expand its sales operations, and a non-cash charge for
amortization of stock compensation expense related to pre-IPO stock options.
uBid expects to continue to experience losses for the foreseeable future as
uBid continues to make significant investments in building its customer base
and operating infrastructure.
Period from April 1, 1997 (inception) to December 31, 1997 and Year Ended
December 31, 1998
Net Revenues. uBid held its first auction the last week of December 1997.
For the year ended December 31, 1998, net revenues were $48.2 million. Growth
in net revenues was due to significant growth in its customer base, an expanded
selection of merchandise offered and an increase in the number of auctions
per week.
Gross Profits. Gross profits for the year ended December 31, 1998 were $4.0
million. As a percent of net revenues, uBid's gross margin was 8.2% for the
year ended December 31, 1998. Gross margin is affected by uBid's ability to
cost-effectively source merchandise and attract sufficient traffic to its
Website to achieve a favorable balance between the number of bidders and the
amount of merchandise auctioned. Merchandise acquired from Creative represented
over 90% of the merchandise sold in the first two months of operations,
decreasing to approximately 30% in March and April 1998, and represented less
than 10% for 1998.
Operating Expenses. uBid's operating expenses have increased significantly
since its inception. This trend is expected to continue as uBid continues to
expand its operations to increase its customer base, enhance its brand name and
increase its market share, all of which will require significant increases in
marketing and advertising, additional personnel, enhancements to uBid's Website
and further development of its infrastructure. Creative provided administrative
(accounting, human resources, legal) (through June 7, 1999), warehousing and
distribution (through June 1998), and Internet/telecom and joint marketing
services to uBid. The cost of these services represented 72% and 21% of uBid's
total operating expenses from its inception to December 31, 1997 and for the
year ended December 31, 1998, respectively.
Sales and Marketing. Sales and marketing expenses were approximately $10,000
and $2.8 million from uBid's inception to December 31, 1997 and for the year
ended December 31, 1998, respectively. Sales and marketing expenses as a
percent of net revenues were 5.9% for the year ended December 31, 1998. These
expenses have increased significantly each month of operations due to
increasing advertising expenditures and personnel additions.
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Technology and Development. Technology and development expenses were
approximately $66,000 and $1.0 million from uBid's inception to December 31,
1997 and for the year ended December 31, 1998, respectively. Technology and
development costs as a percent of net revenues were 2.1% for the year ended
December 31, 1998. In addition to the expenses in 1997, uBid capitalized
approximately $267,000 relating to the development of the core software for
uBid's Website. These costs are being amortized over three years. The increase
in technology and development expenses during 1998 was primarily attributable
to increased staffing and associated costs relating to enhancing the features
and functionality of uBid's Website and related systems.
General and Administrative. General and administrative expenses were
approximately $212,000 and $4.9 million for the period from uBid's inception to
December 31, 1997 and for the year ended December 31, 1998, respectively.
General and administrative expenses as a percent of net revenues were 10.1% for
the year ended December 31, 1998. Creative supplied general and administrative
services for warehousing and distribution, credit card processing, accounting
and benefits administration. General and administrative expenses increased
during 1998 primarily due to hiring additional personnel and related costs to
support increased sales such as credit card processing and distribution costs.
Stock Option Compensation Expense. As discussed above, uBid will incur a
total compensation charge of $13.3 million in connection with options uBid
granted prior to its initial public offering. This amount will be amortized
over the vesting periods of the outstanding options. uBid recognized $5.3
million of this charge to compensation in December 1998.
Income Taxes. uBid had a net loss since its inception in 1997 and expects to
incur losses for the foreseeable future. No benefit for income taxes was
provided in 1997 or 1998 due to the uncertainty of realization of these
benefits in future years.
Net Loss. Based on the foregoing information, uBid had a net loss of
approximately $313,000 and $10.2 million for the period from its inception to
December 31, 1997 and for the year ended December 31, 1998, respectively. In
the year ended December 31, 1998 the loss from operations before the non-cash
stock option compensation expense was $4.7 million, and the stock option
compensation expense totaled $5.3 million.
Liquidity and Capital Resources
Prior to uBid's December 1998 IPO, uBid financed its operations with
advances from Creative and cash flow from operations. The net proceeds from
uBid's IPO were $23.8 million and in September 1999, uBid completed a follow-on
offering of 2,300,000 shares of its common stock which yielded net proceeds of
$48.1 million.
Net cash used in operating activities was $16.5 million for the year ended
December 31, 1999 and approximately $108,000 for the year ended December 31,
1998. During the year ended December 31, 1999, the net decrease in cash from
operating activities was due to a net loss from operations of $25.5 million
after the non-cash compensation charge of $3.5 million, a $7.8 million increase
in inventory, a $3.0 million increase in accounts receivable, and a $2.2
million increase in prepaid expenses and other assets. This decrease was
partially offset by an $11.0 million increase in accounts payable, a $3.8
million increase in accrued marketing, a $3.1 million increase in accrued
freight, and a $3.2 million increase in accrued expenses and other current
liabilities.
Net cash used in investing activities was approximately $6.6 million for the
year ended December 31, 1999 and approximately $347,000 for the year ended
December 31, 1998. During the year ended December 31, 1999, the increase in
cash used in investing activities was due to approximately $4.5 million in
purchases of warehousing and office equipment and investments in software
development and systems related to uBid's auction platform. In addition, uBid's
restricted cash increased by $2.1 million due to collateral invested in
certificates of deposit which are used as security for uBid's office lease and
certain purchases from suppliers.
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Net cash provided by financing activities was approximately $48.6 million
for the year ended December 31, 1999 and $26.5 million for the year ended
December 31, 1998. During the year ended December 31, 1999, cash flow from
financing activities primarily consisted of proceeds from uBid's follow-on
public offering of 2,300,000 shares of common stock from which uBid received
$48.1 million, net of underwriting commissions and discounts.
uBid anticipates that it will have negative cash flows from operations for
the foreseeable future. Creative advanced cash to uBid for its operations until
the consummation of its IPO. Upon consummation of uBid's IPO, those advances
were converted into a note payable to Creative. The outstanding balance on the
note bears interest at the prime rate and will be repaid on or before June 4,
2000. For the year ended December 31, 1999, interest income of $1.5 million
earned on the proceeds of uBid's public offerings was partially offset by
interest expense of approximately $270,000 on the note payable to Creative. Net
proceeds from uBid's public offerings are being used for working capital needs,
including advertising and brand development for growth, as well as development
of uBid's infrastructure. Through December 31, 1999, uBid incurred expenses
related to establishing uBid as an independent company of approximately
$400,000 and uBid has spent a total of approximately $1.8 million in capital
expenditures to fully establish itself as an independent company. These
expenditures included warehouse and distribution equipment, hardware and
software for computer systems and furniture and fixtures. uBid funded the
purchase and leasing of this equipment with working capital. In August 1999,
uBid completed the transition to locate its primary website servers in the
Chicago area and plans to develop a fully redundant back-up site by the end of
the second quarter of 2000. Most of uBid's back office systems operations are
provided through agreements with Creative. Although uBid anticipates continuing
to use its current back office administrative systems in Torrance for the near
term, uBid intends to purchase its own hardware and software systems, by the
end of the second quarter of 2000, at an estimated cost of approximately $1
million. In addition, uBid plans to install new database management software,
purchase new enterprise software and upgrade its existing systems over the next
12 months at a total estimated cost of approximately $3.3 million. uBid expects
to fund the purchase of this equipment with working capital.
uBid expects to use a substantial amount of its working capital for sales
and marketing expenditures to increase its customer base, and expects sales and
marketing expenses to increase significantly both in absolute dollars and as a
percentage of revenues. There can be no assurance this will result in levels of
increased revenues that justify such expenditures.
uBid intends to retain any earnings for the foreseeable future for use in
the operation and expansion of its business. Consequently, uBid does not
anticipate paying any cash dividends on its common stock to its stockholders
for the foreseeable future. In addition, it is probable that any debt financing
agreements uBid may enter into will contain restrictions on its ability to
declare dividends.
uBid believes that the net proceeds from its IPO and its recent follow-on
offering will satisfy its working capital and capital expenditure requirements
for at least the next twelve months. However, there can be no assurance uBid
will not require additional funds prior to the expiration of such period. If
uBid's capital requirements vary materially from those currently planned, uBid
could require additional financing sooner than anticipated. There can be no
assurance that any such financing will be available on acceptable terms, if at
all, or that such financing will not be dilutive to uBid's stockholders.
uBid's ability to raise equity capital within the next two years may be
limited as a result of statutory and contractual restrictions relating to the
spin-off. For a discussion of these restrictions and the risks they present,
see the investment consideration captioned "uBid is subject to restrictions on
its ability to issue equity securities, which may limit its ability to grow its
business and compete effectively."
Year 2000
Computer systems, software packages, and microprocessor dependent equipment
may cease to function or generate erroneous data during the year 2000. The
problem could affect those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field is required to be what is commonly termed "year 2000
compliant."
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uBid may realize exposure and risk if the systems for which it is dependent
upon to conduct day-to-day operations are not year 2000 compliant. The
potential areas of exposure include electronic data exchange systems operated
by third parties with whom uBid transacts business, certain products purchased
from third parties for resale, and computers, software, telephone systems and
other equipment used internally. To
minimize the potential adverse affects of the year 2000 problem, uBid
established an internal project team comprised of all functional disciplines.
This project team identified internal systems (both information technology and
non-information technology systems) that were not year 2000 compliant,
determined their significance in the effective operation of uBid, and developed
plans to resolve the issues where necessary. uBid communicated with the
suppliers and others with whom it does business to coordinate year 2000
readiness. The responses received by uBid indicated that steps were being
undertaken to address this concern. However, if such third parties are not able
to make all systems year 2000 compliant, there could be a material adverse
impact on uBid.
uBid's principal transaction processing software through which nearly all of
uBid's business is transacted appears to be year 2000 compliant and, as such,
uBid does not anticipate any material adverse operational issues to arise. uBid
implemented corrective solutions before the end of the third quarter of 1999.
The costs incurred by uBid with respect to this project were approximately
$500,000, all of which was recorded as an expense in the year incurred. uBid
does not expect to make significant expenditures in the future relating to the
year 2000 issue.
uBid believes its auction software to be year 2000 compliant and full
compliance of the auction software was verified by an external consultant in
1999. uBid currently runs various third party applications that required year
2000 updates. These were implemented prior to the end of 1999. Although uBid
has not experienced any material year 2000 problems or disruptions since
January 1, 2000, there can be no assurance that such problems or disruptions
will not occur in the future.
Market Risk
uBid's financial instruments include cash and government repurchase
agreements at fixed rates. At March 1, 2000, the carrying values of the uBid's
financial instruments approximated their fair values based on current market
prices and rates. uBid has not entered into any derivative financial
instruments. uBid does not have any foreign currency exposure because it does
not transact business in foreign currencies.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
AND MANAGEMENT OF UBID
The following table sets forth information concerning the beneficial
ownership of common stock of uBid as of December 31, 1999 for the following:
. each person or entity who is known by uBid to own beneficially more than
5% of the outstanding shares of uBid's common stock;
. each of uBid's current directors; and
. all directors and executive officers of uBid as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days of December 31, 1999 are deemed outstanding. Percentage of beneficial
ownership is based upon 11,543,842 shares of common stock outstanding at
December 31, 1999. To uBid's knowledge, except as set forth in the footnotes to
this table and subject to applicable community property laws, each person named
in the table has sole voting and investment power with respect to the shares
set forth opposite such person's name. Except as otherwise indicated, the
address of each of the persons in this table is as follows: c/o uBid, Inc. 8550
West Bryn Mawr, Suite 200, Chicago, Illinois 60631.
<TABLE>
<CAPTION>
Shares Beneficially Owned(15)
----------------------------------
Name of Beneficial Owner Number Percentage
- ------------------------ ----------------- ----------------
<S> <C> <C>
5% Stockholders:
Sam U. Khulusi (1)......................... 1,350,966 11.7%
Frank F. Khulusi (2)....................... 1,306,121 11.3
Directors and Named Executive Officers:
Gregory K. Jones (3)....................... 159,098 1.4
Thomas E. Werner (4)....................... 21,990 *
Timothy E. Takesue (5)..................... 31,055 *
Joel D. Ludvigsen (6)...................... 6,597 *
D. Paul Stolarski (7)...................... 7,500 *
Jason M. MacLean (8)....................... 7,500 *
Kenneth Dotson............................. -- N/A
Allen U. Lenzmeier (9)..................... 750 *
Mark C. Layton (10)........................ 5,332 *
Russell I. Pillar (11)..................... 750 *
Howard A. Tullman (12)..................... 5,415 *
Norman H. Wesley (13)...................... 8,415 *
All current executive officers and
directors as a group (12 persons) (14).... 254,402 2.2%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Sam Khulusi's address is 2459 208th Street, Suite 200, Torrance, California
90501. Includes options to purchase approximately 9,163 shares of uBid
common stock that are presently vested or will vest within 60 days of
December 31, 1999.
(2) Frank Khulusi's address is 2555 West 190th Street, Torrance, California
90505. Includes options to purchase approximately 58,740 shares of uBid
common stock that are presently vested or will vest within 60 days of
December 31, 1999 and 6,044 shares held in trust for the benefit of the
children of Basimah Khulusi.
(3) Includes options to purchase approximately 159,098 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
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(4) Includes options to purchase approximately 21,990 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(5) Includes options to purchase approximately 31,055 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(6) Includes options to purchase approximately 6,597 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(7) Includes options to purchase approximately 7,500 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(8) Includes options to purchase approximately 7,500 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(9) Includes options to purchase approximately 750 shares of uBid common stock
that are presently vested or will vest within 60 days of December 31,
1999.
(10) Includes options to purchase approximately 5,332 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(11) Includes options to purchase approximately 750 shares of uBid common stock
that are presently vested or will vest within 60 days of December 31,
1999.
(12) Includes options to purchase approximately 4,415 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(13) Includes options to purchase approximately 4,415 shares of uBid common
stock that are presently vested or will vest within 60 days of December
31, 1999.
(14) Includes an aggregate of 249,402 shares of uBid common stock issuable upon
exercise of stock options which are presently vested or will vest within
60 days of December 31, 1999.
(15) Does not include any shares vesting at the effective time of the merger.
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COMPARISON OF STOCKHOLDER RIGHTS
Both CMGI and uBid are corporations organized under the laws of Delaware and
are therefore subject to the Delaware General Corporation Laws ("DGCL").
However, there are differences in the charters and by-laws of CMGI and uBid.
The following is a brief summary of certain differences between the rights of
uBid stockholders and the rights of CMGI stockholders, and is qualified in its
entirety by reference to the relevant provisions of the charter and by-laws of
CMGI and uBid. See "Where You Can Find More Information" on page 99. Following
the effective time of the merger, the rights of former uBid stockholders will
be governed by the charter and by-laws of CMGI.
Capitalization
CMGI. CMGI is authorized to issue 400,000,000 shares of common stock and
5,000,000 shares of preferred stock, of which 250 shares are designated Series
A convertible preferred stock, 50,000 shares are designated Series B preferred
stock, 375,000 shares have been designated as Series C preferred stock and
18,090.45 shares have been designated as Series D preferred stock. The CMGI
board of directors has the authority, subject to certain stockholder approval
described below, to issue shares of authorized preferred stock from time to
time in one or more series and to fix the rights and preferences, including
voting rights, of each series of preferred stock, which rights and preferences
may be superior to that of CMGI common stock. On March 1, 2000, CMGI had issued
and outstanding:
. 279,687,934 shares of common stock;
. no shares of Series A preferred stock;
. 35,000 shares of Series B preferred stock (convertible into an aggregate
of approximately 2,820,653 shares of common stock as of March 1, 2000);
and
. 375,000 shares of Series C preferred stock (convertible into an
aggregate of approximately 9,506,110 shares of common stock as of March
1, 2000);
. no shares of Series D preferred stock.
The maximum number of shares of CMGI common stock into which shares of
Series B preferred stock may be converted is 8,333,336, subject to adjustment.
uBid. uBid is authorized to issue 20,000,000 shares of common stock and
5,000,000 shares of preferred stock. uBid's board of directors has the
authority, without stockholder approval, to determine or alter the rights,
preferences, privileges and restrictions on any unissued shares of preferred
stock. On February 9, 2000, uBid had issued and outstanding:
. 11,583,473 shares of common stock; and
. no shares of preferred stock.
Voting Rights
CMGI. Each holder of CMGI common stock is entitled one vote for each share.
Holders of each of Series B preferred stock and Series C preferred stock have
no voting power except as otherwise provided by the DGCL and the charter. On
such matters where the holders of each of Series B preferred stock and Series C
preferred stock have a right to vote with the holders of CMGI common stock,
they are entitled to vote their shares on an as converted basis.
CMGI's charter also gives the holders of each of Series B preferred stock
and Series C preferred stock the right to vote on enumerated actions that if
taken by CMGI would impair their rights, preferences and privileges.
Accordingly, CMGI must first obtain the affirmative vote or written consent of
the holders of a majority of the outstanding shares of such series of preferred
stock being adversely affected, before taking actions such as:
. changing the rights, preferences or privileges of such series of
preferred stock or any other capital stock of CMGI;
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<PAGE>
. increasing the number of authorized shares of such series of preferred
stock;
. authorizing or issuing any new class or series of securities senior or
equal to such series of preferred stock; and
. increasing the par value of the CMGI common stock.
uBid. Each holder of uBid common stock is entitled to one vote for each
share and may not cumulate votes for the election of directors.
Number and Classification of Directors
CMGI. CMGI's by-laws provide that its board of directors will consist of at
least three, but not more than 15, persons, and will designate the authorized
number of directors. CMGI's charter and by-laws provide for a classified board
of directors with three classes, each elected for a three year term, consisting
of as nearly an equal number of directors as possible. The elections are
staggered to provide for the election of a different class at each annual
meeting of the CMGI stockholders.
uBid. uBid's by-laws provide that the number of directors on its board is to
be set by resolution of the board. They also dictate that the board must
consist of at least three directors, but no more than seven. Currently, there
are six directors. The board of directors is elected at uBid's annual meeting
and holds office until the next annual meeting. uBid's certificate of
incorporation and by-laws provide for the board to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
Removal of Directors
CMGI. Subject to the rights of holders of any class or series of CMGI
capital stock having a preference over the CMGI common stock, CMGI's charter
and by-laws provide that the CMGI stockholders may remove directors from office
at any annual or special meeting of the stockholders by the affirmative vote of
at least 75% of the outstanding shares of capital stock of CMGI entitled to
vote in an election of directors.
uBid. uBid's by-laws provide that uBid stockholders may remove directors
from office at a meeting of the stockholders only for cause by the affirmative
vote of the holders of at least a majority of the outstanding shares entitled
to vote at an election of directors.
Filling Vacancies on the Board of Directors
CMGI. CMGI's charter and by-laws provide that its board of directors may
fill a vacancy on the board, including a vacancy resulting from an increase in
the size of the board, by an affirmative vote of the majority of the directors
then in office, although less than a quorum, or by a sole remaining director,
except as may be required by law. A director so elected will hold office until
the next election of such director's class and until a successor is elected and
qualified. A decrease in the number of authorized directors will not shorten an
incumbent director's term.
uBid. uBid's by-laws provide that its board of directors may fill a vacancy
on the board, including a vacancy resulting from any increase in the authorized
number of directors, by an affirmative vote of the majority of the directors
then in office. A director so elected will hold office until the next election
of such director's class and until a successor is elected and qualified.
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Charter Amendments
CMGI. CMGI's charter provides that the affirmative vote of at least 75% of
the shares of CMGI capital stock outstanding and entitled to vote is required
to amend, repeal or adopt a provision inconsistent with the following
provisions of the charter:
. restrictions on repurchases by
. stockholder action and special CMGI of shares of its capital
meetings of stockholders; stock from a holder who
beneficially owns more than 5% of
. the board's authority and powers, the outstanding shares of CMGI
including the authority to amend capital stock entitled to vote in
the by-laws and provide for the the election of directors;
issuance of preferred stock
without stockholder approval; . the requirement for a higher vote
of stockholders for business
. number, election and terms of combination proposals; and
directors;
. CMGI's reservation of its right
. personal liability of directors; to amend, alter, change or repeal
any other provision of the
. indemnification of directors and charter in the manner prescribed
officers; by the DGCL.
. factors the board may consider in
determining tender offers or
offers relating to business
combinations or sale of assets;
In addition, any amendment to the charter that would adversely affect the
rights and preferences of each of Series B preferred stock and Series C
preferred stock must be approved by a majority of the outstanding shares of the
holders of the series being so affected.
uBid. uBid's charter provides that the charter may be amended or provisions
repealed as provided by the DGCL, except for any amendment or repeal that would
affect:
(i) uBid's classified board structure; or
(ii) who may call a special meeting of the stockholder and whether
shareholders can act without a meeting,
which would require the affirmative approval of 80% of the outstanding shares
entitled to vote. Currently, this means that an amendment to the charter
requires the affirmative vote of a majority of the outstanding stock entitled
to vote, unless such amendment or repeal would affect Article 6 which concerns
uBid's classified board structure, or Article 11 which concerns who may call a
special meeting of the stockholder and whether shareholders can act without a
meeting.
Amendments to By-Laws
CMGI. CMGI's charter and by-laws provide that its board of directors may
amend the by-laws by a majority vote of the authorized number of directors. In
addition, CMGI's charter and by-laws provide that the CMGI stockholders may
amend the by-laws by an affirmative vote of 75% of the shares of CMGI capital
stock outstanding and entitled to vote in an election of directors, voting
together as a single class.
uBid. uBid's charter and by-laws provide that the board of directors may
make, alter or repeal the by-laws, by majority vote, except for any amendment
or repeal that would affect:
(i) the number and term of office of the uBid directors;
(ii) the indemnification of officers, directors, employees and agents of
uBid; or
(iii) amendments to the by-laws of uBid,
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<PAGE>
which would require the affirmative approval of 80% of the outstanding shares
entitled to vote. In addition, uBid's charter and by-laws provide that the uBid
stockholders may amend the by-laws, by an affirmative vote of a majority of the
shares of uBid capital stock outstanding and entitled to vote in an election of
directors, other than any amendment or repeal that would affect (i) the number
and term of office of the uBid directors, (ii) the indemnification of officers,
directors, employees and agents of uBid, or (iii) amendments to the by-laws of
uBid.
Notice of Stockholder Actions
CMGI. CMGI's by-laws provide that in order to nominate directors or bring
business before an annual meeting, stockholders must provide written notice to
the secretary of CMGI at least 120 days before the annual meeting date that was
stated in connection with the previous year's annual meeting. However, if CMGI
did not hold an annual meeting in the previous year or has changed the annual
meeting date by more than 30 days, then a stockholder must provide notice at
least 30 calendar days before the date on which the notice of the annual
meeting date is first mailed to stockholders.
uBid. uBid's by-laws provide that written notice of a meeting of
stockholders, specifying the place, date, hour and purpose of the meeting, must
be given not less than ten nor more than 60 days before the date of the meeting
to each stockholder entitled to vote, directed to his or her address as it
appears upon the books of the corporation; except that where the matter to be
acted upon is a merger or consolidation of the corporation or a sale, lease or
exchange of substantially all of its assets, the notice must be given not less
than twenty nor more than 60 days prior to the meeting.
Right to Call Special Meeting of Stockholders
CMGI. CMGI's by-laws restrict the persons who may call a special meeting of
CMGI stockholders to the chairman of the board, the board of directors if
pursuant to a resolution approved by a majority of the total authorized number
of directors, or the CMGI stockholders if pursuant to a written request of the
holders of 20% of the shares outstanding and entitled to vote at an election of
directors. The business to be conducted at any special meeting of CMGI
stockholders is limited to the business brought before the meeting by such
persons.
uBid. uBid's charter restricts the persons who may call a special meeting of
uBid stockholders to the chief executive officer, the president, and board of
directors pursuant to a resolution approved by a majority of the entire board.
Dividends and Distributions
CMGI. CMGI's charter provides that its board of directors, at its
discretion, may declare and pay dividends out of funds legally available for
dividends to the holders of CMGI common stock and Series C preferred stock.
Series B preferred stock does not bear any dividends. Series C preferred stock
ranks senior to CMGI common stock as to payment of dividends.
Holders of Series C preferred stock are entitled to receive cumulative
dividends equal to the annual dividend amount of 2% of its stated value
($1,000), payable semiannually, either in cash or, at CMGI's option, by an
upward adjustment to the stated value per share. In addition, in most
circumstances, restrictions apply on distributions made to a series or class of
CMGI securities junior in rank to each of Series B preferred stock and Series C
preferred stock. Accordingly, CMGI must obtain the written consent of the
holders of the majority of the outstanding shares of each of Series B preferred
stock and Series C preferred stock, each voting as a class, prior to making
such a junior security distribution.
uBid. The uBid board of directors may declare and pay dividends upon its
shares, subject to any restrictions in the DGCL. The DGCL provides that the
uBid board of directors, at its discretion, may declare and pay dividends out
of funds legally available to the holders of uBid common stock.
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Redemption
CMGI. CMGI common stock is not subject to redemption.
CMGI must redeem shares of Series B preferred stock upon the occurrence of
circumstances specified in the charter, including CMGI's assignment of all or
substantially all its property or business for the benefit of its creditors and
the institution of bankruptcy, insolvency, reorganization or liquidation
proceedings by or against CMGI.
In addition, holders of Series B preferred stock have the right to cause
CMGI to redeem their shares under specified circumstances, including CMGI's
failure either to issue shares of its common stock upon the conversion by
holders of shares of Series B preferred stock or to maintain the listing of its
common stock on the Nasdaq National Market. The redemption price per share is
the greater of a specified percentage of the stated value ($1,000) of Series B
preferred stock plus an amount equal to 4% per annum of the stated value and
the market price of CMGI common stock during the period specified in CMGI's
charter. In addition, at any time after December 21, 1999, CMGI has the option
to redeem shares of Series B preferred stock in the event that the closing
price of CMGI common stock is less than $18.25 for a period of ten consecutive
trading days. In such an event, the redemption price per share is 115% of the
stated value plus an amount equal to 4% per annum of the stated value. Holders
of shares of Series C preferred stock have the right to cause CMGI to redeem
their shares upon the occurrence of events specified in the charter, including
CMGI's failure to issue shares of common stock upon conversion by holders of
shares of Series C preferred stock. The redemption price will be an amount per
share equal to the liquidation preference on the date of notice to CMGI from
the holder of Series C preferred stock demanding redemption.
uBid. uBid common stock is not subject to redemption.
Liquidation
CMGI. In the event of any liquidation or dissolution of CMGI, holders of
CMGI capital stock are entitled to liquidation distributions. Series B
preferred stock ranks senior to Series C preferred stock which ranks senior to
CMGI common stock as to liquidation distributions.
Holders of Series B preferred stock are entitled to an amount per share
equal to the sum of the stated value plus an amount equal to 4% per annum of
the stated value for the period beginning on the issue date and ending on the
date of final distribution to the holder (prorated for any portion of such
period). CMGI's charter specifies corporate events, including a consolidation
or merger where CMGI is not the surviving corporation, that holders of Series B
preferred stock may elect to treat as a liquidation event and receive a
liquidation distribution equal to 118% of the stated value plus an amount equal
to 4% per annum of the stated value. Alternatively, holders of Series B
preferred stock may elect to have the conversion price for each share of Series
B preferred stock be adjusted accordingly. An affirmative vote of the holders
of a majority of the outstanding shares of Series B preferred stock is required
for either election.
Holders of Series C preferred stock are entitled to receive an amount per
share equal to the sum of the stated value, as adjusted, plus accrued but
unpaid dividends. CMGI's charter specifies corporate events, including a
consolidation or merger in which the CMGI stockholders do not own at least 50%
of the voting power of the acquiring company, that holders of Series C
preferred stock may elect either to treat as a liquidation event and receive a
liquidation distributions or to have the conversion price for each share of
Series C preferred stock be adjusted accordingly. An affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series C preferred
stock is required for either election.
uBid. uBid's charter does not provide liquidation rights for any class of
uBid capital stock.
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STOCKHOLDER PROPOSALS
Although it is expected that the closing of the merger with CMGI will occur
promptly after the stockholder's special meeting, in the event the closing of
the merger is delayed and uBid is required to hold an annual meeting in 2000,
it is expected that such annual meeting will be held on or about August 2000.
In such event, stockholder proposals for inclusion in the proxy material for
uBid's 2000 annual meeting of stockholders should be submitted to the secretary
of uBid in writing and received at the executive offices of uBid a reasonable
time before uBid begins to print and mail its proxy materials for the 2000
annual meeting, which printing and mailing date is expected to be on or about
July 2000. Such proposals must also have met the other requirements of the
rules of the Securities and Exchange Commission relating to stockholder
proposals and must have satisfied the notice procedures for stockholder
proposals set forth in the uBid by-laws. Under uBid's by-laws, a stockholder's
notice to uBid must set forth for each matter proposed to be brought before the
annual meeting (a) a brief description of the matter the stockholder proposes
to bring before the meeting and the reasons for conducting such business at the
meeting, (b) the name and recent address of the stockholder proposing such
business, (c) the class and number of shares of uBid which are beneficially
owned by the stockholder, and (d) any material interest of the stockholder in
such business. With respect to proposals by stockholders for director
nominations, uBid's by-laws require written notice to be received by uBid not
less than 30 days nor more than 60 days before the meeting, unless less than 40
days' notice or public disclosure of the meeting is given, in which case the
stockholder's notice must be received within 10 days after such notice or
disclosure is given. The notice must contain specified information about the
proposed nominee and the stockholder making the nomination.
LEGAL MATTERS
The validity of the shares of CMGI common stock to be issued in connection
with the merger will be passed upon for CMGI by Hale and Dorr LLP.
EXPERTS
The consolidated financial statements and schedule of CMGI as of July 31,
1999 and 1998, and for each of the years in the three-year period ended July
31, 1999, have been incorporated by reference herein and elsewhere in this
proxy statement/prospectus in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon
authority of said firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of uBid, Inc. at December 31, 1998 and 1999, and for the period from
April 1, 1997 (Inception) to December 31, 1997 and for the years ended December
31, 1998 and 1999, as set forth in their report. The financial statements are
included in the proxy statement/prospectus and registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
The discussions included under the heading "Material United States Federal
Income Tax Considerations" were prepared for uBid by PricewaterhouseCoopers
LLP, and the discussions included under the heading "Amendment to Tax
Indemnification Agreement" were prepared for CMGI by KPMG LLP independent
certified public accountants, and have been included herein, and upon the
authority of said firms as experts in tax accounting.
The financial statements of AltaVista Company as of December 31, 1997 and
1998 and for the years ended December 31, 1996 and 1997, and for the period
from January 1, 1998 through June 11, 1998 and for the period from June 12,
1998 through December 31, 1998, the financial statements of Zip2 as of December
31, 1997 and 1998, and for each of the years in the three-year period ended
December 31, 1998, and the financial statements of Shopping.com as of January
31, 1998 and 1999 and for each of the years in the two-year period ended
January 31, 1999, have been incorporated by reference herein in reliance upon
the reports of PricewaterhouseCoopers LLP, independent accountants, given upon
the authority of said firm as experts in
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auditing and accounting. The financial statements of Shopping.com as of the
year ended January 31, 1997, have been incorporated by reference herein in
reliance upon the report of Singer Lewak Greenbaum & Goldstein LLP, independent
certified public accountants, upon the authority of said firm as experts in
accounting and auditing.
The consolidated balance sheets of yesmail as of December 31, 1998 and 1999,
and the related consolidated statements of operations, stockholders' (deficit)
equity and cash flows for each of the two years ended December 31, 1999, have
been incorporated by reference in this registration statement and have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are incorporated herein by reference in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of Tallan as of December 31, 1998 and 1999 and for
each of the three years in the period ended December 31, 1999 have been
incorporated by reference herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
CMGI and uBid each files annual, quarterly and special reports, proxy
statement/prospectus and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
that CMGI or uBid files at the Securities and Exchange Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services and at the web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
CMGI will file with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933 to register with the
Securities and Exchange Commission the CMGI common stock issuable pursuant to
the merger agreement. This proxy statement/prospectus does not contain all the
information you can find in the registration statement or the exhibits and
schedules to the registration statement. For further information with respect
to CMGI, uBid and the CMGI common stock, please refer to the registration
statement, including the exhibits and schedules. You may inspect and copy the
registration statement, including the exhibits and schedules, as described
above. Statements contained in this proxy statement/prospectus about the
contents of any contract or other document are not necessarily complete, and
CMGI refers you, in each case, to the copy of such contract or other document
filed as an exhibit to the registration statement.
The Securities and Exchange Commission allows CMGI and uBid to "incorporate
by reference" information into this proxy statement/prospectus, which means
that CMGI and uBid can disclose important information to you by referring you
to another document filed separately with the Securities and
Exchange Commission. The information incorporated by reference is deemed to be
part of this proxy statement/prospectus, except for any information superseded
by information in this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that CMGI and uBid have previously filed with the Securities and Exchange
Commission. These documents contain important information about CMGI and uBid
and their finances that you should read.
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<TABLE>
<CAPTION>
CMGI Securities and Exchange
Commission Filings (File No. 000-
23262) Period
--------------------------------- ------
<C> <S>
Annual Report on Form 10-K.......... Fiscal year ended July 31, 1999
Quarterly Reports on Form 10-Q...... Fiscal quarters ended October 31, 1999
and January 31, 2000
Current Reports on Form 8-K......... Filed on August 12, 1999, September 2,
1999, September 3, 1999, September 27,
1999, October 1, 1999, December 17, 1999,
January 24, 2000, February 22, 2000 and
March 10, 2000
Current Reports on Form 8-K/A....... Filed on November 1, 1999 (amending the
Current Report on Form
8-K filed on September 2, 1999) and filed
on November 17, 1999 (further amending
the Current Report on Form 8-K filed on
September 2, 1999)
Registration Statement on Form 8-A.. Filed on January 11, 1994
<CAPTION>
uBid Securities and Exchange
Commission Filings (File No. 000-
25119) Period
--------------------------------- ------
<C> <S>
Annual Report on Form 10-K.......... Fiscal year ended December 31, 1998
Quarterly Reports on Form 10-Q...... Fiscal quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999
Current Reports on Form 8-K......... Filed on May 19, 1999 and February 14,
2000
</TABLE>
CMGI and uBid are also incorporating by reference additional documents that
CMGI and uBid may file with the Securities and Exchange Commission between the
date of this proxy statement/prospectus and the date of the special meeting of
uBid stockholders.
CMGI has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to CMGI, and uBid has supplied all
information contained in this proxy statement/prospectus relating to uBid.
Documents incorporated by reference are available from CMGI without charge,
excluding all exhibits unless CMGI has specifically incorporated by reference
an exhibit in this proxy statement/prospectus. Stockholders may obtain
documents incorporated by reference in this proxy statement/prospectus from
CMGI by requesting them in writing or by telephone at the following address:
CMGI, Inc.
Attention: Catherine Taylor
Director of Investor Relations
100 Brickstone Square
Andover, MA 01810
Telephone: (978) 684-3600
Internet address: http://www.cmgi.com
If you would like to request documents from CMGI, please do so by April 21,
2000, to receive them before the uBid special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the merger agreement
and the merger. CMGI and uBid have not authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated March 27, 2000.
You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than March 27, 2000, and
neither the mailing of the proxy statement/prospectus to uBid stockholders nor
the issuance of CMGI common stock in the merger shall create any implication to
the contrary.
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
uBid, Inc.
We have audited the accompanying balance sheets of uBid, Inc. as of December
31, 1998 and 1999, and the related statements of operations, cash flows and
changes in stockholders' equity for the period from April 1, 1997 (Inception)
to December 31, 1997 and the years ended December 31, 1998 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of uBid, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from April 1, 1997 (Inception) to December 31, 1997 and the years ended
December 31, 1998 and 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
January 17, 2000, except for Note 9, as to which
the date is February 9, 2000
F-1
<PAGE>
uBid, Inc.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 26,053 $ 51,544
Restricted cash.......................................... -- 2,092
Accounts receivable, net of allowances of $20 and $113,
respectively............................................ 623 3,615
Merchandise inventories.................................. 7,235 15,098
Prepaid expenses and other assets........................ 195 2,374
-------- --------
Total current assets................................... 34,106 74,723
Fixed assets, net.......................................... 519 4,543
-------- --------
Total assets........................................... $ 34,625 $ 79,266
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to Creative................................. $ -- $ 3,331
Accounts payable......................................... 9,013 19,995
Accrued marketing........................................ 948 4,753
Accrued freight.......................................... 444 3,508
Accrued expenses and other current liabilities........... 2,256 2,417
-------- --------
Total current liabilities.............................. 12,661 34,004
Note payable to Creative................................... 3,331 --
Stockholders' equity :
Preferred Stock; $.001 par value; 5,000,000 shares
authorized; no shares
issued or outstanding................................... -- --
Common Stock; $.001 par value; 20,000,000 shares
authorized;
11,543,842 and 9,146,883 shares issued and outstanding
as of
December 31, 1999 and December 31, 1998, respectively... 2 4
Additional paid-in-capital................................. 37,138 85,752
Deferred stock option compensation expense................. (8,025) (4,517)
Accumulated deficit........................................ (10,482) (35,977)
-------- --------
Total stockholders' equity............................. 18,633 45,262
-------- --------
Total liabilities and stockholders' equity............. $ 34,625 $ 79,266
======== ========
</TABLE>
See notes to the financial statements
F-2
<PAGE>
uBid, Inc.
STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Years Ended
(Inception) to December 31,
December 31, ----------------------
1997 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
Net revenues........................... $ 9 $ 48,232 $ 204,925
Cost of revenues....................... 8 44,257 185,798
---------- ---------- ----------
Gross profit........................... 1 3,975 19,127
Operating expenses:
Sales and marketing.................. 10 2,829 22,154
Technology and development........... 66 1,022 4,092
General and administrative........... 212 4,856 16,073
Stock based compensation............. -- 5,267 3,508
---------- ---------- ----------
Total operating expenses........... 288 13,974 45,827
---------- ---------- ----------
Loss from operations................... (287) (9,999) (26,700)
Interest income........................ -- 74 1,475
Interest expense....................... (26) (244) (270)
---------- ---------- ----------
Net loss............................... $ (313) $ (10,169) $ (25,495)
========== ========== ==========
Basic and diluted net loss per share... $ (0.04) $ (1.36) $ (2.61)
========== ========== ==========
Shares used to compute basic and
diluted net loss per share............ 7,329,883 7,461,061 9,765,366
</TABLE>
See notes to the financial statements
F-3
<PAGE>
uBid, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
April 1, 1997 Years Ended
(Inception) to December 31,
December 31, ------------------
1997 1998 1999
-------------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(313) $(10,169) $(25,495)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 4 155 473
Non cash stock option expense........... -- 5,267 3,508
Changes in operating assets and
liabilities:
Accounts receivable, net.............. (9) (614) (2,992)
Merchandise inventories, net.......... (2) (7,233) (7,863)
Prepaid expenses and other assets..... (20) (175) (2,179)
Accounts payable...................... -- 9,013 10,982
Accrued marketing..................... -- 948 3,805
Accrued freight....................... -- 444 3,064
Accrued expenses and other current
liabilities -- 2,256 161
----- -------- --------
Net cash used in operating activities....... (340) (108) (16,536)
Cash flows from investing activities:
Increase in restricted cash............... -- -- (2,092)
Purchases of property and equipment....... (331) (347) (4,497)
----- -------- --------
Net cash used in investing activities....... (331) (347) (6,589)
Cash flows from financing activities:
Issuance of common stock to Creative...... 1 -- --
Advances from Creative.................... 670 (670) --
Note payable to Creative.................. -- 3,331 --
Proceeds from public offerings of common
stock and exercises of stock options..... -- 23,847 48,616
----- -------- --------
Net cash provided by financing activities... 671 26,508 48,616
----- -------- --------
Net change in cash and cash equivalents..... -- 26,053 25,491
Cash and cash equivalents at beginning of
period..................................... -- -- 26,053
----- -------- --------
Cash and cash equivalents at end of period.. $ -- $ 26,053 $ 51,544
===== ======== ========
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest................................ -- 248 244
</TABLE>
See notes to the financial statements
F-4
<PAGE>
uBid, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common stock Additional
------------- paid-in Deferred Accumulated
Shares Amount capital Compensation deficit Total
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to Creative ........... 7,330 $ 1 $ -- $ -- $ -- $ 1
Net loss for the
period................. -- -- -- -- (313) (313)
------ ---- ------- ------- -------- --------
Balance at December 31,
1997................... 7,330 $ 1 $ -- $ -- $ (313) $ (312)
Issuance of common stock
in IPO................. 1,817 1 23,846 -- -- 23,847
Stock based
compensation........... -- -- 13,292 (13,292) -- --
Amortization of deferred
stock option
compensation .......... -- -- -- 5,267 -- 5,267
Net loss for the year... -- -- -- -- (10,169) (10,169)
------ ---- ------- ------- -------- --------
Balance at December 31,
1998................... 9,147 $ 2 $37,138 $(8,025) $(10,482) $ 18,633
Issuance of common stock
in public offering..... 2,300 2 48,109 -- -- 48,111
Issuance of common stock
upon exercise of stock
options, net of
repurchases............ 97 -- 505 -- -- 505
Amortization of deferred
stock option
compensation .......... -- -- -- 3,508 -- 3,508
Net loss for the year... -- -- -- -- (25,495) (25,495)
------ ---- ------- ------- -------- --------
Balance at December 31,
1999................... 11,544 $ 4 $85,752 $(4,517) $(35,977) $ 45,262
====== ==== ======= ======= ======== ========
</TABLE>
See notes to the financial statements.
F-5
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share data)
1. Description of Company and Summary of Significant Accounting Policies
Description of Company
The Company is engaged in the retail sale of merchandise, including new,
close-out, and refurbished products, utilizing an interactive online auction.
The Company currently specializes in selling primarily brand name computers,
consumer electronics, housewares, jewelry, and sporting goods and memorabilia
over the World Wide Web to consumers and small and medium-sized businesses.
The Company was established by Creative Computers ("Creative") in April 1997
and was incorporated in Delaware in September 1997 as a wholly-owned, indirect
subsidiary of Creative. Beginning on April 1, 1997 ("Inception"), prior to the
formation of the Company, Creative began funding certain startup and
development costs related to the Company's business. On September 19, 1997,
assets and liabilities related to the Company were recorded by the Company at
Creative's basis. The financial statements have been prepared as if the Company
operated as a stand-alone entity since Inception.
Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three months
or less are considered cash equivalents.
Restricted Cash
The Company maintains restricted collateral invested in certificates of
deposits, which mature within one year, and are used as security for the
Company's office lease and certain purchases from suppliers. The classification
is determined based on the expected term of the collateral requirement and not
necessarily the maturity date of the underlying securities.
Revenue Recognition
The Company sells merchandise purchased from suppliers under two types of
arrangements. The Company either purchases merchandise for inventory or
purchases merchandise at the time of sale under consignment-type revenue
sharing agreements. For the years ended December 31, 1998 and 1999, the
Company's sales of merchandise purchased for inventory comprised approximately
96% and 88% of product revenues, respectively, with merchandise purchased under
consignment-type revenue sharing agreements representing approximately 4% and
12% of product revenues, respectively.
The Company recognizes revenue for advertising placed on its Website during
the period in which the advertisement is displayed, provided that no
significant Company obligations remain at the end of the period and collection
of the resulting receivable is probable. The Company recognizes software
licensing revenue when all the criteria of American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, are met. The Company recognizes revenue from payments for
professional services as the related services are performed. The Company
derives revenue from premium and exclusive placements of vendors in their
related category on the Company's Website on a straight-line basis over the
term of the related vendor contract. Commissions and fees from the sale of
equipment and merchandise through the Company's co-branded business-to-business
Websites are recognized on the date the related auction is concluded.
F-6
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
Sales -- merchandise held in inventory
For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing merchandise returns and collecting
accounts receivable. The Company recognizes the gross sales amount as revenue
upon verification of the credit card transaction authorization and shipment of
the merchandise. In instances where the credit card authorization has been
received but the merchandise has not yet been shipped, the Company defers
revenue recognition until the merchandise is shipped. The Company had no
deferred revenue related to sales of purchased inventory as of December 31,
1998 or 1999.
Sales -- merchandise purchased at time of sale under revenue sharing
agreements
For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the supplier retains
physical possession of the merchandise. In either case, the Company is not
obligated to take title to the merchandise nor does it take title unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company purchases the inventory, takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or
arranges for a third party to complete delivery to the customer. The Company
records the gross sales amount as revenue upon verification of the credit card
authorization and shipment of the merchandise. In instances where credit card
authorization has been received but the merchandise has not been shipped, the
Company defers revenue recognition until the merchandise is shipped. The
Company had no deferred revenue related to sales from revenue sharing
agreements as of December 31, 1998 or 1999.
Merchandise return policy
The Company's return policy is that merchandise sold by the Company is sold
on an "as is" basis and is not returnable. However, the Company, although not
obligated to do so, may accept merchandise returns if a product is defective or
does not conform to the specifications of the item sold at auction, and
attempts to work with its customers to resolve complaints about merchandise.
The Company provides for allowances for estimated future returns at the time of
shipment based on historical experience.
Merchandise Inventory
The Company accounts for merchandise inventory under the first-in first-out
method. Inventory is carried at lower of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the assets
which range from three to five years. Leasehold improvements are stated at cost
and depreciation is computed using the straight-line method over the shorter of
the useful life of the asset or the term of the lease.
Accounting for the Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
F-7
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
Software Development Costs
Internal and external costs incurred to develop internal-use computer
software are expensed during the preliminary project stage and capitalized
during the application development stage and amortized over three years. During
the period ended December 31, 1997 and the years ended December 31, 1998 and
1999, $39, $0, and $124 was expensed, respectively. As of December 31, 1998 and
December 31, 1999, capitalized software net of accumulated amortization was
$176 and $1,391, respectively.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising expense
was $0, $2,669 and $21,193 for the period ended December 31, 1997 and years
ended December 31, 1998 and 1999, respectively.
The Company has marketing relationships with a number of online companies
including AOL, MSN/LinkExchange, PC World Online, LookSmart and Prodigy
pursuant to which it receives portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by the Company without cause. There
were no payments made under these agreements for 1997. The Company's payments
to these online companies for years ended December 31, 1998 and 1999 were
approximately $433 and $4,077, respectively.
Income Taxes
Deferred income taxes are recognized by applying enacted statutory tax rates
applicable to future years to differences between the tax bases and financial
reporting amounts of existing assets and liabilities. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The operations of the Company are included in the consolidated tax return of
Creative for the period prior to the spin-off (see Note 3). The tax provision
presented in these financial statements for that period was determined as if
the Company had filed a separate return.
Accounting for Stock Option Compensation
The Company accounts for stock options as prescribed by APB Opinion No. 25
and includes pro forma information in the Stock options footnote, as permitted
by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation.
Net Loss per Share
Basic net loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding during the
reported periods. Diluted net loss per share reflects the potential dilution
that could occur if stock options and other commitments to issue common stock
were exercised. During the period ended December 31, 1997, and the years ended
December 31, 1998 and 1999, options to purchase 458,118, 1,107,278 and
2,887,775 common shares, respectively, were anti-dilutive and have been
excluded from the weighted average share computation.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable from individuals
and merchants located in the United States. Sales are generally made
F-8
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
through credit cards and are pre-approved. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of
accounts receivable and potential credit losses. Such losses have been
immaterial.
Concentration of Suppliers
The Company is dependent upon suppliers to provide it with merchandise for
sale through the Company's Internet auctions. For the period from Inception to
December 31, 1997 one supplier, Creative, accounted for approximately 100% of
net revenues from related product sales. For the years ended December 31, 1998
and December 31, 1999, no individual supplier accounted for greater than 10% of
net revenues from related product sales.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that fair values be disclosed for
most of the Company's financial instruments. The carrying amounts of the
Company's financial instruments, which include cash, accounts receivable, note
payable, and current liabilities are considered to be representative of their
respective fair values.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those estimates.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which requires the Company to display
comprehensive income (loss) and its components as part of the financial
statements. The Company has no components of other comprehensive loss, and, as
a result, the comprehensive loss is the same as the net loss for all periods
presented.
Stock Splits
On June 25, 1998, the Company effected a 100,000-for-1 split of its Common
Stock. On November 30, 1998, the Company effected a .7329883-for-1 reverse
split of its common stock. All common shares and per share data have been
retroactively adjusted to reflect these stock splits.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133,
which will be effective for the Company for the fiscal year and quarters
beginning after June 15, 2000, requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and
F-9
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
measure those instruments at fair value. The Company does not expect the
potential effect of adopting the provisions of SFAS No. 133 to have a
significant impact on its financial position, results of operations, and cash
flows.
Non-monetary Transaction
In August 1999, the Company reached an agreement with ICON International,
Inc. to acquire media trade credits for online and offline advertising in
exchange for approximately $2,500 of the Company's inventory. The Company
recorded the trade credits at the net realizable value of the inventory. The
Company recorded no gain or loss related to this transaction. The unused trade
credits will expire in August 2004.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
----- ------
<S> <C> <C>
Computer, machinery and equipment.......................... $ 372 $2,363
Computer software.......................................... 306 1,471
Furniture and fixtures..................................... -- 741
Leasehold improvements..................................... -- 600
----- ------
678 5,175
Less accumulated depreciation and amortization............. (159) (632)
----- ------
$ 519 $4,543
===== ======
</TABLE>
3. Related Party Transactions
From Inception to the Company's initial public offering (IPO), Creative
provided advances to the Company for working capital and fixed asset purchases
of $670 and $3,331 through December 31, 1997 and December 31, 1998,
respectively. Upon consummation of the Company's IPO (see Note 6), the $3,331
was converted to a note payable to Creative. The outstanding balance on the
note bears interest at the prime rate and will be repaid in June 2000. Interest
expense on these advances and notes payable was $26, $244, and $270 for the
period ended December 31, 1997 and the years ended December 31, 1998 and 1999,
respectively. In addition, from the date of the IPO until December 31, 1998,
Creative advanced the Company an additional $1,277 in short-term non-interest
bearing advances. The advances related to cash disbursements made by Creative
on behalf of the Company during the transition period while the Company
established its own cash management programs. These advances were settled on at
least a monthly basis. During the transition period, the Company continued to
participate in Creative's cash management process through May 1999. In
connection therewith, cash receipts related to the Company's business were
applied directly to reduce the advances from Creative.
F-10
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
In addition, Creative provided various services to the Company such as
administration (accounting, human resources, legal) through June 7, 1999,
warehousing and distribution through June 1998, and Internet/telecom and joint
marketing through September 1999. In consideration for those services, Creative
historically allocated a portion of its overhead costs related to such services
to the Company. The charges for these services were:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------
Period from
April 1, 1997
(Inception) to
December 31,
1997 1998 1999
-------------- ------ ------
<S> <C> <C> <C>
Administrative.............................. $ 36 $ 481 $ 479
Warehousing and distribution................ -- 550 549
Internet/telecom and joint marketing........ 172 773 548
---- ------ ------
$208 $1,804 $1,576
==== ====== ======
</TABLE>
Administration costs for services provided by Creative to the Company were
determined by identifying all of Creative's personnel who supported the
Company. Their pay, based on the number of hours of service provided, benefits,
plus an allocation of overhead, was used to calculate these costs. Credit card
processing costs for transactions above a certain dollar amount were based on
$1.50 per order. Prior to June 30, 1998, warehousing and distribution was
charged at $4.00 per order and was based on Creative's fully burdened cost per
order for warehousing and distribution. Effective July 1, 1998 the Company
began subleasing 50,000 square feet of warehouse space from Creative at its
marginal cost. In October 1998, the sublease was increased to 100,000 square
feet on the same terms. In December 1999, the Company entered into an
additional sublease with Creative for 70,000 square feet. The Company is also
charged a pro-rata share, based on square footage, of the warehouse utilities,
property taxes, and other warehouse costs. Direct labor to operate the
warehouse was charged directly to the Company. Internet/telecom service costs
included an allocation of monthly depreciation for all hardware and software
based on usage by the Company, as well as monthly rates for telecommunication
expenses consumed by the Company. Management asserts that the methods to
identify and allocate costs to the Company for these services provided by
Creative were reasonable.
The Company and Creative entered into on or prior to the consummation of the
IPO, certain agreements governing various interim and ongoing relationships
between the Company and Creative after the completion of the IPO and
Distribution. The terms of such agreements generally provide for services to be
rendered by Creative similar to those described above. The costs of general
accounting services, payroll and benefits administration, and
internet/telecommunications were charged based on Creative's cost plus 10%.
Credit services are charged at $1.50 per transaction. Effective July 1, 1998,
the Company began subleasing a portion of Creative's distribution facility.
Pursuant to the Sublease Agreements, future minimum lease payments to Creative
are $288, $288 and $96 in the years 2000, 2001 and 2002, respectively. The
agreement pursuant to which Creative provides the Company with general
accounting, payroll and benefits administration, and
internet/telecommunications services was terminated upon completion of the
Separation and the Distribution.
On June 7, 1999, Creative distributed to its shareholders its remaining
equity interest in the Company consisting of 7,329,883 shares of Common Stock.
In connection with the spin-off, options to purchase common stock of Creative
that were outstanding as of the date of the spin-off were adjusted to become
options to purchase shares of both Creative's common stock and the Company's
Common Stock. The Company issued options to purchase 520,473 shares of Common
Stock to holders of these Creative options. The number of options to purchase
Common Stock was based on the ratio of the number of shares of Company Common
F-11
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
Stock distributed to Creative shareholders in the spin-off to the number of
shares of Creative common stock outstanding on the record date for the spin-
off. The exercise price for each adjusted option was allocated between the
option to purchase Creative Common Stock and the option to purchase Company
Common Stock based on the respective pre- and post-distribution prices of
Creative's common stock and the Company's Common Stock. Such options were
issued under the Company's 1998 Stock Incentive Plan.
4. Income Taxes
No tax benefit has been provided for pretax losses due to the uncertainty of
realization of these benefits in future years. This is the primary reason the
amount of income tax benefit recorded is less than the amount of income tax
benefit calculated using the U.S. federal statutory rate of 35% for the period
ended December 31, 1997 and for the years ended December 31, 1998 and 1999.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs....................... $ 84 $ 63
Net operating loss carryforwards..................... 1,990 10,814
Stock option compensation............................ 2,107 3,510
Other................................................ 12 45
------- --------
4,193 14,432
Valuation allowance................................ (4,193) (14,432)
------- --------
$ -- $ --
======= ========
</TABLE>
The Company has recorded a 100% valuation allowance equal to the net
deferred tax asset balance based upon management's determination that the
recognition criteria for realization have not been met.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $27 million, which may be used to offset future taxable income.
The net operating loss carryforwards expire beginning in 2012, if not used.
Should certain changes in the Company's ownership occur, there could be a
limitation on the utilization of its net operating losses.
5. Employee Benefits
401(k) Savings Plan
In July 1999, the Company established a 401(k) Savings Plan which covers
substantially all Company full-time employees. Participants may make tax-
deferred contributions of up to 15% of annual compensation (subject to other
limitations specified by the Internal Revenue Code). Through June 1999, the
Company's employees were participants in the 401(k) Plan of Creative. The
related administrative and matching costs, which were charged to the Company by
Creative, were not significant for the period from Inception to December 31,
1997 and for the year ended December 31, 1998. For the year ended December 31,
1999, the cost charged by Creative was $5. Administrative and matching costs
under the Company's independent plan for the year ended December 31, 1999 were
$25.
F-12
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
Employee Stock Option Plans
The Company granted non-qualified options to purchase Common Stock to
certain employees and directors of the Company. The terms of the options
provide for vesting, over a 4 or 5-year period, except for options to purchase
183,247 shares of Common Stock at December 31, 1999 which vested as to the
first 20% of the shares covered by such options upon completion of the
Company's IPO. The options expire 10 years from the date of grant.
In August 1998, the Company's Board of Directors adopted the 1998 Stock
Incentive Plan (the "1998 Plan") and reserved 1,832,470 shares of common stock
for issuance thereunder. The 1998 Plan allows an annual increase of 3% of the
outstanding shares of Common Stock as of December 31, 1999 under an annual
"evergreen" share increase provision. Based on this provision, an additional
346,315 shares of common stock will be made available for issuance in 2000. The
1998 Plan authorized the award of options, stock appreciation rights,
restricted stock awards and performance based stock awards (each an "Award").
The maximum number of shares with respect to options and stock appreciation
rights granted to any employee in any fiscal year is 476,442 shares. Options
granted under the 1998 Plan may be either incentive stock options ("ISOs") or
non-qualified stock options ("NSOs"). ISOs may be granted only to employees
(including officers and directors who are also employees). Awards other than
ISOs may be granted to employees, directors and consultants, as defined.
Options under the 1998 Plan may be granted for periods up to 10 years and at
prices no less than 85% of the fair value of the shares on the date of grant
provided, however, that the exercise price of an ISO may not be less than 100%
of the fair market value of the shares on the date of grant and the exercise
price of an ISO granted to a 10% shareholder may not be less than 110% of the
fair market value of the shares on the date of grant.
There are 1,789,587 outstanding options to purchase common shares that have
been granted under the 1998 Plan through December 31, 1999 and 42,883 shares
are available for grant under the 1998 Plan at December 31, 1999.
The following table summarizes all stock option activity:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
--------- --------
<S> <C> <C>
Granted............................................... 458,118 $ 0.27
Canceled.............................................. -- --
Exercised............................................. -- --
---------
Outstanding at December 31, 1997.................... 458,118 $ 0.27
Granted............................................... 651,725 $ 4.62
Canceled.............................................. (2,565) 0.27
Exercised............................................. -- --
---------
Outstanding at December 31, 1998.................... 1,107,278 $ 2.79
Granted............................................... 2,170,730 $32.39
Canceled.............................................. (282,701) 31.41
Exercised............................................. (107,532) 4.73
---------
Outstanding at December 31, 1999.................... 2,887,775 $22.55
=========
</TABLE>
F-13
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Average
Remaining Weighted
Contractual -Average
Range of Exercise Options Life Exercise Options
Prices Outstanding (In Yrs) Price Exercisable
----------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$ 0.270--$ 5.999 761,309 7.76 $ 0.48 254,778
6.000-- 14.999 619,341 8.13 8.53 211,981
15.000-- 59.999 1,216,800 9.65 32.50 13,800
60.000-- 134.063 290,325 9.17 68.61 --
--------- -------
$ 0.270--$134.063 2,887,775 8.78 $22.55 480,559
========= =======
</TABLE>
The options granted by the Company through the date of the IPO were
exercisable only in the event of a successful public offering or sale of the
Company. The Company completed its IPO on December 4, 1998 causing a
measurement date to occur and requiring the Company to compute compensation
expense based upon the difference between the exercise price of the options and
the IPO price. Based upon the difference between the IPO price of $15.00 per
share and the exercise prices of the 1,038,278 options outstanding at December
4, 1998, the Company recorded a deferred stock option compensation charge of
approximately $13.3 million, which will be recognized over the vesting period.
Approximately $5.3 million and $3.5 million was recognized in 1998 and 1999,
respectively. The expense relates to options awarded to employees in all
operating expense categories and has not been separately allocated to these
categories.
The fair value of each stock option grant has been estimated pursuant to
SFAS No. 123 on the date of grant using the minimum value method for those
options granted prior to the IPO, and the Black-Scholes option pricing method
for those options issued concurrent with and subsequent to the IPO, with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Minimum Black-
Value Scholes Assumptions
Assumptions -------------------
1998 1998 1999
----------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate......................... 6.3% 4.89% 5.50%
Expected dividend yield......................... None None None
Expected lives.................................. 6 years 6 years 6 years
Expected volatility............................. 0% 142% 120%
</TABLE>
The weighted average grant date fair values of options granted during the
period from Inception to December 31, 1997 and the twelve months ended December
31, 1998 and 1999 were $0.08, $4.03, and $35.82, respectively.
Had the Company accounted for stock options under SFAS No. 123, reported net
loss for the year ended December 31, 1998 and 1999 would have been $10,439 and
$32,173 and net loss per share would have been $1.40 and $3.29, respectively.
The effect of applying SFAS No. 123 on operating results is not likely to be
representative of the effect on operating results for future years.
F-14
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
6. Public Offerings of Common Stock
In December 1998, the Company completed its IPO of 1,817,000 shares common
stock. Based on the initial public offering price of $15.00 per share, the
gross proceeds from the offering were $27,255. After commissions paid to the
underwriters, and other offering costs, the net proceeds were $23,847.
Following the completion of the IPO, Creative owned approximately 80% of the
Company's outstanding Common Stock and as a result, continued to control the
Company. Creative's remaining equity interest in the Company was distributed to
its shareholders in 1999, subject to certain conditions and consents (see Note
3).
In September 1999, the Company completed a follow-on public offering of
2,300,000 shares of Common Stock. Based on the offering price of $22.625 per
share, the gross proceeds from the offering were $52,038. After commissions
paid to the underwriters and other offering costs, the net proceeds were
$48,111.
7. Segment Information
The Company operates in a single reportable segment as an online auction for
computer, consumer electronics and housewares, and sports and recreation
products in the United States. The Company's product revenues accounted for
100% and 98% of total revenues in 1998 and 1999, respectively, and are divided
into two categories; sales of merchandise held in inventory by the Company and
sales of merchandise purchased at the time of sale under consignment-type
revenue sharing agreements with vendors. The Company sources its products from
over 430 vendors and offers, on average, over 6,700 items in each of its daily
auctions. All of the Company's revenues in 1997 were in the computer products
category. Product offerings are divided into the following four categories,
with their corresponding percentage of net product revenues for the years ended
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Year
Ended
December 31,
---------------
1998 1999
------ ------
<S> <C> <C>
Computer Products--including desktops, portable
computers, computer accessories, disk drives, modems,
monitors/video equipment, components, printers,
scanners, digital cameras, software and home office
products................................................ 83% 74%
Consumer Electronics--including home theater equipment,
home audio equipment, speakers, televisions, camcorders,
VCR's, DVD players, portable audio players and
automobile audio equipment.............................. 11% 19%
Housewares--including kitchen appliances, vacuum
cleaners, personal care devices, furniture, gifts,
photography, jewelry and sunglasses..................... 6% 4%
Sports and Recreation--including sports memorabilia, golf
and tennis, health and fitness, outdoor sports,
bicycles, water sports, and team sports equipment....... -- 3%
</TABLE>
8. Commitments and Contingencies
The Company currently leases office, warehouse facilities and fixed assets
under noncancelable operating leases. Rental expense under operating lease
agreements for 1999 was $486. The Company had no rental expense under lease
agreements in 1997 and 1998.
The Company has marketing relationships with a number of online companies
pursuant to which it receives portal positioning, anchor tenancy, promotional
placements, sponsorships and/or banner advertisements for a monthly fee.
Generally, these agreements have terms up to three years, do not provide for
guaranteed renewal and may be terminated by the Company without cause. The
costs associated with these agreements are recognized over the term of the
related agreements as services are received.
F-15
<PAGE>
uBid, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share data)
Futures minimum commitments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Marketing
Leases Agreements
--------- ----------
<S> <C> <C>
Years Ended December 31,
2000............................................... $1,375 $5,122
2001............................................... 1,214 4,000
2002............................................... 901 --
------ ------
Total minimum lease payments..................... $3,490 $9,122
====== ======
</TABLE>
9. Subsequent Event
On February 9, 2000, CMGI, Inc., a Delaware corporation ("CMGI"), agreed to
acquire the Company, as a result of which the stockholders of the Company will
become stockholders of CMGI. Under the terms of the Agreement and Plan of
Merger and Reorganization, CMGI will issue .2628 shares of common stock for
every share of the Company's common stock held on the record date of the
transaction. The merger is subject to customary conditions, including approval
by the Company's stockholders, and if approved is expected to close in May
2000.
F-16
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
by and among
CMGI, Inc.,
Senlix Corporation
and
uBID, INC.
Dated as of February 9, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I THE MERGER...................................................... 1
1.1 Effective Time of the Merger........................................ 1
1.2 Closing............................................................. 1
1.3 Effects of the Merger............................................... 2
1.4 Directors........................................................... 2
ARTICLE II CONVERSION OF SECURITIES....................................... 2
2.1 Conversion of Capital Stock......................................... 2
2.2 Exchange of Certificates............................................ 3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 5
3.1 Organization, Standing and Power; Subsidiaries...................... 5
3.2 Capitalization...................................................... 6
3.3 Authority; No Conflict; Required Filings and Consents............... 7
3.4 SEC Filings; Financial Statements................................... 8
3.5 No Undisclosed Liabilities.......................................... 8
3.6 Absence of Certain Changes or Events................................ 9
3.7 Taxes............................................................... 9
3.8 Owned and Leased Real Properties.................................... 10
3.9 Intellectual Property............................................... 11
3.10 Agreements, Contracts and Commitments............................... 11
3.11 Litigation.......................................................... 12
3.12 Environmental Matters............................................... 12
3.13 Employee Benefit Plans.............................................. 13
3.14 Compliance With Laws................................................ 14
3.15 Permits............................................................. 14
3.16 Registration Statement; Proxy Statement/Prospectus.................. 14
3.17 Labor Matters....................................................... 14
3.18 Insurance........................................................... 16
3.19 Business Activity Restrictions...................................... 16
3.20 Year 2000 Compliance................................................ 16
3.21 Assets.............................................................. 17
3.22 No Existing Discussions............................................. 17
3.23 Opinion of Financial Advisor........................................ 17
3.24 Section 203 of the DGCL Not Applicable.............................. 17
3.25 Tax Matters......................................................... 17
3.26 Transactions with Affiliates........................................ 18
3.27 Brokers; Schedule of Fees and Expenses.............................. 18
3.28 Privacy Issues...................................................... 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE TRANSITORY
SUBSIDIARY............................................................... 19
4.1 Organization, Standing and Power.................................... 19
4.2 Capitalization...................................................... 19
4.3 Authority; No Conflict; Required Filings and Consents............... 19
4.4 SEC Filings; Financial Statements................................... 20
4.5 Absence of Certain Changes or Events................................ 20
4.6 Tax Matters......................................................... 21
4.7 Registration Statement; Proxy Statement/Prospectus.................. 21
4.8 Litigation.......................................................... 21
4.9 Operations of the Transitory Subsidiary............................. 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE V CONDUCT OF BUSINESS........................................... A-21
5.1 Covenants of the Company.......................................... A-21
5.2 Cooperation....................................................... A-23
5.3 Confidentiality................................................... A-23
ARTICLE VI ADDITIONAL AGREEMENTS........................................ A-24
6.1 No Solicitation................................................... A-24
6.2 Proxy Statement/Prospectus; Registration Statement................ A-25
6.3 Nasdaq Quotation.................................................. A-25
6.4 Access to Information............................................. A-25
6.5 Stockholders Meeting.............................................. A-26
6.6 Legal Conditions to the Merger.................................... A-26
6.7 Public Disclosure................................................. A-27
6.8 Tax-Free Reorganization........................................... A-27
6.9 Affiliate Agreements.............................................. A-27
6.10 Nasdaq National Market Listing.................................... A-27
6.11 Company Stock Plans and the Company Warrants...................... A-28
6.12 Stockholder Litigation............................................ A-28
6.13 Indemnification................................................... A-28
ARTICLE VII CONDITIONS TO MERGER........................................ A-29
7.1 Conditions to Each Party's Obligation To Effect the Merger........ A-29
7.2 Additional Conditions to Obligations of the Buyer and the
Transitory Subsidiary............................................. A-29
7.3 Additional Conditions to Obligations of the Company............... A-30
ARTICLE VIII TERMINATION AND AMENDMENT.................................. A-31
8.1 Termination....................................................... A-31
8.2 Effect of Termination............................................. A-32
8.3 Fees and Expenses................................................. A-32
8.4 Amendment......................................................... A-33
8.5 Extension; Waiver................................................. A-33
ARTICLE IX MISCELLANEOUS................................................ A-33
9.1 Nonsurvival of Representations and Warranties..................... A-33
9.2 Notices........................................................... A-33
9.3 Entire Agreement.................................................. A-34
9.4 No Third Party Beneficiaries...................................... A-34
9.5 Assignment........................................................ A-34
9.6 Severability...................................................... A-35
9.7 Counterparts and Signature........................................ A-35
9.8 Interpretation.................................................... A-35
9.9 Governing Law..................................................... A-35
9.10 Remedies.......................................................... A-35
9.11 Waiver of Jury Trial.............................................. A-35
9.12 Forum............................................................. A-36
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Stockholder Agreement
Exhibit B Form of Lock-up Agreement
Exhibit C Form of Company Affiliate Agreement
</TABLE>
<PAGE>
TABLES OF DEFINED TERMS
<TABLE>
<CAPTION>
Cross
Reference
Terms in Agreement
----- ------------
<S> <C>
Acquisition Proposal Section 6.1(a)
Affiliate Section 6.9
Affiliate Agreement Section 6.9
Agreement Preamble
Alternative Transaction Section 8.3(e)
Antitrust Laws Section 6.6(b)
Antitrust Order Section 6.6(b)
Buyer Preamble
Buyer Balance Sheet Section 4.4(b)
Buyer Common Stock Section 2.1(c)
Buyer Disclosure Schedule Article IV
Buyer Material Adverse Effect Section 4.1
Buyer Preferred Stock Section 4.2
Buyer SEC Reports Section 4.4(a)
Certificates Section 2.2(b)
Closing Section 1.2
Closing Date Section 1.2
Code Preamble
Company Preamble
Company Balance Sheet Section 3.4(b)
Company Common Stock Section 2.1(b)
Company Disclosure Schedule Article III
Company Employee Plans Section 3.13(a)
Company Intellectual Property Rights Section 3.9(a)
Company Leases Section 3.8(b)
Company Material Adverse Effect Section 3.1
Company Material Contracts Section 3.10
Company Meeting Section 3.16
Company Permits Section 3.15
Company Preferred Stock Section 3.2(a)
Company Products Section 3.20(b)
Company SEC Reports Section 3.4(a)
Company Stock Options Section 3.2(b)
Company Stock Plans Section 3.2(b)
Company Systems Section 3.20(b)
Company Voting Proposal Section 6.5(a)
Company Warrants Section 3.2(b)
Confidentiality Agreement Section 5.3
Constituent Corporations Section 1.3
DGCL Section 1.1
Effective Time Section 1.1
Employee Benefit Plans Section 3.13(a)
Environmental Law Section 3.12(b)
ERISA Affiliate Section 3.13(a)
ERISA Section 3.13(a)
Exchange Agent Section 2.2(a)
Exchange Fund Section 2.2(a)
Exchange Act Section 3.3(c)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cross
Reference
Terms in Agreement
----- ------------
<S> <C>
Exchange Ratio Section 2.1(c)
Governmental Entity Section 3.3(c)
Hazardous Substance Section 3.12(c)
HSR Act Section 3.3(c)
Indemnified Parties Section 6.13
Liens Section 3.22
Lock-up Agreement Preamble
Merger Preamble
Outside Date Section 8.1(b)
Proxy Statement Section 3.16
Registration Statement Section 3.16
Rule 145 Section 6.10
SEC Section 3.3(c)
Securities Act Section 3.4(a)
Stockholder Agreement Preamble
Subsidiary Section 3.1
Superior Proposal Section 6.1(a)
Surviving Corporation Section 1.3
Tax Returns Section 3.7(a)
Taxes Section 3.7(a)
Third Party Section 8.3(e)
Transitory Subsidiary Preamble
Year 2000 Compliant Section 3.20
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement"),
dated as of February 9, 2000, is by and among CMGI, Inc., a Delaware
corporation (the "Buyer"), Senlix Corporation, a Delaware corporation and a
wholly owned subsidiary of Buyer (the "Transitory Subsidiary"), and UBID, Inc.,
a Delaware corporation (the "Company").
WHEREAS, the Boards of Directors of the Buyer and the Company have approved
and declared advisable this Agreement and the Merger (as defined below);
WHEREAS, the combination of the Buyer and the Company shall be effected by
the terms of this Agreement through a merger of the Transitory Subsidiary into
the Company, as a result of which the stockholders of the Company will become
stockholders of the Buyer (the "Merger");
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to the Buyer's willingness to enter into this
Agreement, certain stockholders of the Company have entered into a Stockholder
Agreement dated as of the date of this Agreement in the form attached as
Exhibit A (the "Stockholder Agreement"), pursuant to which such stockholders
have agreed, inter alia, to give the Buyer a proxy to vote all of the shares of
capital stock of the Company that such stockholders own for certain limited
purposes;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to the Buyer's willingness to enter into this
Agreement, certain stockholders and employees of the Company have entered into
a Stockholder Lock-Up Agreement in the form attached hereto as Exhibit B (the
"Lock-Up Agreement"), pursuant to which such parties have agreed to certain
restrictions relating to the disposition of Buyer Common Stock following the
Effective Time (as defined in Section 1.1); and
WHEREAS, for U.S. federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
Buyer, the Transitory Subsidiary and the Company agree as follows:
ARTICLE I
THE MERGER
1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, prior to the Closing (as defined in Section 1.2), the Buyer shall
prepare, and on the Closing Date (as defined in Section 1.2) or as soon as
practicable thereafter the Buyer shall cause to be filed with the Secretary of
State of the State of Delaware, a certificate of merger (the "Certificate of
Merger") in such form as is required by, and executed by the Surviving
Corporation (as defined in Section 1.3) in accordance with, the relevant
provisions of the General Corporation Law of the State of Delaware ("DGCL") and
shall make all other filings or recordings required under the DGCL. The Merger
shall become effective upon the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware or at such later time as is
established by the Buyer and the Company and set forth in the Certificate of
Merger (the "Effective Time").
1.2 Closing. The closing of the Merger (the "Closing") shall take place at
10:00 a.m., Boston time, on a date to be specified by the Buyer and the Company
(the "Closing Date"), which shall be no later than the second business day
after satisfaction or waiver of the conditions set forth in Article VII (other
than delivery of items to be delivered at the Closing and other than
satisfaction of those conditions that by their nature are to be
A-1
<PAGE>
satisfied at the Closing, but subject to the delivery of such items and the
satisfaction or waiver of such conditions at the Closing), at the offices of
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, unless another date,
place or time is agreed to in writing by the Buyer and the Company.
1.3 Effects of the Merger. At the Effective Time (i) the separate existence
of the Transitory Subsidiary shall cease and the Transitory Subsidiary shall be
merged with and into the Company (the Transitory Subsidiary and the Company are
sometimes referred to below as the "Constituent Corporations" and the Company
following the Merger is sometimes referred to below as the "Surviving
Corporation"), (ii) the Certificate of Incorporation of the Company shall be
amended so that Article FOURTH of such Certificate of Incorporation reads in
its entirety as follows: "The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 50,000,000, all of which
shall consist of common stock, $.01 par value per share," and, as so amended,
such Certificate of Incorporation shall be the Certificate of Incorporation of
the Surviving Corporation, and (iii) the By-laws of the Transitory Subsidiary
as in effect immediately prior to the Effective Time shall be the By-laws of
the Surviving Corporation. The Merger shall have the effects set forth in
Section 259 of the DGCL.
1.4 Directors. The directors of the Transitory Subsidiary immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation.
ARTICLE II
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of the
capital stock of the Company or capital stock of the Transitory Subsidiary:
(a) Capital Stock of the Transitory Subsidiary. Each issued and
outstanding share of the capital stock of the Transitory Subsidiary shall
be converted into and become one fully paid and nonassessable share of
common stock, $.01 par value per share, of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Buyer-Owned Stock. All shares of
common stock, $.001 par value per share, of the Company ("Company Common
Stock") that are owned by the Company and any shares of Company Common
Stock owned by the Buyer or the Transitory Subsidiary shall be canceled and
shall cease to exist and no stock of the Buyer or other consideration shall
be delivered in exchange therefor.
(c) Exchange Ratio for Company Common Stock. Subject to Section 2.2,
each share of Company Common Stock (other than shares to be canceled in
accordance with Section 2.1(b)) issued and outstanding immediately before
the Effective Time shall be automatically converted into the right to
receive 0.2628 shares (the "Exchange Ratio") of common stock, $.01 par
value per share, of the Buyer ("Buyer Common Stock"). As of the Effective
Time, all such shares of Company Common Stock shall no longer be
outstanding and shall automatically be canceled, and each holder of a
certificate representing any such shares of Company Common Stock shall
cease to have any rights with respect thereto, except the right to receive
the shares of Buyer Common Stock and any cash in lieu of fractional shares
of Buyer Common Stock to be issued or paid in consideration therefor upon
surrender of such certificate in accordance with Section 2.2, without
interest.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any reclassification, stock split, reverse
split, stock dividend (including any dividend or distribution of securities
convertible into Buyer Common Stock or Company Common Stock),
reorganization, recapitalization or other like change with respect to Buyer
Common Stock or Company Common Stock occurring after the date hereof and
prior to the Effective Time.
A-2
<PAGE>
(e) Unvested Stock. At the Effective Time, any unvested shares of
Company Common Stock awarded to employees, directors or consultants
pursuant to any of the Company's plans or arrangements and outstanding
immediately prior to the Effective Time shall be converted to unvested
shares of Buyer Common Stock in accordance with the Exchange Ratio and
shall remain subject to the same terms, restrictions and vesting schedule
as in effect immediately prior to the Effective Time, except as otherwise
agreed by Buyer and the holder thereof. All outstanding rights which the
Company may hold immediately prior to the Effective Time to repurchase
unvested shares of Company Common Stock shall be assigned to the Buyer in
the Merger and shall thereafter be exercisable by Buyer upon the same terms
and conditions in effect immediately prior to the Effective Time, except
that the shares purchasable pursuant to such rights and the purchase price
payable per share shall be adjusted to reflect the Exchange Ratio. The
Buyer shall take all steps necessary to cause the foregoing provisions of
this Section 2.1(e) to occur.
(f) Treatment of Company Options and Company Warrants. Outstanding
Company Stock Options and Company Warrants (in each case as defined in
Section 3.2(b)) shall be treated following the Effective Time in the manner
set forth in Section 6.11.
2.2 Exchange of Certificates. The procedures for exchanging outstanding
shares of Company Common Stock for Buyer Common Stock pursuant to the Merger
are as follows:
(a) Exchange Agent. As of the Effective Time, the Buyer shall deposit
with a bank or trust company designated by the Buyer (the "Exchange
Agent"), for the benefit of the holders of shares of the Company Common
Stock, for exchange in accordance with this Section 2.2, through the
Exchange Agent, (i) certificates representing the shares of Buyer Common
Stock (such shares of Buyer Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for
outstanding shares of the Company Common Stock, (ii) cash in an amount
sufficient to make payments required pursuant to Section 2.2(e), and (iii)
any dividends or distributions to which holders of Certificates (as defined
below) may be entitled pursuant to Section 2.2(c)
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of the Company Common Stock (the
"Certificates") whose shares were converted pursuant to Section 2.1 into
the right to receive shares of Buyer Common Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as the Buyer may reasonably specify) and (ii) instructions
for effecting the surrender of the Certificates in exchange for
certificates representing shares of Buyer Common Stock (plus cash in lieu
of fractional shares, if any, of Buyer Common Stock and any dividends or
distributions as provided below). Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by the Buyer, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive
in exchange therefor a certificate representing that number of whole shares
of Buyer Common Stock which such holder has the right to receive pursuant
to the provisions of this Article II with respect to the shares of Company
Common Stock represented by such Certificate plus cash in lieu of
fractional shares pursuant to Section 2.2(e) and any dividends or
distributions pursuant to Section 2.2(c), and the Certificate so
surrendered shall immediately be canceled. In the event of a transfer of
ownership of Company Common Stock which is not registered in the transfer
records of the Company, a certificate representing the proper number of
shares of Buyer Common Stock plus cash in lieu of fractional shares
pursuant to Section 2.2(e) and any dividends or distributions pursuant to
Section 2.2(c) may be issued and paid to a person other than the person in
whose name the Certificate so surrender is registered, if such Certificate
is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable
stock transfer taxes have been paid. Until surrendered as contemplated by
this Section 2.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender
the
A-3
<PAGE>
certificate representing shares of Buyer Common Stock plus cash in lieu of
fractional shares pursuant to Section 2.2(e) and any dividends or
distributions pursuant to Section 2.2(c) as contemplated by this Section
2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Buyer Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate and no cash payment in
lieu of fractional shares shall be paid to any such holder pursuant to
Section 2.2(e) until the holder of record of such Certificate shall
surrender such Certificate as contemplated by Section 2.2(b). Subject to
the effect of applicable laws, following surrender of any such Certificate,
there shall be issued and paid to the record holder of the Certificate, (i)
certificates representing whole shares of Buyer Common Stock issued in
exchange therefor, without interest, (ii) at the time of such surrender,
the amount of any cash payable in lieu of a fractional share of Buyer
Common Stock to which such holder is entitled pursuant to Section 2.2(e)
and the amount of dividends or other distributions with a record date after
the Effective Time previously paid with respect to such whole shares of
Buyer Common Stock, and (iii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective
Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Buyer Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Buyer Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms hereof (including any cash or other
distributions paid pursuant to Sections 2.2(c) or 2.2(e)) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock, and from and after the Effective Time there
shall be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II.
(e) No Fractional Shares. No certificate or scrip representing
fractional shares of Buyer Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any other rights of a stockholder
of the Buyer. Notwithstanding any other provision of this Agreement, each
holder of shares of Company Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
Buyer Common Stock (after taking into account all Certificates delivered by
such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of Buyer Common Stock
multiplied by the average of the last reported sales prices of the Buyer
Common Stock on the Nasdaq National Market during the ten (10) consecutive
trading days ending on and including the last trading day prior to the
Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for 180 days after
the Effective Time shall be delivered to the Buyer, upon demand, and any
holder of the Certificates who has not previously complied with this
Section 2.2 shall thereafter look only to the Buyer, for payment of its
claim for Buyer Common Stock, any cash in lieu of fractional shares of
Buyer Common Stock and any dividends or distributions with respect to Buyer
Common Stock.
(g) No Liability. To the extent permitted by applicable law, none of the
Buyer, the Transitory Subsidiary, the Company, the Surviving Corporation or
the Exchange Agent shall be liable to any holder of shares of Company
Common Stock or Buyer Common Stock, as the case may be, for such shares (or
dividends or distributions with respect thereto) delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law. If any Certificate shall not have been surrendered prior to one year
after the Effective Time (or immediately prior to such earlier date on
which any shares of Buyer Common Stock, and any cash payable to the holder
of such Certificate pursuant to this Article II or any dividends or
distributions payable to the holder of such Certificate would otherwise
escheat to or become
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the property of any Governmental Entity (as defined in Section 3.3(c))),
any such shares of Buyer Common Stock or cash, dividends or distributions
in respect of such Certificate shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free and clear of
all claims or interest of any person previously entitled thereto.
(h) Withholding Rights. Each of the Buyer and the Surviving Corporation
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code, or any other
applicable provision of law. To the extent that amounts are so withheld by
the Surviving Corporation or the Buyer, as the case may be, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by the Surviving Corporation
or the Buyer, as the case may be.
(i) Lost Certificates. If any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Buyer Common Stock and any
cash in lieu of fractional shares, and unpaid dividends and distributions
on shares of Buyer Common Stock deliverable in respect thereof pursuant to
this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer and the Transitory
Subsidiary that the statements contained in this Article III are true and
correct, except as set forth herein or in the Company disclosure schedule
delivered by the Company to the Buyer on or before the date of this Agreement
(the "Company Disclosure Schedule"). The Company Disclosure Schedule shall be
arranged in paragraphs corresponding to the numbered paragraphs contained in
Article III and the disclosure in any paragraph shall qualify other paragraphs
in this Article III only to the extent that it is reasonably apparent from a
reading of such disclosure that it also qualifies or applies to such other
paragraphs.
3.1 Organization, Standing and Power; Subsidiaries.
(a) Each of the Company and its Subsidiaries (as defined below) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business as now being conducted and as proposed to be conducted,
and is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified,
individually or in the aggregate, would be reasonably likely to have a material
adverse effect on the business, properties, financial condition, results of
operations or prospects of the Company and its Subsidiaries, taken as a whole,
or to have a material adverse effect on the ability of the Company to
consummate the transactions contemplated by this Agreement, the Stockholder
Agreement or the Company Stock Option Agreement other than any effect (a)
resulting from or arising out of the public announcement of this Agreement or
any of the transactions contemplated hereby, (b) attributable to any legal
action or proceeding brought by or on behalf of stockholders of the Company
alleging that the Board of Directors of the Company breached its fiduciary
duties in connection with its approval of the Merger, this Agreement or the
transactions contemplated hereby, or (c) arising or resulting from general
industry, economic or stock market conditions that affect the Company in a
manner not disproportionate to the manner in which such conditions affect other
companies in the technology sector (a "Company Material Adverse Effect").
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(b) Except as set forth in the Company SEC Reports (as defined in Section
3.4) filed prior to the date of this Agreement, neither the Company nor any of
its Subsidiaries directly or indirectly owns any equity, membership,
partnership or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity, membership, partnership or similar
interest in, any corporation, partnership, joint venture, limited liability
company or other business association or entity, whether incorporated or
unincorporated. As used in this Agreement, the word "Subsidiary" means, with
respect to a party, any corporation, partnership, joint venture, limited
liability company or other business association or entity, whether incorporated
or unincorporated, of which (i) such party or any other Subsidiary of such
party is a general partner (excluding partnerships, the general partnership
interests of which held by such party and/or one or more of its Subsidiaries do
not have a majority of the voting interest in such partnership), (ii) such
party and/or one or more of its Subsidiaries holds voting power to elect a
majority of the board of directors or other governing body performing similar
functions, or (iii) such party and/or one or more of its Subsidiaries, directly
or indirectly, owns or controls more than 50% of the equity, membership,
partnership or similar interests.
(c) The Company has delivered or made available to the Buyer complete and
accurate copies of the Certificate of Incorporation and By-laws of the Company
and of the charter, by-laws or other organizational documents of each
Subsidiary of the Company.
3.2 Capitalization.
(a) The authorized capital stock of the Company consists of 20,000,000
shares of Company Common Stock and 5,000,000 shares of preferred stock, $.001
par value per share ("Company Preferred Stock"). As of the close of business on
February 7, 2000, (i) 11,584,126 shares of Company Common Stock were issued and
outstanding, (ii) no shares of Company Common Stock were held in the treasury
of the Company or by Subsidiaries of the Company, and (iii) no shares of the
Company Preferred Stock were issued and outstanding.
(b) Section 3.2(b) of the Company Disclosure Schedule lists the number of
shares of Company Common Stock reserved for future issuance pursuant to stock
options granted and outstanding as of the date of this Agreement and the plans
(if any) under which such options were granted (collectively, the "Company
Stock Plans") and sets forth a complete and accurate list of all holders of
outstanding options to purchase shares of Company Common Stock (such
outstanding options, the "Company Stock Options"), indicating the number of
shares of Company Common Stock subject to each Company Stock Option, and the
exercise price, the date of grant, vesting schedule and the expiration date
thereof. Section 3.2 of the Company Disclosure Schedule shows the number of
shares of Company Common Stock reserved for future issuance pursuant to
warrants or other outstanding rights to purchase shares of Company Common Stock
outstanding as of the date of this Agreement (such outstanding warrants or
other rights, the "Company Warrants") and the agreement or other document under
which such Company Warrants were granted and sets forth a complete and accurate
list of all holders of Company Warrants indicating the number and type of
shares of Company Common Stock subject to each Company Warrant, and the
exercise price, the date of grant and the expiration date thereof. Except (x)
as set forth in this Section 3.2 and (y) as reserved for future grants under
Company Stock Plans, (i) there are no equity securities of any class of the
Company or any of its Subsidiaries, or any security exchangeable into or
exercisable for such equity securities, issued, reserved for issuance or
outstanding and (ii) there are no options, warrants, equity securities, calls,
rights, commitments or agreements of any character to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound obligating the Company or any of its Subsidiaries to
issue, transfer, deliver or sell, or cause to be issued, transferred, delivered
or sold, additional shares of capital stock of the Company or any of its
Subsidiaries or any security or rights convertible into or exchangeable or
exercisable for any such shares, or obligating the Company or any of its
Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify or
amend or enter into any such option, warrant, equity security, call, right,
commitment or agreement. Neither the Company nor any of its Subsidiaries has
issued and outstanding any stock appreciation rights, phantom stock,
performance based rights or similar rights or obligations. To the knowledge of
the Company, other than the Stockholder Agreements, there are no agreements or
understandings with respect to the voting (including voting trusts and proxies)
or
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sale or transfer (including agreements imposing transfer restrictions) of any
shares of capital stock of the Company or any of its Subsidiaries.
(c) All outstanding shares of Company Common Stock are, and all shares of
Company Common Stock subject to issuance as specified above, upon issuance on
the terms and conditions specified in the instruments pursuant to which they
are issuable, will be, duly authorized, validly issued, fully paid and
nonassessable and not subject to or issued in violation of any purchase option,
call option, right of first refusal, preemptive right, subscription right or
any similar right under any provision of the DGCL, the Company's Certificate of
Incorporation or By-laws or any agreement to which the Company is a party or is
otherwise bound. There are no obligations, contingent or otherwise, of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of the Company Common Stock or the capital stock of the Company or
any of its Subsidiaries or to provide funds to or make any material investment
(in the form of a loan, capital contribution or otherwise) in the Company or
any Subsidiary of the Company or any other entity, other than guarantees of
bank obligations of Subsidiaries of the Company entered into in the ordinary
course of business.
(d) All of the outstanding shares of capital stock of each of the Company's
Subsidiaries are duly authorized, validly issued, fully paid, nonassessable and
free of preemptive rights and all such shares (other than directors' qualifying
shares in the case of non-U.S. Subsidiaries, all of which the Company has the
power to cause to be transferred for no or nominal consideration to the Buyer
or the Buyer's designee) are owned, of record and beneficially, by the Company
or another Subsidiary of the Company free and clear of all security interests,
liens, claims, pledges, agreements, limitations in the Company's voting rights,
charges or other encumbrances of any nature.
(e) No consent of the holders of Company Stock Options is required in
connection with the conversion of such options contemplated by Section 6.11.
3.3 Authority; No Conflict; Required Filings and Consents.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement by the Company have been duly
authorized by all necessary corporate action on the part of the Company,
subject only to the approval of the Merger by the Company's stockholders under
the DGCL. This Agreement has been duly executed and delivered by the Company
and constitutes valid and binding obligation of the Company, enforceable in
accordance with its terms.
(b) Except as disclosed in Section 3.3(b) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company does not,
and the consummation of the transactions contemplated by this Agreement will
not, (i) conflict with, or result in any violation or breach of, any provision
of the Certificate of Incorporation or By-laws of the Company or the charter,
by-laws, or other organizational document of any Subsidiary of the Company,
(ii) conflict with, or result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
any material benefit) under, or require a consent or waiver under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract or other agreement, instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound, or (iii) subject to compliance with
the requirements specified in clauses (i), (ii), (iii), (iv) and (v) of Section
3.3(c), conflict with or violate any permit, concession, franchise, license,
judgment, injunction, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its Subsidiaries or any of its
or their properties or assets, except in the case of clauses (ii) and (iii) of
this Section 3.3(b) for any such conflicts, violations, breaches, defaults,
terminations, cancellations, accelerations or losses which, individually or in
the aggregate, are not reasonably likely to have a Company Material Adverse
Effect.
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(c) No consent, approval, license, permit, order or authorization of, or,
registration, declaration, notice or filing with, any court, arbitrational
tribunal, administrative agency or commission or other governmental or
regulatory authority or agency (a "Governmental Entity") is required by or with
respect to the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement by the Company or the consummation of
the transactions contemplated by this Agreement, except for (i) the filing of a
pre-merger notification report under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing of the
Certificate of Merger with the Delaware Secretary of State, (iii) the filing of
the Proxy Statement (as defined in Section 3.16 below) with the Securities and
Exchange Commission (the "SEC") in accordance with the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), (iv) the filing of such reports or
schedules under Section 13 of the Exchange Act as may be required in connection
with this Agreement and the transactions contemplated hereby and (v) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws except where
the failure to obtain any such consent, approval, order, authorization,
registration, declaration or filing would not have a Company Material Adverse
Effect.
(d) The affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock on the record date for the Company Meeting (as
defined below) is the only vote of the holders of any class or series of the
Company's capital stock or other securities necessary to adopt this Agreement.
There are no bonds, debentures, notes or other indebtedness of the Company
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which stockholders of the Company
may vote.
3.4 SEC Filings; Financial Statements.
(a) The Company has filed and made available to the Buyer all forms, reports
and other documents required to be filed by the Company with the SEC since its
inception. All such required forms, reports and other documents (including
those that the Company may file after the date hereof until the Closing)
together with any amendments thereto are referred to herein as the "Company SEC
Reports." The Company SEC Reports (i) were or will be filed on a timely basis,
(ii) were or will be prepared in compliance in all material respects with the
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Reports, and
(iii) did not or will not at the time they were or are filed contain any untrue
statement of a material fact or omit to state a material fact required to be
stated in such Company SEC Reports or necessary in order to make the statements
in such Company SEC Reports, in the light of the circumstances under which they
were made, not misleading. No Subsidiary of the Company is required to file any
forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes and schedules) contained or to be contained in the Company
SEC Reports (i) complied or will comply as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, (ii) were or will be prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted by the SEC on Form 10-Q under the Exchange Act) and (iii) fairly
presented or will fairly present the consolidated financial position of the
Company and its Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods indicated,
consistent with the books and records of the Company and its Subsidiaries,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount. The unaudited balance sheet of the Company as of
September 30, 1999 is referred to herein as the "Company Balance Sheet."
3.5 No Undisclosed Liabilities. Except as disclosed in the Company SEC
Reports filed prior to the date of this Agreement, and except for normal or
recurring liabilities incurred since the date of the Company
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Balance Sheet in the ordinary course of business consistent with past
practices, the Company and its Subsidiaries do not have any liabilities, either
accrued, contingent or otherwise (whether or not required to be reflected in
financial statements in accordance with United States generally accepted
accounting principles), and whether due or to become due, which, individually
or in the aggregate, are reasonably likely to have a Company Material Adverse
Effect.
3.6 Absence of Certain Changes or Events. Except as disclosed in the Company
SEC Reports filed prior to the date of this Agreement, since the date of the
Company Balance Sheet, the Company and its Subsidiaries have conducted their
respective businesses only in the ordinary course and in a manner consistent
with past practice and, since such date, there has not been (i) any event,
change or development in the business, properties, financial condition, results
of operations or prospects of the Company and its Subsidiaries, taken as a
whole, which, individually or in the aggregate, has had, or is reasonably
likely to have, a Company Material Adverse Effect; or (ii) except as disclosed
pursuant to this Agreement (including Section 3.6 of the Company Disclosure
Schedule) any other action or event that would have required the consent of the
Buyer pursuant to Section 5.1 of this Agreement had such action or event
occurred after the date of this Agreement.
3.7 Taxes.
(a) The Company and each of its Subsidiaries has filed all Tax Returns (as
defined below) that it was required to file, and all such Tax Returns were
correct and complete except for any errors or omissions which are not,
individually or in the aggregate, reasonably likely to have a Company Material
Adverse Effect. To the knowledge of the Company, each group of corporations
with which the Company or any Subsidiary has filed (or was required to file)
consolidated, combined, unitary or similar Tax Returns (an "Affiliated Group")
has filed all Tax Returns that it was required to file with respect to any
period in which the Company or a Subsidiary was a member of such Affiliated
Group (an "Affiliated Period"), and all such Tax Returns were correct and
complete except for any errors or omissions which are not, individually or in
the aggregate, reasonably likely to have a Company Material Adverse Effect. The
Company and each of its Subsidiaries has paid on a timely basis all Taxes (as
defined below) that are shown to be due on any such Tax Returns and to the
knowledge of the Company each Affiliated Group has paid all that were due and
payable with respect to all Affiliated Periods. The unpaid Taxes of the Company
and its Subsidiaries for Tax periods through the date of the Company Balance
Sheet do not exceed the accruals and reserves for Taxes set forth on the
Company Balance Sheet exclusive of any accruals and reserves for "deferred
taxes" or similar items that reflect timing differences between Tax and
financial accounting principles. All Taxes that the Company or any of its
Subsidiaries is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Entity. For purposes of this Agreement, (i) "Taxes" means all
taxes, charges, fees, levies or other similar assessments or liabilities,
including income, gross receipts, ad valorem, premium, value-added, excise,
real property, personal property, sales, use, services, transfer, withholding,
employment, payroll and franchise taxes imposed by the United States of America
or any state, local or foreign government, or any agency thereof, or other
political subdivision of the United States or any such government, and any
interest, fines, penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any tax or any contest or
dispute thereof and (ii) "Tax Returns" means all reports, returns,
declarations, statements or other information required to be supplied to a
taxing authority in connection with Taxes.
(b) The Company has delivered to the Buyer correct and complete copies of
all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company or any of its
Subsidiaries since inception to the knowledge of the Company and correct and
complete copies of the portion of the federal income Tax Returns, examination
reports and statements of deficiency assessed against or agreed to with respect
to any Affiliated Group relating to the activities of the Company and the
Subsidiaries for all Affiliated Periods. The federal income Tax Returns of the
Company and each of its Subsidiaries and to the knowledge of the Company each
Affiliated Group have been audited by the Internal Revenue Service or are
closed by the applicable statute of limitations for all taxable years through
the taxable year specified in Section 3.7(b) of the Company Disclosure
Schedule. The Company has made available to the Buyer correct and
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complete copies of all other Tax Returns of the Company and its Subsidiaries
together with all related examination reports and statements of deficiency for
all periods and to the knowledge of the Company correct and complete copies of
the portion of all other Tax Returns, examination reports and statements of
deficiency assessed against or agreed to with respect to any Affiliated Group
relating to the activities of the Company and the Subsidiaries for all
Affiliated Periods. No examination or audit of any Tax Return of the Company or
any of its Subsidiaries or to the knowledge of the Company any Affiliated Group
with respect to any Affiliated Period by any Governmental Entity is currently
in progress or, to the knowledge of the Company and its Subsidiaries,
threatened or contemplated. Neither the Company nor any of its Subsidiaries nor
to the knowledge of the Company any member of the Affiliated Group has been
informed by any Governmental Entity that the Governmental Entity believes that
the Company or any of its Subsidiaries or the Affiliated Group was required to
file any Tax Return that was not filed. Neither the Company nor any of its
Subsidiaries has waived any statute of limitations with respect to Taxes or
agreed to an extension of time with respect to a Tax assessment or deficiency.
(c) Neither the Company nor any of its Subsidiaries: (i) is a "consenting
corporation" within the meaning of Section 341(f) of the Code, and none of the
assets of the Company or its Subsidiaries are subject to an election under
Section 341(f) of the Code; (ii) has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(l)(A)(ii) of the Code; (iii) has
made any payments, is obligated to make any payments, or is a party to any
agreement that could obligate it to make any payments that may be treated as an
"excess parachute payment" under Section 280G of the Code; (iv) has any actual
or potential liability for any Taxes of any person (other than the Company and
its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar
provision of law in any jurisdiction), or as a transferee or successor, by
contract, or otherwise; or (v) is or has been required to make a basis
reduction pursuant to Treasury Regulation Section 1.1502-20(b) or Treasury
Regulation Section 1.337(d)-2(b).
(d) None of the assets of the Company or any of its Subsidiaries: (i) is
property that is required to be treated as being owned by any other person
pursuant to the provisions of former Section 168(f)(8) of the Code; (ii) is
"tax-exempt use property" within the meaning of Section 168(h) of the Code; or
(iii) directly or indirectly secures any debt the interest on which is tax
exempt under Section 103(a) of the Code.
(e) Neither the Company nor any of its Subsidiaries has undergone, or will
undergo as a result of the transactions contemplated by the Agreement, a change
in its method of accounting resulting in an adjustment to its taxable income
pursuant to Section 481(a) of the Code.
(f) Except as disclosed in Section 3.7(f) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries (i) is or has ever
been a member of a group of corporations with which it has filed (or been
required to file) consolidated, combined or unitary Tax Returns, other than a
group of which only the Company and its Subsidiaries are or were members or
(ii) is a party to or bound by any Tax indemnity, Tax sharing or Tax allocation
agreement.
(g) No state or federal "net operating loss" of the Company determined as of
the Closing Date is subject to limitation on its use pursuant to Section 382 of
the Code or comparable provisions of state law as a result of any "ownership
change" within the meaning of Section 382(g) of the Code occurring prior to the
Closing Date.
(h) Since June 7, 1997 one or more persons have not acquired, directly or
indirectly, a 50% or greater interest in either the Company, or to the
knowledge of the Company, Creative Computers Inc. (DE) or Creative Computers,
Inc. (CA), such interest calculated in the manner required under Section 355(e)
of the Code.
3.8 Owned and Leased Real Properties.
(a) The Company does not own and has never owned any real property.
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(b) The Company has provided to the Buyer in Section 3.8(b) of the Company
Disclosure Schedule a complete and accurate list of all real property leased by
the Company or its Subsidiaries (collectively "Company Leases") and the
location of the premises. The Company is not in default in any material respect
under any of the Company Leases. Each of the Company Leases is in full force
and effect and will not cease to be in full force and effect as a result of the
transactions contemplated by this Agreement.
3.9 Intellectual Property.
(a) The Company and its Subsidiaries exclusively own, or are licensed or
otherwise possess legally enforceable rights to use, without any obligation to
make any fixed or contingent payments, including any royalty payments, all
patents, trademarks, trade names, domain names, service marks and copyrights,
any applications for and registrations of such patents, trademarks, trade
names, domain names, service marks and copyrights, and all processes, formulae,
methods, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material
that are used or necessary to conduct the business of the Company and its
Subsidiaries as currently conducted (the "Company Intellectual Property
Rights").
(b) Except as disclosed in Section 3.9(b) in the Company Disclosure
Schedule, the execution and delivery of this Agreement and consummation of the
Merger will not result in the breach of, or create on behalf of any third party
the right to terminate or modify, any material license, sublicense or other
agreement relating to the Company Intellectual Property Rights, or any license,
sublicense and other agreement as to which the Company or any of its
Subsidiaries is a party and pursuant to which the Company or any of its
Subsidiaries is authorized to use any third party patents, trademarks,
copyrights or trade secrets (the "Company Third Party Intellectual Property
Rights"), including software that is used in the manufacture of, incorporated
in, or forms a part of any product or service sold or expected to be sold by
the Company or any of its Subsidiaries.
(c) Except as disclosed in Section 3.9 in the Company Disclosure Schedule:
(i) All issued patents, registered trademarks, registered service marks
and registered copyrights which are held by the Company or any of its
Subsidiaries and which are material to the business of the Company and its
Subsidiaries, taken as a whole, are valid and subsisting. The Company and
its Subsidiaries have taken reasonable measures to protect the proprietary
nature of the Company Intellectual Property Rights that are material to the
business of the Company and its Subsidiaries, taken as a whole, and to
maintain in confidence all trade secrets and confidential information owned
or used by the Company or any of its Subsidiaries and that are material to
the business of the Company and its Subsidiaries, taken as a whole.
(ii) To the knowledge of the Company, no other person or entity is
infringing, violating or misappropriating any of the Company Intellectual
Property Rights.
(iii) None of the activities or business previously or currently
conducted by the Company or any of the Subsidiaries infringes, violates or
constitutes a misappropriation of, any patents, trademarks, trade names,
service marks and copyrights, any applications for and registrations of
such patents, trademarks, trade names, service marks and copyrights, and
all processes, formulae, methods, schematics, technology, know-how,
computer software programs or applications and tangible or intangible
proprietary information or material of any other person or entity except
for any infringement, violation or misappropriation that would not have a
Company Material Adverse Effect. Neither the Company nor any of its
Subsidiaries has received any complaint, claim or notice alleging any such
infringement, violation or misappropriation.
(d) Source Code. Except as set forth on Schedule 3.9(d) of the Company
Disclosure Schedule, the Company has not disclosed, granted access to,
permitted use of or otherwise made available its source code relating to its
Technology Systems to any third party.
3.10 Agreements, Contracts and Commitments.
(a) Section 3.10(a) of the Company Disclosure Schedule sets forth a list of
all contracts, agreements and commitments, written or oral ("Contracts"), of
the following categories to which the Company or any of its Subsidiaries is a
party or by which any of them is bound ("Company Material Contracts"):
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(i) Contracts under which the Company or any Subsidiary licenses any
Company Intellectual Property Rights to a third party, other than to
customers in the ordinary course of business;
(ii) Contracts under which the Company or any Subsidiary licenses any
material item of intellectual property from a third party;
(iii) Contracts with any Affiliate of the Company;
(iv) Contracts for the acquisition, sale or disposition of any material
assets of the Company or any of its Subsidiaries outside the ordinary
course of business;
(v) any Contract not disclosed in a Company SEC Report that is a
material contract (as defined in Item 601(b)(10) of Regulation S-K of the
SEC);
(vi) any Contract under which a third party would be entitled to receive
a license or any other right to intellectual property of the Buyer or any
of Buyer's affiliates (as defined in Rule 405 under the Securities Act),
other than the Surviving Corporation, following the Closing, and
(vii) any Contract that would require Buyer to register any shares of
Buyer Common Stock under the Securities Act after the Closing
(viii) any Contract with America Online, Inc.
(b) Except as disclosed in Section 3.10(b) in the Company Disclosure
Schedule, each Company Material Contract has not expired by its terms and is in
full force and effect. Neither the Company nor any of its Subsidiaries is in
violation of or in default under (nor does there exist any condition which,
upon the passage of time or the giving of notice or both, would cause such a
violation of or default under) any Company Material Contract or any other loan
or credit agreement, note, bond, mortgage, indenture, lease, permit,
concession, franchise, license or other contract, arrangement or understanding
to which it is a party or by which it or any of its properties or assets is
bound, except for violations or defaults which, individually or in the
aggregate, have not resulted in, and are not reasonably likely to result in, a
Company Material Adverse Effect.
3.11 Litigation. Except as disclosed in the Company SEC Reports filed prior
to the date of this Agreement and in Section 3.11 in the Company Disclosure
Schedule, there is no action, suit, proceeding, claim, arbitration or
investigation pending or, to the knowledge of the Company, threatened against
or affecting the Company or any of its Subsidiaries which, individually or in
the aggregate, has had, or is reasonably likely to have, a Company Material
Adverse Effect. There are no judgments, orders or decrees outstanding against
the Company.
3.12 Environmental Matters.
(a) Except as disclosed in the Company SEC Reports filed prior to the date
of this Agreement and except for such matters which, individually or in the
aggregate, have not had, and are not reasonably likely to have a Company
Material Adverse Effect: (i) the Company and each of its Subsidiaries has
complied with, and is not in violation of, any applicable Environmental Laws
(as defined in Section 3.12(b)); (ii) the properties currently owned or
operated by the Company and its Subsidiaries (including soils, groundwater,
surface water, buildings or other structures) are not contaminated with any
Hazardous Substances (as defined in Section 3.12(c)); (iii) the properties
formerly owned or operated by the Company or any of its Subsidiaries were not
contaminated with Hazardous Substances prior to or during the period of
ownership or operation by the Company or any of its Subsidiaries; (iv) neither
the Company nor its Subsidiaries are subject to liability for any Hazardous
Substance disposal or contamination on the property of any third party; (v)
neither the Company nor any of its Subsidiaries have released any Hazardous
Substance to the environment; (vi) neither the Company nor any of its
Subsidiaries has received any notice, demand, letter, claim or request for
information alleging that the Company or any of its Subsidiaries may be in
violation of, liable under or have obligations under any Environmental Law;
(vii) neither the Company nor any of its Subsidiaries is subject to any orders,
decrees, injunctions or other arrangements with any Governmental Entity or is
subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law or relating to Hazardous Substances; and
(viii) there are no circumstances or conditions involving the Company or any of
its
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Subsidiaries that could reasonably be expected to result in any claims,
liability, obligations, investigations, costs or restrictions on the ownership,
use or transfer of any property of the Company or any of its Subsidiaries
pursuant to any Environmental Law.
(b) For purposes of this Agreement, "Environmental Law" means any law,
regulation, order, decree, permit, authorization, opinion, common law or agency
requirement of any jurisdiction relating to: (A) the protection, investigation
or restoration of the environment, human health and safety, or natural
resources, (B) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance or (C) noise, odor, wetlands, pollution,
contamination or any injury or threat of injury to persons or property.
(c) For purposes of this Agreement, "Hazardous Substance" means any
substance that is: (A) listed, classified, regulated or which falls within the
definition of a "hazardous substance" or "hazardous material" pursuant to any
Environmental Law; (B) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (C) any other substance which is the subject
of regulatory action by any Governmental Entity pursuant to any Environmental
Law.
(d) Section 3.12(d) of the Company Disclosure Schedule sets forth a complete
and accurate list of all documents (whether in hard copy or electronic form)
that contain any environmental reports, investigations and audits relating to
premises currently or previously owned or operated by the Company or any of its
Subsidiaries (whether conducted by or on behalf of the Company or one of its
Subsidiaries or a third party, and whether done at the initiative of the
Company or one of its Subsidiaries or directed by a Governmental Entity or
other third party) which were issued or conducted during the past five years
and of which the Company has possession. A complete and accurate copy of each
such document has been provided to the Buyer.
3.13 Employee Benefit Plans.
(a) Section 3.13(a) of the Company Disclosure Schedule sets forth a complete
and accurate list of all Employee Benefit Plans (as defined below) maintained,
or contributed to, by the Company, any Subsidiary of the Company, or any ERISA
Affiliate (as defined below) with respect to which the Company or any
Subsidiary has or may have any actual or contingent liabilities (together, the
"Company Employee Plans"). For purposes of this Agreement, the following terms
shall have the following meanings: (i) "Employee Benefit Plan" means any
"employee pension benefit plan" (as defined in Section 3(2) of ERISA), any
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and any
other plan, agreement or arrangement involving direct or indirect compensation
or fringe benefits, including without limitation insurance coverage, severance
benefits, disability benefits, deferred compensation, bonuses, stock options,
stock purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation; (ii) "ERISA" means the Employee
Retirement Income Security Act of 1974, as amended; and (iii) "ERISA Affiliate"
means any entity which is, or at any applicable time was, a member of (1) a
controlled group of corporations (as defined in Section 414(b) of the Code),
(2) a group of trades or businesses under common control (as defined in Section
414(c) of the Code), or (3) an affiliated service group (as defined under
Section 414(m) of the Code or the regulations under Section 414(o) of the
Code), any of which includes or included the Company or a Subsidiary.
(b) With respect to each Company Employee Plan, the Company has furnished to
the Buyer, a complete and accurate copy of (i) such Company Employee Plan (or a
written summary of any unwritten plan), (ii) the most recent annual report
(Form 5500, 5500C or 5500R) filed with the IRS, if any, required under ERISA or
the Code, (iii) each trust agreement, group annuity contract and summary plan
description, if any, required under ERISA relating to such Company Employee
Plan and (iv) reports, if any, regarding the satisfaction of the
nondiscrimination requirements of Sections 401(a)(4), 401(k), 401(m) and 410(b)
of the Code for the last plan year for which such tests has been performed.
(c) Each Company Employee Plan has been administered in all material
respects in accordance with its terms and each of the Company, the Company's
Subsidiaries and their ERISA Affiliates has in all material
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respects met its obligations with respect to such Company Employee Plan and has
made all required contributions thereto. With respect to the Company Employee
Plans, no event has occurred, and to the knowledge of the Company, there exists
no condition or set of circumstances in connection with which the Company or
any of its Subsidiaries could be subject to (i) any liability (other than the
obligation to fund and administer the plans in accordance with their respective
terms) under ERISA, the Code or any other applicable law which, individually or
in the aggregate, is reasonably likely to have a Company Material Adverse
Effect; or (ii) any contractual indemnification or contribution obligation
protecting any fiduciary, insurer or service provider with respect to any
Company Employee Plan.
(d) With respect to the Company Employee Plans, there are no funded benefit
obligations for which contributions have not been made or properly accrued and
there are no unfunded benefit obligations (other than routine claims for
benefits) which have not been accounted for by reserves, or otherwise properly
footnoted in accordance with United States generally accepted accounting
principles, on the financial statements of the Company.
(e) All the Company Employee Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Company Employee Plans are
qualified and the plans and trusts related thereto are exempt from federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code, or
were established using a standardized prototype plan document with respect to
which a determination letter was received by the sponsor, no such determination
letter has been revoked and revocation has not been threatened, and no such
Company Employee Plan has been amended or operated since the date of its most
recent determination letter or application therefor in any respect, and no act
or omission has occurred, that would adversely affect its qualification or
materially increase its cost.
(f) Neither the Company, any Subsidiary of the Company nor any ERISA
Affiliate has (i) ever maintained a Company Employee Plan which was ever
subject to Section 412 of the Code or Title IV of ERISA or (ii) ever been
obligated to contribute to, or otherwise has any liability with respect to, a
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA). No Company
Employee Plan is funded by, associated with or related to a "voluntary
employee's beneficiary association" within the meaning of Section 501(c)(9) of
the Code.
(g) Each Company Employee Plan is amendable and terminable unilaterally by
the Company at any time without any material liability to the Company as a
result thereof and no Company Employee Plan, plan documentation or agreement,
summary plan description or other written communication distributed generally
to employees by its terms prohibits the Company from amending or terminating
any such Company Employee Plan.
(h) Except for plans identified in Section 3.13(a) or in Section 3.10(h) of
the Company Disclosure Schedule or the Company SEC Reports filed prior to the
date of this Agreement, neither the Company nor any of its Subsidiaries is a
party to any (i) agreement with any stockholders, director, executive officer
or other key employee of the Company or any of its Subsidiaries (A) the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving the Company or any of its
Subsidiaries of the nature of any of the transactions contemplated by this
Agreement, (B) providing any term of employment or compensation guarantee or
(C) providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii) agreement,
plan or arrangement under which any person may receive payments from the
Company or any of its Subsidiaries that may be subject to the tax imposed by
Section 4999 of the Code or included in the determination of such person's
"parachute payment" under Section 280G of the Code; and (iii) agreement or plan
binding the Company or any of its Subsidiaries, including any stock option
plan, stock appreciation right plan, restricted stock plan, stock purchase
plan, severance benefit plan, or Company Employee Plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement.
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(i) Except as disclosed in Section 3.13(i) of the Company Disclosure
Schedule: (i) no claims (other than claims for benefits payable in the
normal operation of the Company Employee Plans) are outstanding with
respect to any Company Employee Plan; (ii) there are no pending nor, to the
Company's knowledge, threatened legal proceedings with respect to any
Company Employee Plan; and (iii) no Company Employee Plan is the subject of
an examination by any governmental authority or of any government-sponsored
amnesty, voluntary compliance or similar program.
(j) The Company represents that it has or will have immediately prior to
the Effective Time all requisite corporate power, right and authority under
the Company Stock Plans, and all grants and awards thereunder, to take all
actions contemplated by Section 6.11(f) of this Agreement, without
violating any of the terms of the Company Stock Plans or any grants or
awards outstanding thereunder. Except for the elections of optionees
contemplated by Schedule 6.11, no consent of any holder of a Company Stock
Option is required in connection with the treatment of options provided for
in Schedule 6.11 of this Agreement.
3.14 Compliance With Laws. The Company and each of its Subsidiaries has
complied with, is not in violation of, and has not received any notice alleging
any violation with respect to, any applicable provisions of any federal or
state statute, law or regulation with respect to the conduct of its business,
or the ownership or operation of its properties or assets, except for failures
to comply or violations which, individually or in the aggregate, have not had,
and are not reasonably likely to have, a Company Material Adverse Effect.
3.15 Permits. The Company and each of its Subsidiaries have all permits,
licenses and franchises from Governmental Entities required to conduct their
businesses as now being conducted or as presently contemplated to be conducted
(the "Company Permits"), except for such permits, licenses and franchises the
absence of which, individually or in the aggregate, have not resulted in, and
are not reasonably likely to result in, a Company Material Adverse Effect. The
Company and its Subsidiaries are in compliance, in all material respects, with
the terms of the Company Permits.
3.16 Registration Statement; Proxy Statement/Prospectus. The information to
be supplied by the Company for inclusion in the registration statement on Form
S-4 pursuant to which shares of Buyer Common Stock issued in connection with
the Merger will be registered under the Securities Act (the "Registration
Statement"), shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information to be supplied by the Company for inclusion in the proxy
statement/prospectus (the "Proxy Statement") to be sent to the stockholders of
the Company in connection with the meeting of the Company's stockholders to
consider this Agreement and the Merger (the "Company Meeting") shall not, on
the date the Proxy Statement is first mailed to stockholders of the Company, at
the time of the Company Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements made
in the Proxy Statement not false or misleading; or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the Company Meeting which has become
false or misleading. If at any time prior to the Effective Time any event
relating to the Company or any of its Affiliates, officers or directors should
be discovered by the Company which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, the Company
shall promptly inform the Buyer.
3.17 Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization.
Neither the Company nor any of its Subsidiaries is the subject of any
proceeding asserting that the Company or any of its Subsidiaries has committed
an unfair labor practice or is seeking to compel it to bargain with any labor
union or labor organization, nor is there pending or, to the knowledge of the
Company,
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threatened, any labor strike, dispute, walkout, work stoppage, slow-down or
lockout involving the Company or any of its Subsidiaries.
3.18 Insurance. Each of the Company and its Subsidiaries maintains
insurance policies with reputable insurance carriers against all risks of a
character and in such amounts as are usually insured against by similarly
situated companies in the same or similar businesses. Each insurance policy is
in full force and effect and is valid, outstanding and enforceable, and all
premiums due thereon have been paid in full. None of the insurance policies
will terminate or lapse (or be affected in any other materially adverse
manner) by reason of the transactions contemplated by this Agreement. The
Company and its Subsidiaries have complied in all material respects with the
provisions of each insurance policy under which it is the insured party. No
insurer under any insurance policy has canceled or generally disclaimed
liability under any such policy or indicated any intent to do so or not to
renew any such policy. All material claims under the insurance policies have
been filed in a timely fashion.
3.19 Business Activity Restrictions. There is no non-competition or other
similar agreement, commitment, judgment, injunction or order to which the
Company or any Subsidiary of the Company is a party or subject to that has or
could reasonably be expected to have the effect of prohibiting or impairing
the conduct of the business by the Company in any material respect. Except as
set forth in Section 3.19 of the Company Disclosure Schedule, the Company has
not entered into any agreement under which it is restricted in any material
respect from selling, licensing or otherwise distributing any of its
technology or products, or providing services to, customers or potential
customers or any class of customers, in any geographic area, during any period
of time or any segment of the market or line of business.
3.20 Year 2000 Compliance.
(a) Except as disclosed in Section 3.20(a) in the Company Disclosure
Schedule, the Company has conducted "year 2000" audits with respect to (i) all
of the Company's internal systems used in the business or operations of the
Company, including, without limitation, computer hardware systems, software
applications, firmware, equipment firmware and other embedded systems, and
(ii) the software, hardware, firmware and other technology which constitute
part of the products and services marketed or sold by the Company or licensed
by the Company to third parties. The Company has obtained "year 2000"
certificates with respect to all material third-party systems used in
connection with the business or operations of the Company.
(b) All of (i) the Company's material internal systems used in the business
or operations of the Company, including, without limitation, computer hardware
systems, software applications, firmware, equipment containing embedded
microchips and other embedded systems (the "Company Systems"), and (ii) the
software, hardware, firmware and other technology which constitute part of the
products and services marketed or sold by the Company or licensed by the
Company to third parties (the "Company Products") are Year 2000 Compliant.
(c) The Company has no knowledge of any failure to be Year 2000 Compliant
of any material third-party system used in connection with the business or
operations of the Company.
(d) For purposes of this Agreement, "Year 2000 Compliant" means that the
applicable system or item:
(i) accurately receives, records, stores, provides, recognizes and
processes all date and time data from, during, into and between the
twentieth and twenty-first centuries, the years 1999 and 2000 and all leap
years;
(ii) accurately performs all date-dependent calculations and operations
(including, without limitation, mathematical operations, sorting, comparing
and reporting) from, during, into and between the twentieth and twenty-
first centuries, the years 1999 and 2000 and all leap years; and
(iii) does not malfunction, cease to function or provide invalid or
incorrect results as a result of (x) the change of years from 1999 to 2000
or from 2000 to 2001, (y) date data, including date data which
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represents or references different centuries, different dates during 1999
and 2000, or more than one century or (z) the occurrence of any particular
date;
in each case without human intervention, other than original data entry;
provided, in each case, that all applications, hardware and other systems used
in conjunction with such system or item which are not owned or licensed by the
Company correctly exchange date data with or provide data to such system or
item.
(e) The Company has not provided any guarantee or warranty for any Company
Product to the effect that such product or service (i) complies with or
accounts for the fact of the arrival of the year 2000, (ii) will not be
adversely affected with respect to functionality, interoperability, performance
or volume capacity (including, without limitation, the processing and reporting
of data) by virtue of the arrival of the year 2000 or (iii) is otherwise Year
2000 Compliant.
3.21 Assets. Each of the Company and its Subsidiaries owns or leases all
tangible assets necessary for the conduct of its businesses as presently
conducted and as presently proposed to be conducted. Except as disclosed in
Section 3.21 in the Company Disclosure Schedule, all of such tangible assets
which are owned, are owned free and clear of all mortgages, security interest,
pledges, liens and encumbrances ("Liens") except for (i) Liens which are
disclosed in the Company SEC Reports filed prior to the date of this Agreement
and (ii) other Liens which, individually and in the aggregate, do not
materially interfere with the ability of the Company or its Subsidiaries to
conduct their business as currently conducted and as presently proposed to be
conducted and have not resulted in, and are not reasonably likely to result in,
a Company Material Adverse Effect. The tangible assets of the Company and its
Subsidiaries, taken as a whole, are free from material defects, have been
maintained in accordance with normal industry practice, are in good operating
condition and repair (subject to normal wear and tear) and are suitable for the
purpose for which they are presently used.
3.22 No Existing Discussions. As of the date of this Agreement, neither the
Company nor any of its Subsidiaries is engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to an Acquisition
Proposal (as defined in Section 6.1).
3.23 Opinion of Financial Advisor. The financial advisor of the Company,
Merrill Lynch & Co., Inc., has delivered to the Company an opinion, dated the
date of this Agreement, to the effect that, as of such date and based upon and
subject to the matters stated in the opinion, that the Exchange Ratio is fair
to the holders of the Company Common Stock from a financial point of view.
3.24 Section 203 of the DGCL Not Applicable. The Board of Directors of the
Company has taken all actions necessary so that the restrictions contained in
Section 203 of the DGCL applicable to a "business combination" (as defined in
Section 203) will not apply to the execution, delivery or performance of this
Agreement, the Stockholder Agreement or the consummation of the Merger or the
other transactions contemplated by this Agreement, or the Stockholder
Agreement.
3.25 Tax Matters
(a) To the Company's knowledge, after consulting with its independent
auditors, neither the Company nor any of its Affiliates has taken or agreed to
take any action which would prevent the Merger from constituting a transaction
qualifying as a reorganization under Section 368(a) of the Code.
(b) The representations made by the Company and its Subsidiaries and, to the
knowledge of the Company, the representations made by Creative Computer, Inc.
("CCI") and the 5% shareholders of the Company and CCI in the certificates
and/or letters provided to PricewaterhouseCoopers LLP and KPMG LLP (the
"Accounting Firms") for the purpose of the Accounting Firms issuing opinions to
CCI, Buyer and/or the Company with respect to the applicability of Section
355(e)(1) of the Code to the Merger are true, correct and complete in all
respects.
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3.26 Transactions with Affiliates. Except as disclosed in the Company SEC
Reports filed prior to the date of this Agreement, neither the Company nor any
of its Subsidiaries has entered into any transaction with any director, officer
or other affiliate of the Company or any of its Subsidiaries or any transaction
that would be subject to proxy statement disclosure pursuant to Item 404 of
Regulation S-K.
3.27 Brokers; Schedule of Fees and Expenses.
(a) No agent, broker, investment banker, financial advisor or other firm or
person acting on behalf of the Company is or will be entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with any of the transactions contemplated by this Agreement, except Merrill
Lynch & Co., Inc., whose fees and expense will be paid by the Company. The
Company has delivered to the Buyer a complete and accurate copy of all
agreements pursuant to which Merrill Lynch & Co., Inc., is entitled to any fees
and expenses in connection with any of the transactions contemplated by this
Agreement.
(b) Section 3.27(b) of the Company Disclosure Schedule sets forth a complete
and accurate list of the estimated fees and expenses incurred and to be
incurred by the Company and any of its Subsidiaries in connection with this
Agreement and the transactions contemplated by this Agreement (including the
fees and expenses of Merrill Lynch & Co., Inc., and of the Company's legal
counsel and accountants) and such estimated fees and expenses shall be no more
than as set forth on Section 3.27(b) of the Company Disclosure Schedule.
3.28 Privacy Issues.
(a) The Company's (including any Subsidiaries) statistical models used to
determine whether to post products for auction on the Company's website have
not been disclosed to any third party at any time other than to third parties
who have executed nondisclosure agreements with the Company.
(b) The Company has implemented all reasonable steps which are known in the
information systems industry and which are generally known as best practices in
the physical and electronic protection of its information assets from
unauthorized disclosure, use or modification. The Company has previously
disclosed to the Buyer whether, to its knowledge, there have been breaches of
security, known consequences, and the steps the Company has taken to remedy any
such breaches.
(c) The Company has conducted its business and has collected, maintained and
used its data at all times materially in accordance with (i) accepted industry
practice and the privacy policy of the Company as currently set forth on the
company's website; and (ii) all applicable United States federal and state
laws, including but not limited to those relating to privacy.
(d) The electronic data processing, information, record keeping,
communications, telecommunications, auction trading and computer systems and
intellectual property (including software) that are used by the Company in its
business (collectively, the "Technology Systems") operate in accordance with
their technical specifications and are adequate for the operation of the
business of the Company as currently operated and proposed to be operated. The
Company owns or has the right to use all components of the Technology Systems,
free of any rights of Creative Computers, Inc. or any other third party. There
has not been any material malfunction with respect to any of the Technology
Systems since December 31, 1996 that has not been remedied or replaced without
disruption to the business of the Company.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE
TRANSITORY SUBSIDIARY
The Buyer and the Transitory Subsidiary represent and warrant to the Company
that the statements contained in this Article IV are true and correct, except
as set forth herein or in the Buyer disclosure schedule delivered by the Buyer
to the Company on or before the date of this Agreement (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and the disclosure in any paragraph shall qualify other paragraphs in this
Article IV only to the extent that it is reasonably apparent from a reading of
such document that it also qualifies or applies to such other paragraphs.
4.1 Organization, Standing and Power. Each of the Buyer and the Transitory
Subsidiary and the Buyer's other Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own, lease
and operate its properties and assets and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in which
the failure to be so qualified, individually or in the aggregate, would be
reasonably likely to have a material adverse effect on the business,
properties, financial condition, results of operations or prospects of the
Buyer and its Subsidiaries, taken as a whole, or to have a material adverse
effect on the ability of the Buyer to consummate the transactions contemplated
by this Agreement (a "Buyer Material Adverse Effect").
4.2 Capitalization. The authorized capital stock of the Buyer consists of
400,000,000 shares of Buyer Common Stock and 5,000,000 shares of preferred
stock, $.01 par value per share (the "Buyer Preferred Stock"), of which (i) 250
shares are designated Series A Preferred Stock, (ii) 50,000 shares are
designated Series B Preferred Stock, (iii) 375,000 shares are designated Series
C Preferred Stock and (iv) 18,090.45 shares are designated Series D Preferred
Stock. As of the close of business on January 26, 2000, 265,342,554 shares of
Buyer Common Stock were issued and outstanding, and (i) no shares of Series A
Preferred Stock, (ii) 35,000 shares of Series B Preferred Stock (convertible
into an aggregate of 2,808,556 shares of Buyer Common Stock), (iii) 375,000
shares of Series C Preferred Stock (convertible into an aggregate of 9,488,056
shares of Buyer Common Stock), and (iv) no shares of Series D Preferred Stock
were issued and outstanding. All outstanding shares of Buyer Common Stock are,
and all shares of Buyer Common Stock subject to issuance as specified above,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, will be, duly authorized, validly issued, fully
paid and nonassessable. All of the shares of Buyer Common Stock issuable
pursuant to Section 2.1(c) in connection with the Merger, when issued in
accordance with this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable.
4.3 Authority; No Conflict; Required Filings and Consents.
(a) Each of the Buyer and the Transitory Subsidiary has all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated by this Agreement. The execution and delivery of
this Agreement and the consummation of the transactions contemplated by this
Agreement by the Buyer and the Transitory Subsidiary have been duly authorized
by all necessary corporate action on the part of each of the Buyer and the
Transitory Subsidiary, including the approval of the Merger by the Buyer in its
capacity as sole stockholder of the Transitory Subsidiary. This Agreement has
been duly executed and delivered by each of the Buyer and the Transitory
Subsidiary and constitutes the valid and binding obligation of each of the
Buyer and the Transitory Subsidiary, enforceable in accordance with its terms.
(b) The execution and delivery of this Agreement by each of the Buyer and
the Transitory Subsidiary does not, and the consummation of the transactions
contemplated by this Agreement will not, (i) conflict with, or result in any
violation or breach of, any provision of the Certificate of Incorporation or
By-laws of the Buyer or the Transitory Subsidiary, (ii) conflict with, or
result in any violation or breach of, or constitute (with or
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without notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require a consent or waiver under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract or other agreement, instrument or obligation to which the
Buyer or any of its Subsidiaries is a party or by which any of them or any of
their properties or assets may be bound, or (iii) subject to compliance with
the requirements specified in clause (i), (ii), (iii), (iv), (v) and (vi) of
Section 4.3(c), conflict with or violate any permit, concession, franchise,
license, judgment, injunction, order, decree, statute, law, ordinance, rule or
regulation applicable to the Buyer or any of its Subsidiaries or any of its or
their properties or assets, except in the case of (ii) and (iii) for any such
conflicts, violations, breaches, defaults, terminations, cancellations or
accelerations which, individually or in the aggregate, are not reasonably
likely to have a Buyer Material Adverse Effect.
(c) No consent, approval, license, permit, order or authorization of, or
registration, declaration, notice or filing with, any Governmental Entity is
required by or with respect to the Buyer or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by the Buyer or
the Transitory Subsidiary or the consummation of the transactions contemplated
by this Agreement, except for (i) the filing of a pre-merger notification
report under the HSR Act, (ii) the filing of the Certificate of Merger with the
Delaware Secretary of State, (iii) the filing of the Registration Statement
with the SEC in accordance with the Securities Act, (iv) the filings of such
reports or schedules under Section 13 of the Exchange Act as may be required in
connection with this Agreement and the transactions contemplated hereby, (v)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable state securities laws and (vi)
the filing with the Nasdaq National Market of a Notification Form for Listing
of Additional Shares with respect to the Buyer Common Stock issuable in
connection with the Merger.
4.4 SEC Filings; Financial Statements.
(a) The Buyer has filed and made available to the Company all forms, reports
and other documents required to be filed by the Buyer with the SEC since June
1, 1998. All such required forms, reports and other documents (including those
that the Buyer may file after the date hereof until the Closing) are referred
to herein as the "Buyer SEC Reports." The Buyer SEC Reports (i) were or will be
filed on a timely basis, (ii) were or will be prepared in compliance in all
material respects with the applicable requirements of the Securities Act and
the Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Buyer SEC Reports, and (iii) did not or will not
at the time they were or are filed contain any untrue statement of a material
fact or omit to state a material fact required to be stated in such Buyer SEC
Reports or necessary in order to make the statements in such Buyer SEC Reports,
in the light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes and schedules) contained or to be contained in the Buyer SEC
Reports (i) complied or will comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, (ii) were or will be prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
to such financial statements or, in the case of unaudited statements, as
permitted by the SEC on Form 10-Q under the Exchange Act) and (iii) fairly
presented or will fairly present the consolidated financial position of the
Buyer and its Subsidiaries as of the dates and the consolidated results of its
operations and cash flows for the periods indicated, consistent with the books
and records of the Buyer and its Subsidiaries, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
The audited balance sheet of the Buyer as of July 31, 1999 is referred to
herein as the "Buyer Balance Sheet."
4.5 Absence of Certain Changes or Events. Except as disclosed in the Buyer
SEC Reports filed prior to the date of this Agreement, since the date of the
Buyer Balance Sheet, there has not been any event, change or development in the
business, properties, financial condition, results of operations or prospects
of the Buyer and its Subsidiaries, taken as a whole, which has had, or is
reasonably likely to have, a Buyer Material Adverse Effect.
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4.6 Tax Matters. To the Buyer's knowledge, after consulting with its
independent auditors, neither the Buyer nor any of its Affiliates has taken or
agreed to take any action which would prevent the Merger from constituting a
transaction qualifying as a reorganization under Section 368(a) of the Code.
4.7 Registration Statement; Proxy Statement/Prospectus. The information in
the Registration Statement (except for information supplied by the Company for
inclusion in the Registration Statement, as to which the Buyer makes no
representation and which shall not constitute part of the Buyer SEC Reports for
purposes of this Agreement) shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement, in light of the circumstances under which they were made, not
misleading. If at any time prior to the Effective Time any event relating to
the Buyer or any of its Affiliates, officers or directors should be discovered
by the Buyer which should be set forth in an amendment to the Registration
Statement, the Buyer shall promptly inform the Company.
4.8 Litigation. Except as disclosed in the Buyer SEC Reports filed prior to
the date of this Agreement, there is no action, suit, proceeding, claim,
arbitration or investigation pending or, to the knowledge of the Buyer,
threatened against or affecting the Buyer or any of its Subsidiaries which,
individually or in the aggregate, has had, or is reasonably likely to have, a
Buyer Material Adverse Effect. There are no material judgments, orders or
decrees outstanding against the Buyer.
4.9 Operations of the Transitory Subsidiary. The Transitory Subsidiary has
engaged in no business activities other than as contemplated by this Agreement
and has conducted its operations only as contemplated by this Agreement.
4.10 Brokers. No agent, broker, investment banker, financial advisor or
other firm or person acting on Buyer's behalf is or will be entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with any of the transactions contemplated by this Agreement, except
for Greenhill & Co., whose fees and expense will be paid by the Buyer.
ARTICLE V
CONDUCT OF BUSINESS
5.1 Covenants of the Company. Except as expressly provided herein or as
consented to in writing by the Buyer, from and after the date of this Agreement
until the earlier of the termination of this Agreement in accordance with its
terms or the Effective Time, the Company shall, and shall cause each of its
Subsidiaries to, act and carry on its business in the usual, regular and
ordinary course in substantially the same manner as previously conducted, and
use all reasonable efforts, consistent with past practices, to maintain and
preserve its and each Subsidiary's business organization, assets and
properties, keep available the services of its present officers and employees
and preserve its advantageous business relationships with customers, suppliers,
distributors and others having business dealings with it to the end that its
goodwill and ongoing business shall be unimpaired at the Effective Time.
Without limiting the generality of the foregoing, from and after the date of
this Agreement until the earlier of the termination of this Agreement in
accordance with its terms or the Effective Time, the Company shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly, do any of
the following without the prior written consent of the Buyer:
(a) (A) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, securities or other property) in respect
of, any of its capital stock (other than dividends and distributions by a
direct or indirect wholly owned subsidiary of the Company to its parent);
(B) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution of shares of its capital stock; or (C) purchase, redeem or
otherwise acquire any
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shares of its capital stock or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities (other
than repurchases at cost from employees upon termination of their
employment);
(b) issue, deliver, sell, grant, pledge or otherwise dispose of or
encumber any shares of its capital stock, any other voting securities or
any securities convertible into or exchangeable for, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible or exchangeable securities (other than the issuance of shares
of Company Common Stock upon the exercise of Company Options or Company
Warrants outstanding on the date of this Agreement in accordance with their
present terms);
(c) amend its certificate of incorporation, by-laws or other comparable
charter or organizational documents, except as expressly provided by this
Agreement;
(d) acquire (A) by merging or consolidating with, or by purchasing a
substantial portion of the assets or any stock of, or by any other manner,
any business or any corporation, partnership, joint venture, limited
liability company, association or other business organization or division
thereof or (B) any assets that are material, in the aggregate, to the
Company and the Subsidiaries, taken as a whole, except purchases of
inventory in the ordinary course of business consistent with past practice;
(e) except in the ordinary course of business consistent with past
practice, sell, lease, license, pledge, or otherwise dispose of or encumber
any properties or assets of the Company or of any of its Subsidiaries;
(f) whether or not in the ordinary course of business or consistent with
past practice, sell or dispose of any assets material to the Company and
its Subsidiaries, taken as a whole (including any accounts, leases,
contracts or intellectual property or any assets or the stock of any
Subsidiaries, but excluding the sale of products and services in the
ordinary course of business consistent with past practice);
(g) adopt or implement any stockholder rights plan;
(h) except as permitted by Section 6.1, enter into an agreement with
respect to any merger, consolidation, liquidation or business combination,
or any acquisition or disposition of all or substantially all of the assets
or securities of the Company or any of its Subsidiaries;
(i) (A) incur or suffer to exist any indebtedness for borrowed money
other than such indebtedness which existed as of November 30, 1999 as
reflected on the Company Balance Sheet or guarantee any such indebtedness
of another person, (B) issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or any of its
Subsidiaries, guarantee any debt securities of another person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, other than the incurrence of
accounts payable in the ordinary course of business, or (C) make any loans,
advances (other than routine advances to employees of the company in the
ordinary course of business consistent with past practice) or capital
contributions to, or investment in, any other person;
(j) make any capital expenditures or expenditures for property, plant or
equipment, except consistent with the capital budget shown on Section
5.1(j) of the Company Disclosure Schedule;
(k) make any changes in accounting methods, principles or practices,
except insofar as may have been required by a change in United States
generally accepted accounting principles or, except as so required, change
any assumption underlying, or method of calculating, any bad debt,
contingency or other reserve;
(l) (A) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of the Company included in the Company SEC Reports filed
prior to the date of this
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Agreement (to the extent so reflected or reserved against) or incurred
thereafter in the ordinary course of business consistent with past
practice, or (B) except as permitted under Section 6.1, waive any material
benefits of any confidentiality, standstill or similar agreements to which
the Company or any of its Subsidiaries is a party;
(m) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which the Company or any of
its Subsidiaries is party, or knowingly waive, release or assign any
material rights or claims (including any write-off or other compromise of
any accounts receivable of the Company or any of its Subsidiaries);
(n) (A) except in the ordinary course of business consistent with past
practice, enter into any material contract or agreement or (B) license any
material intellectual property rights to or from any third party;
(o) except as required to comply with applicable law or agreements,
plans or arrangements existing on the date hereof or as contemplated by
this Agreement or disclosed on Section 5.1(o) of the Company Disclosure
Schedule, (A) adopt, enter into, terminate or amend any employment,
severance or similar agreement or benefit plan for the benefit or welfare
of any current or former director, officer or employee or any collective
bargaining agreement, (B) increase in any material respect the compensation
or fringe benefits of, or pay any bonus to, any director, officer or key
employee, (C) accelerate the payment, right to payment or vesting of any
compensation or benefits, including any outstanding options or restricted
stock awards, (D) pay any material benefit not provided for as of the date
of this Agreement under any benefit plan, (E) grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
benefit plan (including the grant of stock options, stock appreciation
rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any benefit
plans or agreements or awards made thereunder) except for the grant of
Permitted Options, or (F) take any action other than in the ordinary course
of business consistent with past practice to fund or in any other way
secure the payment of compensation or benefits under any employee plan,
agreement, contract or arrangement or benefit plan;
(p) make or rescind any Tax election, settle or compromise any Tax
liability or amend any Tax return;
(q) initiate, compromise or settle any material litigation or
arbitration proceeding;
(r) close any facility or office;
(s) invest funds in debt securities or other instruments maturing more
than 90 days after the date of investment; or
(t) authorize any of, or commit or agree, in writing or otherwise, to
take any of, the foregoing actions or any action which would materially
impair or prevent the occurrence of any conditions of Article VII hereof.
5.2 Cooperation. Subject to compliance with applicable law, from and after
the date of this Agreement and continuing until the earlier of the termination
of this Agreement in accordance with its terms or the Effective Time, the
Company and each of its Subsidiaries shall make its officers available to
confer on a regular and frequent basis with one or more representatives of the
Buyer to report on the general status of ongoing operations and shall promptly
provide the Buyer or its counsel with copies of all filings made by such party
with any Governmental Entity in connection with this Agreement, the Merger and
the transactions contemplated hereby.
5.3 Confidentiality. The parties acknowledge that the Buyer and the Company
have previously executed a Mutual Confidentiality Agreement, dated as of
January 14, 2000 (the "Confidentiality Agreement"), which Confidentiality
Agreement will continue in full force and effect in accordance with its terms,
except as expressly modified herein.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 No Solicitation.
(a) From and after the date of this Agreement until the earlier of the
termination of this Agreement in accordance with its terms or the Effective
Time, the Company and its Subsidiaries shall not, directly or indirectly,
through any officer, director, employee, financial advisor, representative or
agent (i) solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets,
tender offer, sale of shares of capital stock (excluding sales pursuant to
existing Company Stock Plans or pursuant to the Company Warrants) or similar
transaction involving the Company or any of its Subsidiaries, other than the
transactions contemplated by this Agreement (any of the foregoing inquiries or
proposals being referred to in this Agreement as an "Acquisition Proposal"),
(ii) engage in negotiations or discussions concerning, or provide any
information to any person or entity relating to, any Acquisition Proposal, or
(iii) agree to or recommend any Acquisition Proposal; provided, however, that,
if the Company has not breached this Section 6.1, nothing contained in this
Agreement shall prevent the Company or its Board of Directors, prior to the
adoption of this Agreement by the stockholders of the Company, from:
(A) furnishing information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited
bona fide written Acquisition Proposal by such person or entity or
recommending an unsolicited bona fide written Acquisition Proposal to the
stockholders of the Company, if and only to the extent that
(1) the Board of Directors of the Company believes in good faith
(after consultation with its financial advisor) that such Acquisition
Proposal is reasonably capable of being completed on the terms proposed
and would, if consummated, result in a transaction more favorable than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Superior
Proposal") and the Company's Board of Directors determines in good
faith after consultation with outside legal counsel that such action is
necessary for such Board of Directors to fulfill its fiduciary duties,
(2) prior to furnishing such non-public information to, or entering
into discussions or negotiations with, such person or entity, such
Board of Directors receives from such person or entity an executed
confidentiality agreement with terms no less favorable to such party
than those contained in the Confidentiality Agreement, and
(3) prior to recommending a Superior Proposal or terminating this
Agreement in respect thereof, the Company shall provide the Buyer with
at least five business days' prior notice of its proposal to do so,
during which time the Buyer may make, and in such event the Company
shall consider, a counterproposal to such Superior Proposal, and the
Company shall itself and shall cause its financial and legal advisors
to negotiate with the Buyer with respect to the terms and conditions of
such counterproposal; or
(B) complying with Rule 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal; provided, however, that neither
the Company nor its Board of Directors shall, except as permitted by
paragraph (A) of this section, propose to approve or recommend an
Acquisition Proposal.
(b) The Company will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore of the nature
described in Section 6.1(a) and will use reasonable efforts to obtain the
return of any confidential information furnished to any such parties.
(c) The Company shall notify the Buyer immediately (but in any event, within
one (1) business day) after receipt by the Company (or its advisors) of any
Acquisition Proposal or any request for nonpublic information in connection
with an Acquisition Proposal or for access to the properties, books or records
of the Company by
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any person or entity that informs the Company that it is considering making, or
has made, an Acquisition Proposal. Such notice shall be made orally and in
writing and shall indicate in reasonable detail the identity of the offer and
the terms and conditions of such proposal, inquiry or contact. The Company
shall continue to keep the Buyer promptly informed of any change in the status
of any such discussions or negotiations and the terms being discussed or
negotiated.
(d) Nothing in this Section 6.1 shall (i) permit the Company to terminate
this Agreement (except as specifically provided in Section 8.1 hereof), or (ii)
permit the Company to enter into any agreement with respect to an Acquisition
Proposal during the term of this Agreement (other than a confidentiality
agreement of the type referred to in Section 6.1(a) above).
(e) Without limiting the foregoing, it is understood that any violation of
the restrictions set forth in this Section 6.1 by any director or officer of
the Company or any of its Subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative of the Company or any of
its Subsidiaries shall be deemed to be a breach of this Section 6.1 by the
Company.
6.2 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement, the
Buyer and the Company shall prepare and the Company shall file with the SEC the
Proxy Statement, and the Buyer shall prepare and file with the SEC the
Registration Statement, in which the Proxy Statement will be included as a
prospectus, provided that the Buyer may delay the filing of the Registration
Statement until approval of the Proxy Statement by the SEC. The Buyer and the
Company shall use reasonable efforts to cause the Registration Statement to
become effective as soon after such filing as practicable. Each of the Buyer
and the Company will respond to any comments of the SEC and will use its
respective reasonable efforts to have the Proxy Statement cleared by the SEC
and the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filings and the Company will cause the Proxy
Statement and the prospectus contained within the Registration Statement to be
mailed to its stockholders at the earliest practicable time after both the
Proxy Statement is cleared by the SEC and the Registration Statement is
declared effective under the Securities Act. Each of the Buyer and the Company
will notify the other promptly upon the receipt of any comments from the SEC or
its staff or any other government officials and of any request by the SEC or
its staff or any other government officials for amendments or supplements to
the Registration Statement, the Proxy Statement or any filing pursuant to
Section 6.2(b) or for additional information and will supply the other with
copies of all correspondence between such party or any of its representatives,
on the one hand, and the SEC, or its staff or any other government officials,
on the other hand, with respect to the Registration Statement, the Proxy
Statement, the Merger or any filing pursuant to Section 6.2(b). Each of the
Buyer and the Company will cause all documents that it is responsible for
filing with the SEC or other regulatory authorities under this Section 6.2 to
comply in all material respects with all applicable requirements of law and the
rules and regulations promulgated thereunder. Whenever any event occurs which
is required to be set forth in an amendment or supplement to the Proxy
Statement, the Registration Statement or any filing pursuant to Section 6.2(b),
the Buyer or the Company, as the case may be, will promptly inform the other of
such occurrence and cooperate in filing with the SEC or its staff or any other
government officials, and/or mailing to stockholders of the Company, such
amendment or supplement.
(b) The Buyer and the Company shall make all necessary filings with respect
to the Merger under the Securities Act, the Exchange Act, applicable state blue
sky laws and the rules and regulations thereunder.
6.3 Nasdaq Quotation. The Company agrees to continue the quotation of the
Company Common Stock on the Nasdaq National Market during the term of this
Agreement.
6.4 Access to Information. The Company shall (and shall cause each of its
Subsidiaries to) afford to the Buyer's officers, employees, accountants,
counsel and other representatives, reasonable access, during normal business
hours during the period prior to the Effective Time, to all its properties,
books, contracts,
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commitments, personnel and records and, during such period, the Company shall
(and shall cause each of its Subsidiaries to) furnish promptly to the Buyer (a)
a copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the requirements of
federal or state securities laws and (b) all other information concerning its
business, properties, assets and personnel as the Buyer may reasonably request.
Unless otherwise required by law, the Buyer will hold any such information
which is nonpublic in confidence in accordance with the Confidentiality
Agreement. No information or knowledge obtained in any investigation pursuant
to this Section or otherwise shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to the
obligations of the parties to consummate the Merger.
6.5 Stockholders Meeting.
(a) The Company, acting through its Board of Directors, shall, subject to
and according to applicable law and its Certificate of Incorporation and By-
laws, promptly and duly call, give notice of, convene and hold as soon as
practicable following the date on which the Registration Statement becomes
effective the Company Meeting for the purpose of voting to approve and adopt
this Agreement and the Merger (the "Company Voting Proposal"). The Board of
Directors of the Company shall (i) recommend approval and adoption of the
Company Voting Proposal by the stockholders of the Company and include in the
Proxy Statement such recommendation and (ii) take all reasonable and lawful
action to solicit and obtain such approval; provided, however, that the Board
of Directors of the Company may withdraw such recommendation if (but only if)
such Board of Directors has received a Superior Proposal and after consultation
with its outside legal counsel determines that it is required, in order to
fulfill its fiduciary duties under applicable law, to recommend such Superior
Proposal to the stockholders of the Company and (iii) the Company has complied
with the provisions of Section 6.1.
(b) The Company shall call and hold the Company Meeting for the purpose of
voting upon the adoption of this Agreement and the Merger whether its Board of
Directors at any time subsequent to the date hereof determines that this
Agreement is no longer advisable and withdraws, or proposes publicly to
withdraw, its approval or recommendation of this Agreement or the Merger, or
approves or recommends, or proposes publicly to approve or recommend, any
Superior Proposal.
6.6 Legal Conditions to the Merger.
(a) Subject to the terms hereof, the Company and the Buyer shall each use
its reasonable efforts to (i) take, or cause to be taken, all actions, and do,
or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective the transactions contemplated hereby as promptly as practicable, (ii)
obtain from any Governmental Entity or any other third party any consents,
licenses, permits, waivers, approvals, authorizations, or orders required to be
obtained or made by the Company or the Buyer or any of their Subsidiaries in
connection with the authorization, execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby, (iii) as promptly as
practicable, make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Merger required under (A)
the Securities Act and the Exchange Act, and any other applicable federal or
state securities laws, (B) the HSR Act and any related governmental request
thereunder, and (C) any other applicable law and (iv) execute or deliver any
additional instruments necessary to consummate the transactions contemplated
by, and to fully carry out the purposes of, this Agreement. The Company and the
Buyer shall cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection therewith.
The Company and the Buyer shall use their respective reasonable efforts to
furnish to each other all information required for any application or other
filing to be made pursuant to the rules and regulations of any applicable law
(including all information required to be included in the Proxy Statement and
the Registration Statement) in connection with the transactions contemplated by
this Agreement.
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(b) Subject to the terms hereof, the Buyer and the Company agree, and shall
cause each of their respective Subsidiaries, to cooperate and to use their
respective reasonable efforts to obtain any government clearances or approvals
required for Closing under the HSR Act, the Sherman Act, as amended, the
Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any
other federal, state or foreign law or, regulation or decree designed to
prohibit, restrict or regulate actions for the purpose or effect of
monopolization or restraint of trade (collectively "Antitrust Laws"), to
respond to any government requests for information under any Antitrust Law, and
to contest and resist any action, including any legislative, administrative or
judicial action, and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other order (whether temporary, preliminary or
permanent) (an "Antitrust Order") that restricts, prevents or prohibits the
consummation of the Merger or any other transactions contemplated by this
Agreement under any Antitrust Law. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted by or on
behalf of any party hereto in connection with proceedings under or relating to
any Antitrust Law. The Buyer shall be entitled to direct any proceedings or
negotiations with any Governmental Entity relating to any of the foregoing,
provided that it shall afford the Company a reasonable opportunity to
participate therein. Notwithstanding anything to the contrary in this Section,
neither the Buyer nor any of its Subsidiaries shall be required to (i) divest
any of their respective businesses, product lines or assets, or to take or
agree to take any other action or agree to any limitation, that could
reasonably be expected to have a material adverse effect on the Buyer or on the
Buyer combined with the Company after the Effective Time or (ii) take any
action under this Section if the United States Department of Justice or the
United States Federal Trade Commission authorizes its staff to seek a
preliminary injunction or restraining order to enjoin consummation of the
Merger.
(c) Each of the Company and the Buyer shall give (or shall cause their
respective Subsidiaries to give) any notices to third parties, and use, and
cause their respective Subsidiaries to use, their reasonable efforts to obtain
any third party consents related to or required in connection with the Merger
that are (A) necessary to consummate the transactions contemplated hereby, (B)
disclosed or required to be disclosed in Section 6.6(c) of the Company
Disclosure Schedule or the Buyer Disclosure Schedule, as the case may be, or
(C) required to prevent a Company Material Adverse Effect or a Buyer Material
Adverse Effect from occurring prior to or after the Effective Time.
6.7 Public Disclosure. The Buyer and the Company shall each use its
reasonable efforts to consult with the other before issuing any press release
or otherwise making any public statement with respect to the Merger or this
Agreement and shall not issue any such press release or make any such public
statement prior to using such efforts, except as may be required by law.
6.8 Tax-Free Reorganization. The Buyer and the Company shall each use its
reasonable efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368(a) of the Code. The parties hereto hereby adopt this
Agreement as a plan of reorganization.
6.9 Affiliate Agreements. Upon the execution of this Agreement, the Company
will provide the Buyer with a list of those persons who are, in the Company's
reasonable judgment, "affiliates" of the Company, within the meaning of Rule
145 (each such person who is an "affiliate" of the Company within the meaning
of Rule 145 is referred to as an "Affiliate") promulgated under the Securities
Act ("Rule 145"). The Company shall provide to the Buyer such information and
documents as the Buyer shall reasonably request for purposes of reviewing such
list and shall notify the Buyer in writing regarding any change in the identity
of its Affiliates prior to the Closing Date. The Company shall use its
reasonable efforts to deliver or cause to be delivered to the Buyer prior to
the mailing of the Proxy Statement from each of its Affiliates, an executed
Affiliate Agreement, in substantially the form appended hereto as Exhibit C
(the "Affiliate Agreement").
6.10 Nasdaq National Market Listing. The Buyer shall file with the Nasdaq
National Market a Notification Form for Listing of Additional Shares with
respect to the Buyer Common Stock issuable in connection with the Merger.
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6.11 Company Stock Plans and the Company Warrants.
(a) At the Effective Time, each outstanding and unvested Company Stock
Option under Company Stock Plans shall terminate in accordance with their
respective terms and the terms of the Company Stock Plans.
(b) The Buyer shall take all corporate action necessary for the substitution
of options pursuant to optionee elections as contemplated in Section 6.11,
including the reservation for issuance of a sufficient number of shares of
Buyer Common Stock for delivery upon exercise of such substituted options. As
soon as practicable after the Effective Time, the Buyer shall file a
registration statement on Form S-8 (or any successor form) or another
appropriate form with respect to the shares of Buyer Common Stock subject to
such substituted options and shall use its best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding. It is intended that
the Company Stock Options assumed by Buyer shall qualify following the
Effective Time as incentive stock options (as defined in Section 422 of the
Code) to the extent the Company Stock Options qualified as incentive stock
options immediately prior to the Effective Time and this Section 6.11 shall be
construed consistent with such intent.
(c) At the Effective Time, by virtue of the Merger, each Company Warrant
outstanding immediately prior to the Effective Time shall be automatically
assumed by Buyer and converted into a warrant to acquire, on the same terms and
conditions as were applicable under such Company Warrant, the same number of
shares of Buyer Common Stock (rounded down to the nearest whole share) as the
holder of such Company Warrant would have been entitled to receive pursuant to
the Merger had such holder exercised such Company Warrant in full immediately
prior to the Effective Time, at a price per share (rounded up to the nearest
whole cent) of Buyer Common Stock equal to (A) the aggregate exercise price for
the shares of Company Common Stock otherwise purchasable pursuant to such
Company Warrant divided by (B) the aggregate number of shares of Buyer Common
Stock deemed purchasable pursuant to such Company Warrant (each, as so
adjusted, an "Adjusted Warrant"). Prior to the Effective Time, Buyer shall take
all necessary actions for the assumption of the Company Warrants and their
conversion into Adjusted Warrants, including the reservation, issuance and
quotation of Buyer Common Stock in a number at least equal to the number of
shares of Buyer Common Stock that will be subject to the Adjusted Warrants.
(d) Prior to the Effective Time, the Board of Directors of the Company shall
take all necessary actions pursuant to and in accordance with the Company Stock
Plans and the instruments evidencing the Company Stock Options to provide for
the treatment of the Company Stock Options as provided in Schedule 6.11 .
Except for the elections of optionees' contemplated by Schedule 6.11, no
consent of the holders of Company Stock Options is required in connection with
such actions.
(e) Subject to the Company's compliance with Section 6.11(d), the Buyer
shall permit holders of vested Company Stock Options to elect to substitute
such options for options to acquire shares of Buyer Common Stock in accordance
with Schedule 6.11(e).
6.12 Stockholder Litigation. Until the earlier of the termination of this
Agreement in accordance with its terms or the Effective Time, the Company shall
give the Buyer the opportunity to participate in the defense or settlement of
any stockholder litigation against the Company or its Board of Directors
relating to this Agreement or any of the transactions contemplated by this
Agreement, and shall not settle any such litigation without the Buyer's prior
written consent, which will not be unreasonably withheld or delayed.
6.13 Indemnification.
(a) From and after the Effective Time, the Buyer shall, to the fullest
extent permitted by law, cause the Surviving Corporation, for a period of six
years from the Effective Time, to honor all of the Company's obligations to
indemnify and hold harmless each present and former director and officer of the
Company (the "Indemnified Parties"), against any costs or expenses (including
attorneys' fees), judgments, fines, losses,
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claims, damages, liabilities or amounts paid in settlement incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the extent
that such obligations to indemnify and hold harmless exist on the date of this
Agreement.
(b) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person in a single transaction or a series of transactions, then, and in
each such case, Buyer will either guaranty the indemnification obligations
referred to in this Section 6.13 or will make or cause to be made proper
provision so that the successors and assigns of the Surviving Corporation
assume the indemnification obligations described herein for the benefit of the
Indemnified Parties.
(c) The provisions of this Section 6.13 are (i) intended to be for the
benefit of, and will be enforceable by, each of the Indemnified Parties and
(ii) in addition to, and not in substitution for, any other rights to
indemnification or contribution that any such person may have by contract or
otherwise.
ARTICLE VII
CONDITIONS TO MERGER
7.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. The Company Voting Proposal shall have been
approved and adopted at the Company Meeting, at which a quorum is present,
by the affirmative vote of the holders of a majority of the shares of the
Company Common Stock outstanding on the record date for the Company
Meeting.
(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) Governmental Approvals. Other than the filings provided for by
Section 1.1, all authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations of waiting periods imposed by,
any Governmental Entity, the failure of which to file, obtain or occur is
reasonably likely to have a Buyer Material Adverse Effect or a Company
Material Adverse Effect shall have been filed, been obtained or occurred.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
(e) No Injunctions. No Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any order,
executive order, stay, decree, judgment or injunction (each an "Order") or
statute, rule or regulation which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger.
7.2 Additional Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligations of the Buyer and the Transitory Subsidiary to
effect the Merger are subject to the satisfaction of each of the following
additional conditions, any of which may be waived in writing exclusively by the
Buyer and the Transitory Subsidiary:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct (i) as
of the date of this Agreement (except to the extent such representations
and warranties are specifically made as of a particular date, in which case
such representations and warranties shall be true and correct as of such
date) and (ii) as of the Closing Date as
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though made on and as of the Closing Date (except (x) to the extent such
representations and warranties are specifically made as of a particular
date, in which case such representations and warranties shall be true and
correct as of such date, (y) for changes contemplated by this Agreement and
(z) where the failures to be true and correct (without regard to any
materiality, Company Material Adverse Effect or knowledge qualifications
contained therein), individually or in the aggregate, have not had, and are
not reasonably likely to have, a Company Material Adverse Effect); and the
Buyer shall have received a certificate signed on behalf of the Company by
the chief executive officer and the chief financial officer of the Company
to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date; and the Buyer
shall have received a certificate signed on behalf of the Company by the
chief executive officer and the chief financial officer of the Company to
such effect.
(c) Tax Opinion. The Buyer shall have received a written opinion from
Hale and Dorr LLP, counsel to the Buyer, to the effect that the Merger will
be treated for federal income tax purposes as a tax-free reorganization
within the meaning of Section 368(a) of the Code; provided that if Hale and
Dorr LLP does not render such opinion, this condition shall nonetheless be
deemed satisfied if Morrison & Foerster LLP or PricewaterhouseCoopers LLP
renders such opinion to the Buyer (it being agreed that the Buyer and the
Company shall each provide reasonable cooperation, including making
reasonable representations, to Hale and Dorr LLP, Morrison & Foerster LLP
or PricewaterhouseCoopers LLP, as the case may be, to enable them to render
such opinion).
(d) Third Party Consents. The Company shall have obtained all consents
and approvals of third parties to the Buyer referred to in Section 7.2(d)
of the Company Disclosure Schedule.
(e) Resignations. The Buyer shall have received copies of the
resignations, effective as of the Effective Time, of each director of the
Company and its Subsidiaries
(f) Security Procedure Documentation. The Buyer shall have received from
the Company in a form reasonably satisfactory to the Buyer the
documentation referred to in Section 7.2(f) of the Company Disclosure
Schedule with respect to the data center and Technology Systems of the
Company.
(g) Notice. The Company shall have given to each holder of a Company
Stock Option reasonable notice in order to permit such optionholder to
exercise such option prior to its termination in accordance with the terms
of the Company Stock Plans and the grants and awards thereunder.
(h) Company Stock Plans. The Company shall have taken all actions
contemplated by Section 6.11(f) of this Agreement
(i) Contracts. The Company shall have obtained all amendments and
terminations of the agreements set forth in Schedule 7.2(i) of the Buyer
Disclosure Schedule in a form reasonably satisfactory to the Buyer.
7.3 Additional Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is subject to the satisfaction of each of the
following additional conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. The representations and warranties
of the Buyer and the Transitory Subsidiary set forth in this Agreement
shall be true and correct (i) as of the date of this Agreement (except to
the extent such representations are specifically made as of a particular
date, in which case such representations and warranties shall be true and
correct as of such date) and (ii) as of the Closing Date as though made on
and as of the Closing Date (except (x) to the extent such representations
and warranties are specifically made as of a particular date, in which case
such representations and warranties shall be true and correct as of such
date, (y) for changes contemplated by this Agreement and (z) where the
failures to be true and correct (without regard to any materiality, Buyer
Material Adverse Effect or knowledge qualifications contained therein),
individually or in the aggregate, have not had, and are not reasonably
likely to have, a Buyer Material Adverse Effect); and the Company shall
have received
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a certificate signed on behalf of the Buyer by the chief executive officer
or the chief financial officer of the Buyer to such effect.
(b) Performance of Obligations of the Buyer and the Transitory
Subsidiary. The Buyer and Sub shall have performed in all material respects
all obligations required to be performed by them under this Agreement at or
prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of the Buyer by the chief executive officer or
the chief financial officer of the Buyer to such effect.
(c) Tax Opinion. The Company shall have received the opinion of Morrison
& Foerster LLP, counsel to the Company, or PricewaterhouseCoopers LLP, to
the effect that the Merger will be treated for federal income tax purposes
as a tax-free reorganization within the meaning of Section 368(a) of the
Code; provided that if Morrison & Foerster LLP or PricewaterhouseCoopers
LLP does not render such opinion, this condition shall nonetheless be
deemed satisfied if Hale and Dorr LLP renders such opinion to the Company
(it being agreed that the Buyer and the Company shall each provide
reasonable cooperation, including making reasonable representations, to
Morrison & Foerster LLP, Hale and Dorr LLP or PricewaterhouseCoopers LLP,
as the case may be, to enable them to render such opinion).
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time (with respect to Sections 8.1(b) through 8.1(g), by written
notice by the terminating party to the other party), whether before or, subject
to the terms hereof, after adoption of this Agreement by the stockholders of
the Company or the stockholder of the Transitory Subsidiary:
(a) by mutual written consent of the Buyer, Transitory Subsidiary and
the Company; or
(b) by either the Buyer or the Company if the Merger shall not have been
consummated by August 31, 2000 (the "Outside Date") (provided that the
right to terminate this Agreement under this Section 8.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been a principal cause of or resulted in the failure of the
Merger to occur on or before such date); or
(c) by either the Buyer or the Company if a Governmental Entity of
competent jurisdiction shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger; or
(d) by either the Buyer or the Company if at the Company Meeting
(including any adjournment or postponement), the requisite vote of the
stockholders of the Company in favor of the Company Voting Proposal shall
not have been obtained (provided that the right to terminate this Agreement
under this Section 8.1(d) shall not be available to any party seeking
termination who at the time is in breach of or has failed to fulfill its
obligations under this Agreement); or
(e) by the Buyer, if: (i) the Board of Directors of the Company shall
have failed to recommend approval of the Company Voting Proposal in the
Proxy Statement or shall have withdrawn or modified its recommendation of
the Company Voting Proposal; (ii) the Board of Directors of the Company
shall have approved or recommended to the stockholders of the Company an
Alternative Transaction (as defined in Section 8.3(e)); (iii) an
Alternative Transaction shall have been announced or otherwise publicly
known and the Board of Directors of the Company shall have (A) failed to
recommend against acceptance of such Alternative Transaction by its
stockholders within ten (10) days of delivery of a written request from the
Buyer for such action or (B) failed to reconfirm its approval and
recommendation of this Agreement and the transactions contemplated hereby
within ten (10) days of delivery of a written request from the Buyer for
such action or (iv) a tender offer or exchange offer for 20% or more of the
outstanding shares of the Company Common Stock is commenced (other than by
the Buyer or an Affiliate of the Buyer) and the Board of Directors of the
Company recommends that the stockholders of the Company tender their shares
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in such tender or exchange offer or, within ten (10) days after such tender
or exchange offer, fails to recommend against acceptance of such offer or
takes no position with respect to the acceptance thereof; or
(f) by either the Buyer or the Company, if there has been a breach or
failure to perform of any representation, warranty, covenant or agreement
on the part of the other party set forth in this Agreement, which breach or
failure to perform (i) causes the conditions set forth in Section 7.2(a) or
7.2(b) (in the case of termination by the Buyer) or Section 7.3(a) or
7.3(b) (in the case of termination by the Company) not to be satisfied, and
(ii) shall not have been cured within 20 days following receipt by the
breaching party or party failing to perform written notice of such breach
from the other party; or
(g) by the Company if (i) the Company after the date hereof has received
an unsolicited Acquisition Proposal that its Board of Directors has
determined after consultation with its financial advisor is a Superior
Proposal, (ii) the Company has complied with all of the provisions of
Section 6.1(a)(A), (iii) the Board of Directors of the Company has
determined in good faith after consultation with its outside legal counsel
that termination of this Agreement is necessary for such Board of Directors
to fulfill with its fiduciary duties under applicable law, and (iv) the
Company, contemporaneously with, and as a condition to, its termination of
this Agreement, pays to Buyer the fee and expenses provided for in Section
8.3.
8.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 8.1, this Agreement shall immediately become void and there
shall be no liability or obligation on the part of the Buyer, the Company, the
Transitory Subsidiary or their respective officers, directors, stockholders or
Affiliates, except as set forth in Sections 3.26, 5.3, 8.3 and Article IX;
provided that any such termination shall not relieve any party from liability
for any willful breach of this Agreement (which includes without limitation the
making of any representation or warranty by a party in this Agreement that the
party knew was not true and accurate when made) and, Sections 3.26, 5.3, 8.3
and Article IX of this Agreement and the Confidentiality Agreement shall remain
in full force and effect and survive any termination of this Agreement.
8.3 Fees and Expenses.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby
shall be paid by the party incurring such fees and expenses, whether or not the
Merger is consummated; provided however, that the Company and the Buyer shall
share equally all fees and expenses, other than attorneys' fees, incurred with
respect to the printing and filing of the Proxy Statement (including any
related preliminary materials) and the Registration Statement and any
amendments or supplements thereto.
(b) The Company shall pay the Buyer up to $500,000 as reimbursement for
expenses of the Buyer actually incurred relating to the transactions
contemplated by this Agreement prior to termination (including, but not limited
to, fees and expenses of the Buyer's counsel, accountants and financial
advisors, but excluding any discretionary fees paid to such financial
advisors), upon the termination of this Agreement by the Buyer pursuant to
Section 8.1(b) as a result of the failure to satisfy the condition set forth in
Section 7.2(a); or by the Buyer or the Company pursuant to Section 8.1(d) under
circumstances in which no fee is payable to Buyer under Section 8.3(c).
(c) The Company shall pay the Buyer a termination fee of $20,000,000 upon
the earliest to occur of the following events:
(i) the termination of this Agreement by the Buyer pursuant to
Section 8.1(e); or
(ii) the termination of this Agreement by the Buyer pursuant to
Section 8.1(f) as a result of a breach of the provisions of Section 6.1
or 6.5; or
(iii) the termination of this Agreement by the Company pursuant to
Section 8.1(g).
If the Buyer or the Company terminates this Agreement pursuant to Section
8.1(d) and, at or prior to such termination a bona fide proposal for an
Alternative Transaction with respect to the Company shall have been publicly
announced, the Company shall pay to the Buyer, upon such termination, a
termination fee of $10,000,000. If such termination fee shall have become
payable to the Buyer pursuant to the preceding
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sentence and, within 12 months after such termination, the Company shall enter
into a definitive agreement with respect to an Alternative Transaction or an
Alternative Transaction involving the Company shall be consummated, the Company
shall pay to the Buyer an additional fee of $10,000,000 upon the execution and
delivery of such definitive agreement or consummation, as the case may be.
(d) If one party fails to promptly pay to the other any expense
reimbursement or fee due hereunder, the defaulting party shall pay the costs
and expenses (including legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the publicly
announced prime rate of Fleet Bank, N.A. plus five percent per annum,
compounded quarterly, from the date such expense reimbursement or fee was
required to be paid.
(e) As used in this Agreement, "Alternative Transaction" means either (i) a
transaction pursuant to which any person (or group of persons) other than the
Buyer or its affiliates (a "Third Party"), acquires more than 20% of the
outstanding shares of the Company Common Stock pursuant to a tender offer or
exchange offer or otherwise, (ii) a merger or other business combination
involving the Company pursuant to which any Third Party acquires more than 20%
of the outstanding shares of Company Common Stock or of the entity surviving
such merger or business combination, (iii) any other transaction pursuant to
which any Third Party acquires control of assets (including for this purpose
the outstanding equity securities of Subsidiaries of the Company, and the
entity surviving any merger or business combination including any of them) of
the Company having a fair market value equal to more than 20% of the fair
market value of all the assets of the Company immediately prior to such
transaction, or (iv) any public announcement by a Third Party of a proposal,
plan or intention to do any of the foregoing or any agreement to engage in any
of the foregoing; provided, however, that all references in this subsection (e)
to "20%" shall mean "50%" for purposes of the second paragraph of Section
8.3(c).
8.4 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of the Company or the Transitory Subsidiary, but, after any
such approval, no amendment shall be made which by law requires further
approval by such stockholders without such further approval. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
if set forth in a written instrument signed on behalf of such party. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
8.5 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Boards of Directors,
may, to the extent legally allowed, (i) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (ii) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto and (iii) waive compliance with any of
the agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
9.1 Nonsurvival of Representations and Warranties. The respective
representations and warranties of the Company, the Buyer and the Transitory
Subsidiary contained in this Agreement or in any instrument delivered pursuant
to this Agreement shall expire with, and be terminated and extinguished upon,
the Effective Time.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly delivered (i) four business days after being
sent by registered or certified mail, return receipt requested,
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postage prepaid, or (ii) one business day after being sent for next business
day delivery, fees prepaid, via a reputable nationwide overnight courier
service, in each case to the intended recipient as set forth below:
(a) if to the Buyer or Transitory Subsidiary, to
CMGI, Inc.
100 Brickstone Square
Andover, Massachusetts 01810
Attn: General Counsel
Telecopy: (978) 684-3601
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attn: Mark G. Borden, Esq.
Telecopy: (617) 526-5000
(b) if to the Company, to
UBID, Inc.
8550 Bryn Mawr Avenue, Suite 200
Chicago, Illinois 60631
Attn: President
Telecopy: (773) 272-4051
with a copy to:
Morrison & Foerster LLP
19900 MacArthur Blvd.
Irving, CA 92612
Attn: Robert M. Mattson, Jr., Esq.
Telecopy: (949) 251-0900
Any party may give any notice or other communication hereunder using any
other means (including personal delivery, messenger service, telecopy, telex,
ordinary mail or electronic mail), but no such notice or other communication
shall be deemed to have been duly given unless and until it actually is
received by the party for whom it is intended. Any party may change the address
to which notices and other communications hereunder are to be delivered by
giving the other parties notice in the manner herein set forth.
9.3 Entire Agreement. This Agreement (including the Schedules and Exhibits
hereto and the documents and instruments referred to herein that are to be
delivered at the Closing) constitutes the entire agreement among the parties
hereto and supersedes any prior understandings, agreements or representations
by or among the parties hereto, or any of them, written or oral, with respect
to the subject matter hereof; provided that the Confidentiality Agreement shall
remain in effect in accordance with its terms.
9.4 No Third Party Beneficiaries. Except as provided in Section 6.13, this
Agreement is not intended, and shall not be deemed, to confer any rights or
remedies upon any person other than the parties hereto and their respective
successors and permitted assigns, to create any agreement of employment with
any person or to otherwise create any third-party beneficiary hereto.
9.5 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement may be assigned or delegated, in whole or in
part, by operation of law or otherwise by any of the parties hereto without the
prior written consent of the other parties, and any such assignment without
such prior written consent shall be null and void, except that the Buyer and/or
the Transitory Subsidiary may assign this Agreement to any direct or indirect
wholly owned Subsidiary of the Buyer without consent of the Company, provided
that the Buyer shall remain liable for all of its obligations under this
Agreement. Subject to the
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preceding sentence, this Agreement shall be binding upon, inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns.
9.6 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties agree hereto that the court making such
determination shall have the power to limit the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified. In the event
such court does not exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid or
unenforceable term.
9.7 Counterparts and Signature. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties hereto and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart. This Agreement may be executed and delivered by
facsimile transmission.
9.8 Interpretation. When reference is made in this Agreement to an Article
or a Section, such reference shall be to an Article or Section of this
Agreement, unless otherwise indicated. The table of contents, table of defined
terms and headings contained in this Agreement are for convenience of reference
only and shall not affect in any way the meaning or interpretation of this
Agreement. The language used in this Agreement shall be deemed to be the
language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction shall be applied against any party. Whenever the
context may require, any pronouns used in this Agreement shall include the
corresponding masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural, and vice versa. Any reference to
any federal, state, local or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. Whenever the words "include", "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation".
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Delaware or any other jurisdiction) that would cause the application of laws
of any jurisdictions other than those of the State of Delaware.
9.10 Remedies. Except as otherwise provided herein, any and all remedies
herein expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof this being in addition to any other remedy to
which they are entitled at law or in equity.
9.11 Waiver of Jury Trial. EACH OF THE BUYER, THE TRANSITORY SUBSIDIARY AND
THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THE ACTIONS OF THE BUYER, THE TRANSITORY SUBSIDIARY OR
A-35
<PAGE>
THE COMPANY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT.
9.12 Forum. Each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, and (iii) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a Federal court sitting
in the State of Delaware or a Delaware state court.
[Signature Page to follow]
A-36
<PAGE>
IN WITNESS WHEREOF, the Buyer, the Transitory Subsidiary and the Company
have caused this Agreement to be signed by their respective officers thereunto
duly authorized as of the date first written above.
CMGI, Inc.
By: /s/ Andrew J. Hajducky III
----------------------------------
Title: Executive Vice President,
Chief Financial
Officer and Treasurer
Senlix Corporation
By: /s/ Andrew J. Hajducky III
----------------------------------
Title: Executive Vice President,
Chief Financial
Officer and Treasurer
U-Turn, Inc.
By: /s/ Gregory Jones
----------------------------------
Title: Executive Chief Officer
A-37
<PAGE>
Exhibit A
to Annex A
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated as of February 9, 2000 (this "Agreement"),
among the stockholders listed on the signature pages hereto (collectively,
"Stockholders" and each individually, a "Stockholder"), Ubid, Inc., a Delaware
corporation (the "Company") and CMGI, Inc., a Delaware corporation
("Acquiror"). Capitalized terms used and not otherwise defined herein shall
have the respective meanings assigned to them in the Merger Agreement referred
to below.
WHEREAS, as of the date hereof, the Stockholders collectively own of record
and beneficially shares of capital stock of the Company, as set forth on
Schedule I hereto (such shares, or any other voting or equity of securities of
the Company hereafter acquired by any Stockholder prior to the termination of
this Agreement, being referred to herein collectively as the "Shares");
WHEREAS, concurrently with the execution of this Agreement, Acquiror and the
Company are entering into an Agreement and Plan of Merger and Reorganization,
dated as of the date hereof (the "Merger Agreement"), pursuant to which, upon
the terms and subject to the conditions thereof, a subsidiary of Buyer will be
merged with and into the Company, and the Company will be the surviving
corporation (the "Merger"); and
WHEREAS, as a condition to the willingness of Acquiror to enter into the
Merger Agreement, Acquiror has required that the Stockholders agree, and in
order to induce Acquiror to enter into the Merger Agreement, the Stockholders
are willing to agree to vote in favor of adopting the Merger Agreement and
approving the Merger, upon the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereby agree, severally and not jointly, as follows:
Section 1. Voting of Shares.
(a) Each Stockholder covenants and agrees that until the termination of this
Agreement in accordance with the terms hereof, at the Company Meeting or any
other meeting of the stockholders of the Company, however called, and in any
action by written consent of the stockholders of the Company, such Stockholder
will vote, or cause to be voted, all of his, her or its respective Shares (a)
in favor of adoption of the Merger Agreement and approval of the Merger
contemplated by the Merger Agreement, as the Merger Agreement may be modified
or amended from time to time in a manner not adverse to the Stockholders, and
(b) against any other Alternative Transaction.
(b) Each Stockholder hereby irrevocably grants to, and appoints, Acquiror,
and any individual designated in writing by it, and each of them individually,
as its proxy and attorney-in-fact (with full power of substitution), for and in
its name, place and stead, to vote his, her or its Shares at any meeting of the
stockholders of the Company called with respect to any of the matters specified
in, and in accordance and consistent with this Section 1. Each Stockholder
understands and acknowledges that Acquiror is entering into the Merger
Agreement in reliance upon the Stockholder's execution and delivery of this
Agreement. Each Stockholder hereby affirms that the irrevocable proxy set forth
in this Section 1(b) is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance
of the duties of such Stockholder under this Agreement. Except as otherwise
provided for herein, each Stockholder hereby (i) affirms that the irrevocable
proxy is coupled with an interest and may under no circumstances be revoked,
(ii) ratifies and confirms all that the proxies appointed hereunder may
lawfully do or
1
<PAGE>
cause to be done by virtue hereof and (iii) affirms that such irrevocable proxy
is executed and intended to be irrevocable in accordance with the provisions of
Section 212(e) of the Delaware General Corporation Law. Notwithstanding any
other provisions of this Agreement, the irrevocable proxy granted hereunder
shall automatically terminate upon the termination of this Agreement.
Section 2. Transfer of Shares.
(a) Each Stockholder covenants and agrees that such Stockholder will not
directly or indirectly, (a) sell, assign, transfer (including by merger,
testamentary disposition, interspousal disposition pursuant to a domestic
relations proceeding or otherwise by operation of law), pledge, encumber or
otherwise dispose of any of the Shares, (b) deposit any of the Shares into a
voting trust or enter into a voting agreement or arrangement with respect to
the Shares or grant any proxy or power of attorney with respect thereto which
is inconsistent with this Agreement or (c) enter into any contract, option or
other arrangement or undertaking with respect to the direct or indirect sale,
assignment, transfer (including by merger, testamentary disposition,
interspousal disposition pursuant to a domestic relations proceeding or
otherwise by operation of law) or other disposition of any Shares.
Section 3. Representations and Warranties of the Stockholders. Each
Stockholder on its own behalf hereby severally represents and warrants to
Acquiror with respect to itself and its, his or her ownership of the Shares as
follows:
(a) Ownership of Shares. On the date hereof, the Shares are owned
beneficially by Stockholder or its nominee. Stockholder has sole voting
power, without restrictions, with respect to all of the Shares.
(b) Power, Binding Agreement. Stockholder has the legal capacity, power
and authority to enter into and perform all of its obligations, under this
Agreement. The execution, delivery and performance of this Agreement by
Stockholder will not violate any material agreement to which Stockholder is
a party, including, without limitation, any voting agreement, stockholders'
agreement, partnership agreement or voting trust. This Agreement has been
duly and validly executed and delivered by Stockholder and constitutes a
valid and binding obligation of Stockholder, enforceable against
Stockholder in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar
laws affecting creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
(c) No Conflicts. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby will not,
conflict with or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under, any provision of any loan or credit agreement,
note, bond, mortgage, indenture, lease, or other agreement, instrument,
permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Stockholder or any of its
properties or assets, other than such conflicts, violations or defaults or
terminations, cancellations or accelerations which individually or in the
aggregate do not materially impair the ability of Stockholder to perform
its obligations hereunder.
Section 4. No Solicitation. Prior to the termination of this Agreement in
accordance with its terms, each Stockholder agrees, in its individual capacity
as a stockholder of the Company, that (i) it will not, nor will it authorize or
permit any of its employees, agents and representatives to, directly or
indirectly, (a) initiate, solicit or encourage any inquiries or the making of
any Acquisition Proposal (as defined in the Merger Agreement), (b) enter into
any agreement with respect to any Acquisition Proposal, or (c) participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal, and (ii) it will notify Acquiror
as soon as possible if any such inquiries or proposals are received by, any
information or documents is requested from, or any negotiations or discussions
are sought to be initiated or continued with, it or any of its affiliates in
its individual capacity.
2
<PAGE>
Section 5. Termination. This Agreement shall terminate upon the earliest to
occur of (i) the Effective Time (as such term is defined in the Merger
Agreement) or (ii) any termination of the Merger Agreement in accordance with
the terms thereof; provided that no such termination shall relieve any party of
liability for a willful breach hereof prior to termination.
Section 6. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
Section 7. Fiduciary Duties. Each Stockholder is signing this Agreement
solely in such Stockholder's capacity as an owner of his, her or its respective
Shares, and nothing herein shall prohibit, prevent or preclude such Stockholder
from taking or not taking any action in his or her capacity as an officer or
director of the Company, to the extent permitted by the Merger Agreement.
Section 8. Miscellaneous.
(a) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect thereto. This Agreement may not be amended, modified or rescinded
except by an instrument in writing signed by each of the parties hereto.
(b) If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted by
applicable law in a mutually acceptable manner in order that the terms of this
Agreement remain as originally contemplated to the fullest extent possible.
(c) This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to the principles of conflicts of
law thereof.
(d) This Agreement may be executed in counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
instrument.
[signature page to follow]
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed individually or by its respective duly authorized officer as of the
date first written above.
CMGI, Inc.
By:
----------------------------------
Name:
Title:
uBID, Inc.
By:
----------------------------------
Name:
Title:
[Remainder of Page Intentionally Left Blank]
4
<PAGE>
STOCKHOLDERS:
_____________________________________
Signature
_____________________________________
Print Name
_____________________________________
Signature
_____________________________________
Print Name
_____________________________________
Signature
_____________________________________
Print Name
_____________________________________
Signature
_____________________________________
Print Name
_____________________________________
Signature
_____________________________________
Print Name
5
<PAGE>
Exhibit B-1
to Annex A
LOCK-UP AGREEMENT
CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Ladies and Gentlemen:
Pursuant to the terms of an Agreement and Plan of Merger and Reorganization
dated as of February 9, 2000 (the "Agreement") between CMGI, Inc., a Delaware
corporation ("Acquiror"), a subsidiary of Acquiror and uBid, Inc., a Delaware
corporation (the "Company"), I will receive shares of common stock, $.01 par
value per share, of Acquiror (the "Shares"), in exchange for shares of common
stock of the Company owned by me.
In order to induce Acquiror to enter into the Agreement, I hereby agree as
follows:
1. I will not sell, offer to sell, contract to sell, sell any option or
contract for the sale or purchase of, lend, enter into any swap or other
arrangement that transfers to another any of the economic consequences of
ownership of, or otherwise dispose of (collectively, "Transfer"), any of the
Shares, except as follows: commencing on the day that is one day after the date
which is the six month anniversary of the Closing (as defined in the
Agreement), I may sell all my Shares but no more than one-sixth ( 1/6) my
Shares on such anniversary and on each one month anniversary thereafter.
2. I acknowledge that the Acquiror may impose stock transfer restrictions on
the Shares to enforce the provisions of this Agreement.
Very truly yours,
-------------------------------------
Name
By:
----------------------------------
Signature
Date:
----------------------------------
AGREED TO:
CMGI, Inc.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
<PAGE>
Exhibit B-2
to Annex A
LOCK-UP AGREEMENT
CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Ladies and Gentlemen:
Pursuant to the terms of an Agreement and Plan of Merger and Reorganization
dated as of February 9, 2000 (the "Agreement") between CMGI, Inc., a Delaware
corporation ("Acquiror"), a subsidiary of Acquiror and uBid, Inc., a Delaware
corporation (the "Company"), I will receive shares of common stock, $.01 par
value per share, of Acquiror (the "Shares"), in exchange for shares of common
stock of the Company owned by me.
In order to induce Acquiror to enter into the Agreement, I hereby agree as
follows:
1. I will not sell, offer to sell, contract to sell, sell any option or
contract for the sale or purchase of, lend, enter into any swap or other
arrangement that transfers to another any of the economic consequences of
ownership of, or otherwise dispose of (collectively, "Transfer"), any of
the Shares, except as follows: commencing on the day that is one week after
the date of the Closing (as defined in the Agreement), I may sell one-
twelfth ( 1/12) of my Shares on such one week anniversary and an additional
one-twelfth ( 1/12) of my Shares on each one week anniversary thereafter.
2. I acknowledge that the Acquiror may impose stock transfer
restrictions on the Shares to enforce the provisions of this Agreement.
Very truly yours,
-------------------------------------
Name
By:
----------------------------------
Signature
Date:
---------------------------------
AGREED TO:
CMGI, Inc
By:
-------------------------------------
Name:
-----------------------------------
Title:
------------------------------------
<PAGE>
Exhibit C
to Annex A
COMPANY AFFILIATE LETTER
CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of uBid, Inc., a Delaware corporation (the "Company"), as the
term "affiliate" is defined for purposes of paragraphs (c) and (d) of Rule 145
of the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). Pursuant to the terms of the Agreement and Plan of Merger
and Reorganization, dated as of February , 2000 (the "Agreement"), between
CMGI, Inc., a Delaware corporation ("Acquiror"), a subsidiary of Acquiror
("Sub") and the Company, Sub will be merged with and into the Company (the
"Merger") and the Company will be the surviving corporation.
As a result of the Merger, I may receive shares of common stock, par value
$.01 per share, of Acquiror (the "Acquiror Common Stock") in exchange for
shares owned by me of common stock of the Company ("Company Common Stock").
1. Compliance with the Act. I represent, warrant and covenant to Acquiror
that in the event I receive any Acquiror Common Stock as a result of the
Merger:
(a) I shall not make any sale, transfer or other disposition of the
Acquiror Common Stock in violation of the Act or the Rules and Regulations.
(b) I have been advised that the issuance of Acquiror Common Stock to me
pursuant to the Merger will be registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised
that, since at the time the Merger is submitted for a vote of the
stockholders of the Company, I may be deemed to have been an affiliate of
the Company and the distribution by me of the Acquiror Common Stock has not
been registered under the Act, I may not sell, transfer or otherwise
dispose of the Acquiror Common Stock issued to me in the Merger unless (i)
such sale, transfer or other disposition has been registered under the Act,
(ii) such sale, transfer or disposition is made in conformity with Rule 145
promulgated by the Commission under the Act, or (iii) in the opinion of
counsel reasonably acceptable to Acquiror, or pursuant to a "no action"
letter obtained by the undersigned from the staff of the Commission, such
sale, transfer or other disposition is otherwise exempt from registration
under the Act.
(c) I understand that Acquiror is under no obligation to register the
sale, transfer or disposition of the Acquiror Common Stock by me or on my
behalf under the Act.
(d) I also understand that stop transfer instructions will be given to
the Acquiror's transfer agent with respect to the Acquiror Common Stock and
that there will be placed on the Certificates for the Acquiror Common Stock
issued to me, or any substitutions therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT, DATED FEBRUARY , 2000 BETWEEN
THE REGISTERED HOLDER HEREOF AND CMGI, INC., A COPY OF WHICH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICES OF CMGI, INC."
<PAGE>
(e) I also understand that unless the transfer by me of my Acquiror
Common Stock has been registered under the Act or is a sale made in
conformity with the provisions of Rule 145, Acquiror reserves the right to
put the following legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER
THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE
HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this
Agreement.
It is understood and agreed that such legends and the stop orders referred
to above will be removed if (i) one year shall have elapsed from the date the
undersigned acquired the Acquiror Common Stock received in the Merger and the
provisions of Rule 145(d)(2) are then available to the undersigned, (ii) two
years shall have elapsed from the date the undersigned acquired Acquiror Common
Stock received in the Merger and the provisions of Rule 145(d)(3) are then
available to the undersigned, or (iii) Acquiror has received either an opinion
of counsel, which opinion and counsel shall be reasonably satisfactory to
Acquiror, or a "no action" letter obtained by the undersigned from the staff of
the Commission, to the effect that the restrictions imposed by Rule 145 under
the Act no longer apply to the undersigned.
2. Certain Tax Matters. The undersigned does not intend to take a position
on any federal or state income tax return that is inconsistent with the
treatment of the Merger as a tax-free reorganization for federal or state
income tax purposes.
Very truly yours,
-------------------------------------
Signature
-------------------------------------
Print Name
Accepted this day of
, 2000 by:
CMGI, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
2
<PAGE>
Annex B
[LETTERHEAD OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED]
February 9, 2000
Board of Directors
uBid, Inc.
8550 Bryn Mawr Avenue, Suite 200
Chicago, Illinois 60631
Members of the Board of Directors:
CMGI, Inc. ("CMGI") and uBid, Inc. ("uBid") propose to enter into an
Agreement and Plan of Merger and Reorganization (the "Agreement") pursuant to
which Senlix Corporation, a Delaware corporation and a wholly owned subsidiary
of CMGI, will be merged with and into uBid (the "Merger") and each outstanding
share of the common stock, par value $.001 per share, of uBid (the "uBid Common
Stock") will be converted into the right to receive 0.2628 of a share (the
"Exchange Ratio") of common stock, par value $.01 per share, of CMGI (the "CMGI
Common Stock").
You have asked us whether, in our opinion, the Exchange Ratio is fair from a
financial point of view to the holders of uBid Common Stock.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to uBid and CMGI that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flows, assets, liabilities and
prospects of uBid and CMGI furnished to us by uBid and CMGI;
(3) Conducted discussions with members of senior management and
representatives of uBid and CMGI concerning the matters described in
clauses 1 and 2 above, as well as their respective businesses and
prospects before and after giving effect to the Merger;
(4) Reviewed the market prices and valuation multiples for the uBid Common
Stock and the CMGI Common Stock and compared them with those of
certain publicly traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of uBid and compared them with
those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Participated in certain discussions and negotiations among
representatives of uBid and CMGI and their respective financial and
legal advisors;
(8) Reviewed the Agreement dated February 9, 2000; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of uBid or CMGI. In addition, we have not assumed any obligation to
conduct, nor have we conducted, any physical inspection of the properties or
facilities of uBid or CMGI. With respect to the financial forecast information
furnished to or discussed with us
B-1
<PAGE>
by uBid or CMGI, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgments of the respective
managements of uBid or CMGI as to the expected future financial performance of
uBid or CMGI, as the case may be. We have further assumed that the Merger will
qualify as a tax-free reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. In connection with the preparation of this opinion,
we have not been authorized by uBid or the Board of Directors to solicit, nor
have we solicited, third-party indications of interest for the acquisition of
all or any part of uBid.
We are acting as financial advisor to uBid in connection with the Merger and
will receive a fee from uBid for our services contingent upon the consummation
of the Merger. In addition, uBid has agreed to indemnify us for certain
liabilities arising out of our engagement. We have, in the past, provided
financial advisory and financing services to uBid and may continue to do so and
have received, and may receive, compensation for the rendering of such
services. In addition, in the ordinary course of our business, we may actively
trade uBid Common Stock, as well as CMGI Common Stock and other securities of
CMGI, for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of uBid in
its evaluation of the Merger and may not be used for any other purpose. Our
opinion does not address the merits of the underlying decision by uBid to
engage in the Merger and does not constitute a recommendation to any
shareholder as to how such shareholder should vote on the proposed Merger.
We are not expressing any opinion herein as to the prices at which CMGI
Common Stock will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Exchange Ratio is fair from a financial point of view
to the holders of uBid Common Stock.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith
Incorporated
______________________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
B-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law grants the Registrant
the power to indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative by reason
of the fact that he is or was a director, officer, employee or agent of the
Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful;
provided, however, no indemnification shall be made in connection with any
proceeding brought by or in the right of the Registrant where the person
involved is adjudged to be liable to the Registrant except to the extent
approved by a court. Article NINTH of the Registrant's Restated Certificate of
Incorporation and Article VII of the Registrant's Restated By-laws provide that
the Registrant shall, to the fullest extent permitted by applicable law,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit, or proceeding by reason
of the fact that he is or was, or has agreed to become, a director or officer
of the Registrant, or is or was serving at the written request of the
Registrant, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust, or other
enterprise. The indemnification provided for in each of Article NINTH and
Article VII is expressly not exclusive of any other rights to which those
seeking indemnification may be entitled under any law, agreement, or vote of
stockholders or disinterested directors or otherwise, and shall inure to the
benefit of the heirs, executors, and administrators of such persons. Article
VII also provides that the Registrant shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Registrant, or is or was serving at the request of
the Registrant, as a director, trustee, partner, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against any liability asserted against and incurred by such person in any such
capacity.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Laws,
Article EIGHTH of the Registrant's Restated Certificate of Incorporation
eliminates a director's personal liability for monetary damages to the
Registrant and its stockholders for breaches of fiduciary duty as a director,
except in circumstances involving a breach of a director's duty of loyalty to
the Registrant or its stockholders, acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of the law, self-
dealing, or the unlawful payment of dividends or repurchase of stock.
The Registrant maintains an insurance policy on behalf of itself and certain
of its subsidiaries, and on behalf of the directors and officers thereof,
covering certain liabilities which may arise as a result of the actions of the
directors and officers.
The Registrant has entered into agreements with all of its directors
affirming the Registrant's obligation to indemnify them to the fullest extent
permitted by law and providing various other protections.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<C> <S>
2.1(1) Agreement and Plan of Merger and Reorganization, dated as of February
9, 2000, by and among the Registrant, Senlix Corporation and uBid,
Inc.
3.1(2) Restated Certificate of Incorporation of the Registrant.
3.2(3) Certificate of Designations, Preferences and Rights of Series D
Preferred Stock of the Registrant.
3.3(4) Restated By-laws of the Registrant, as amended.
4.1(5) Specimen stock certificate representing common stock, $.01 par value
per share, of the Registrant.
4.2(6) Stockholder Agreement, dated as of February 9, 2000, by and among the
Registrant and each of the stockholders of uBid, Inc. named therein.
*5.1 Opinion of Hale and Dorr LLP.
*8.1 Opinion of Hale and Dorr LLP as to certain tax matters related to
Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code").
*8.2 Opinion of PricewaterhouseCoopers LLP as to certain tax matters
related to Section 368(a) of the Code.
*8.3 Opinion of PricewaterhouseCoopers LLP as to certain tax matters
related to Section 355(e) of the Code.
8.4 Opinion of KPMG LLP as to certain tax matters related to Section
355(e) of the Code.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 8.1).
*23.3 Consent of PricewaterhouseCoopers LLP.
*23.4 Consent of PricewaterhouseCoopers LLP (included in Exhibit 8.2).
23.5 Consent of KPMG LLP (included in Exhibit 8.4).
23.6 Consent of Singer Lewak Greenbaum & Goldstein LLP.
23.7 Consent of Ernst & Young LLP.
23.8 Consent of PricewaterhouseCoopers LLP.
23.9 Consent of PricewaterhouseCoopers LLP.
23.10 Consent of Arthur Andersen LLP.
23.11 Consent of KPMG LLP.
*23.12 Consent of Merill, Lynch, Pierce, Fenner & Smith, Inc.
23.13 Consent of Deloitte & Touche LLP.
*24.1 Power of Attorney.
99.1(7) Opinion of Merrill Lynch, Pierce, Fenner & Smith, Inc.
99.2 Form of proxy card of uBid, Inc.
99.3 Form of letter to option holders of UBid, Inc. related to the
termination of options.
</TABLE>
- --------
* Previously filed upon the initial filing of this Registration Statement.
(1) Attached as Annex A to the Proxy Statement/Prospectus, which is part of
this Registration Statement.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (File No. 333-85047) filed on August 12, 1999.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on September 2, 1999.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 (File No. 333-92607) filed on December 3, 1999.
(5) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1999.
(6) Attached as an Exhibit to the Agreement and Plan of Merger and
Reorganization attached as Annex A to the Proxy Statement/Prospectus, which
is part of this Registration Statement.
(7) Attached as Annex B to the Proxy Statement/Prospectus, which is part of
this Registration Statement.
II-2
<PAGE>
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are not applicable, and, therefore, have been
omitted.
Item 22. Undertakings.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act").
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (and where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act), that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
C. The Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
II-3
<PAGE>
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
D. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
E. The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11, or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This included information contained in documents filed
subsequent to the effective date of this Registration Statement through the
date of responding to the request.
F. The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved herein, that was not the subject of and included in the
Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Andover, Commonwealth of
Massachusetts on the 27th day of March, 2000.
CMGI, INC.
/s/ Andrew J. Hajducky III
By: _________________________________
Andrew J. Hajducky III
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, March 27, 2000
______________________________________ President, Chief
David S. Wetherell Executive Officer and
Director (Principal
Executive Officer)
/s/ Andrew J. Hajducky III Chief Financial Officer March 27, 2000
______________________________________ and Treasurer (Principal
Andrew J. Hajducky III Financial and Accounting
Officer)
* Director March 27, 2000
______________________________________
William H. Berkman
* Director March 27, 2000
______________________________________
Craig D. Goldman
* Director March 27, 2000
______________________________________
Avram Miller
* Director March 27, 2000
______________________________________
Robert J. Ranalli
* Director March 27, 2000
______________________________________
William D. Strecker
</TABLE>
/s/ Andrew J. Hajducky III
By: ________________________
Andrew J. Hajducky III
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1(1) Agreement and Plan of Merger and Reorganization, dated as of February
9, 2000, by and among the Registrant, Senlix Corporation and uBid,
Inc.
3.1(2) Restated Certificate of Incorporation of the Registrant.
3.2(3) Certificate of Designations, Preferences and Rights of Series D
Preferred Stock of the Registrant.
3.3(4) Restated By-laws of the Registrant, as amended.
4.1(5) Specimen stock certificate representing common stock, $.01 par value
per share, of the Registrant.
4.2(6) Stockholder Agreement, dated as of February 9, 2000, by and among the
Registrant and each of the stockholders of uBid, Inc. named therein.
*5.1 Opinion of Hale and Dorr LLP.
*8.1 Opinion of Hale and Dorr LLP as to certain tax matters related to
Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code").
*8.2 Opinion of PricewaterhouseCoopers LLP as to certain tax matters
related to Section 368(a) of the Code.
*8.3 Opinion of PricewaterhouseCoopers LLP as to certain tax matters
related to Section 355(e) of the Code.
8.4 Opinion of KPMG LLP as to certain tax matters related to Section
355(e) of the Code.
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 8.1).
*23.3 Consent of PricewaterhouseCoopers LLP.
*23.4 Consent of PricewaterhouseCoopers LLP (included in Exhibit 8.2).
23.5 Consent of KPMG LLP (included in Exhibit 8.4).
23.6 Consent of Singer Lewak Greenbaum & Goldstein LLP.
23.7 Consent of Ernst & Young LLP.
23.8 Consent of PricewaterhouseCoopers LLP.
23.9 Consent of PricewaterhouseCoopers LLP.
23.10 Consent of Arthur Andersen LLP.
23.11 Consent of KPMG LLP.
*23.12 Consent of Merill, Lynch, Pierce, Fenner & Smith, Inc.
23.13 Consent of Deloitte & Touche LLP.
*24.1 Power of Attorney.
99.1(7) Opinion of Merrill Lynch, Pierce, Fenner & Smith, Inc.
99.2 Form of proxy card of uBid, Inc.
99.3 Form of letter to option holders of UBid, Inc. related to the
termination of options.
</TABLE>
- --------
* Previously filed upon the initial filing of this Registration Statement.
(1) Attached as Annex A to the Proxy Statement/Prospectus, which is part of
this Registration Statement.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (File No. 333-85047) filed on August 12, 1999.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on September 2, 1999.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 (File No. 333-92607) filed on December 3, 1999.
(5) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1999.
(6) Attached as an Exhibit to the Agreement and Plan of Merger and
Reorganization attached as Annex A to the Proxy Statement/Prospectus, which
is part of this Registration Statement.
(7) Attached as Annex B to the Proxy Statement/Prospectus, which is part of
this Registration Statement.
<PAGE>
EXHIBIT 8.4
March 9, 2000
PRIVATE & CONFIDENTIAL
The Board of Directors
CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Dear Board Members:
On February 10, 2000, KPMG LLP ("KPMG") issued a tax opinion letter (the "KPMG
Tax Opinion") which stated that the proposed acquisition by CMGI, Inc. ("CMGI")
of all of the outstanding stock of uBid, Inc. ("U-Turn") should not result in
an adverse impact under section 355(e)/1/ which would require Creative
Computers, Inc. (CA) ("Creative") or Creative Computers, Inc. (DE) ("Holdings")
to recognize taxable gain on the prior distribution by Creative of the U-Turn
stock to Holdings, followed by the distribution by Holdings of the U-Turn stock
to its shareholders (together, the "Distributions"), both of which occurred on
June 7, 1999.
KPMG hereby consents to referencing the KPMG Tax Opinion in CMGI's Form S-4 to
be filed with the Securities and Exchange Commission and to the filing of the
KPMG Tax Opinion as an exhibit to CMGI's Form S-4.
If you have any questions, please contact me at (617) 988-1008.
Very truly yours,
KPMG LLP
Robert B. Haran
Principal, Boston Mergers and Acquisitions Tax Group
_____________________________
/1/ Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended, and all Regulation section references are to
the Treasury Regulations promulgated thereunder.
February 10, 2000
PRIVATE & CONFIDENTIAL
The Board of Directors
CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Dear Board Members:
CMGI, Inc. ("CMGI") has requested the opinion of KPMG LLP ("KPMG") regarding
certain United States federal income tax consequences resulting from the
proposed acquisition of all of the outstanding stock of uBid, Inc. ("U-Turn")
(the "Proposed Acquisition"). This opinion letter has been prepared in response
to your request.
Specifically, CMGI has requested KPMG to opine that the Proposed Acquisition
should not result in an adverse impact under section 355(e)/1/ which would
require Creative Computers, Inc. (CA) ("Creative") or Creative Computers, Inc.
(DE) ("Holdings") to recognize taxable gain on the prior distribution by
Creative of the U-Turn stock to Holdings ("Distribution I"), followed by the
distribution by Holdings of the U-Turn stock to its shareholders ("Distribution
II"; together, the "Distribution"), both of which occurred on June 7, 1999 (the
"Distribution Date").
Our opinion letter will be based on the assumption that Distribution I qualified
as a tax-free distribution pursuant to sections 368(a)(1)(D) and 355 and
Distribution II qualified as a tax-free distribution pursuant to section 355.
The Distribution was subject to tax opinion letters issued by
PricewaterhouseCoopers ("PwC") on August 28, 1998 (the "1998 PwC Opinion")/2/
and August 31, 1999 (the "1999 PwC Opinion")/3/. Thus, KPMG will not opine on
whether the Distribution qualified as a tax-free distribution pursuant to
sections 368(a)(1)(D) and 355.
- --------------------
/1/ Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended, and all Regulation section references are
to the Treasury Regulations promulgated thereunder.
/2/ The 1998 PwC Opinion was incorporated into the Form S-1/A filed by U-Turn
on November 30, 1998 as Exhibit 8.1.
/3/ The 1999 PwC Opinion was incorporated into the Form S-1/A filed by U-Turn
on September 1, 1999 as Exhibit 8.1.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 2
In preparing this opinion, KPMG has relied upon certain factual representations
supplied by and representations made by the management and five-percent
shareholders/4/ of U-Turn, Creative, and Holdings and the management of CMGI.
The factual representations are recited below in the STATEMENT OF FACTS,
REPRESENTATIONS, AND APPENDIXES. We have not made any independent investigation
of these representations nor of the facts and circumstances discussed herein.
STATEMENT OF FACTS
The STATEMENT OF FACTS describes the facts as they existed at all times from
June 7, 1997 through the date of the this letter, unless otherwise stated. The
use of the present tense should not be interpreted to limit the applicability of
the description to the present only. The STATEMENT OF FACTS also incorporates by
reference the facts described in the 1998 PwC Opinion and the 1999 PwC Opinion.
GENERAL COMPANY BACKGROUND
- --------------------------
HOLDINGS
Holdings is a publicly traded domestic corporation organized under the laws of
the state of Delaware. Holdings is a holding company which owns directly all of
the outstanding stock of Creative. The only outstanding stock of Holdings is
voting common stock. Although Holdings has authorized the issuance of a class of
preferred stock, it has not issued any of these shares. Holdings has not issued
any securities convertible into stock. Since 1994, Holdings has granted stock
options to attract and retain key employees and to compensate members of
Holdings' Board of Directors. As of December 31, 1998, Holdings had options
outstanding to acquire 904,353 shares of its stock.
Only four persons were five percent shareholders of Holdings at some point
during the period beginning June 7, 1997 through the date of this letter. Two of
these persons, SC Fundamental/5/ and Amre Youness, disposed of sufficient
portions of their Holdings stock
- --------------------
/4/ For purposes of this letter, the term "five-percent shareholder" means any
person that owns, directly or indirectly, five percent or more of any class
of the stock of a corporation.
/5/ "SC Fundamental" refers collectively to The SC Fundamental Value Fund, L.P.
and SC Fundamental Value BVI, Ltd.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 3
before the Distribution Date to reduce their ownership in Holdings to less than
five percent./6/
The remaining two five percent shareholders, Frank Khulusi, the President and
Chief Executive Officer of Holdings, and Sam Khulusi, a member of the Holdings
Board of Directors, were five percent shareholders of Holdings at all times from
June 7, 1997 through the date of this letter (including the Distribution Date).
On the Distribution Date, Frank and Sam owned approximately 17.5 percent and
18.5 percent, respectively, of the outstanding Holdings common stock.
At all times since the sales by SC Fundamental L.P. and Mr. Youness, described
above, the remaining 64 percent of Holdings' stock was widely held and publicly
traded on the NASDAQ Stock Exchange, with no five percent shareholders, except
as described above. According to the Holdings' Form 10-K filed on March 26,
1999, Holdings had approximately 1,500 public shareholders of record.
CREATIVE
Creative is a domestic corporation organized under the laws of the state of
California. Creative is actively involved in the direct sales business. Creative
has one class of outstanding stock, voting common stock, all of which is held by
Holdings. Creative has not issued any options.
U-TURN
U-Turn is a domestic corporation organized under the laws of the state of
Delaware. U-Turn was incorporated on September 19, 1997 as a direct wholly owned
subsidiary of Creative. At all times since its incorporation, U-Turn has had
only a single class of outstanding stock, voting common stock. Although U-Turn
has authorized the issuance
- --------------------
/6/ Before November 17, 1998, SC Fundamental owned approximately 9.8 percent of
the outstanding Holdings common stock. On that date, SC Fundamental sold
799,500 of its Holdings common stock on the open market. Before January 21,
1999, Amre Youness owned approximately 7.7 percent of the outstanding
Holdings common stock. On that date, Mr. Youness sold 201,200 of his
Holdings common stock on the open market. To the best of knowledge of the
management of Holdings, Creative, and U-Turn, the November 17, 1998 sale by
SC Fundamental L.P. and the January 21, 1999 sale by Amre Youness (a) were
effected on the open market and completed with an unrelated purchaser; (b)
were not placed to a single buyer or group of buyers; (c) were made
pursuant to independent investment decisions of SC Fundamental .and
Youness, respectively; and (d) were not part of a plan or series of
transactions in which one or more persons acquired control of either
Holdings or U-Turn. This representation was made to PwC in the 1999 PwC
Opinion.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 4
of a class of preferred stock, it has not issued any of these shares. U-Turn has
not issued any securities convertible into stock. As of June 30, 1999, U-Turn's
authorized capital consisted of 20 million shares of common stock, $0.001 par
value ("common stock") of which 9,146,883 shares were issued and outstanding,
and 5 million shares of preferred stock, $0.001 par value ("preferred stock"),
none of which was issued and outstanding.
U-Turn is actively involved in the auction sales business. U-Turn's auction
sales business was an expansion of the direct sales business of Creative.
U-TURN IPO
On December 4, 1998, U-Turn completed an initial public offering of 1,817,000
shares of its common stock (the "IPO"), leaving Creative with 7,329,883 shares
of U-Turn common stock. As of the date of the IPO, U-Turn had options
outstanding to acquire 1,038,278 shares of its stock.
Since October 1997, U-Turn has granted stock options to attract and retain key
employees. Options issued prior to the IPO were exercisable only in the event of
a successful public offering or a sale of U-Turn. As of December 4, 1998, the
date of the IPO, U-Turn had options outstanding to acquire 1,380,278 shares of
its stock, including options granted under an informal plan and options granted
under U-Turn's 1998 Stock Incentive Plan (the "1998 Plan").
The IPO was consummated with the understanding that it would be followed by the
Distribution. As detailed below, Merrill Lynch & Company ("Merrill Lynch") and
William Blair & Company advised Holdings that U-Turn would raise more per share
in an initial offering if the investors understood that U-Turn would be a
corporation separate from Holdings and Creative.
At the time of the IPO, U-Turn's objective was to become the Internet auction
site of choice for vendors and consumers. U-Turn intended to achieve this
objective by pursuing the following key strategies: (1) increasing brand
awareness, (2) promoting repeat visits, (3) offering a superior customer
experience, (4) continuing to employ sophisticated merchandising techniques, and
(5) developing new revenue opportunities. In furtherance of these goals, U-Turn
intended to use, and in fact used, the IPO proceeds for working capital,
including its advertising and brand development expenditures and for the
development of its infrastructure in order to support growth.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 5
THE DISTRIBUTION
On June 7, 1999, Creative distributed 7,329,883 shares of U-Turn common stock,
representing approximately 80.1 percent of the voting power and value of the
outstanding U-Turn common stock, to Holdings in Distribution I. Holdings then
immediately distributed this U-Turn common stock to its shareholders in
Distribution II. Distribution I was intended to qualify as a tax-free
distribution pursuant to sections 368(a)(1)(D) and 355. Distribution II was
intended to qualify as a tax-free distribution pursuant to section 355. At the
time of the Distribution, the only five percent shareholder of U-Turn was
Creative.
Options to purchase Holdings stock that were granted on or prior to December 9,
1998 and that were outstanding as of the Distribution Date, were adjusted to
become options to purchase shares of both Holdings and U-Turn common stock. As a
result of this adjustment, options to acquire approximately 528,524 shares of
U-Turn stock were received by Holdings option holders.
Immediately before the Distribution, U-Turn had options outstanding to acquire
approximately 1,868,699 shares of its stock and no options previously granted
had been exercised. If these options had been exercised, then the stock issued
upon such exercise would have represented approximately 17 percent of the U-Turn
outstanding stock immediately before the Distribution.
Creative received the 1998 PwC Opinion regarding certain federal income tax
consequences of the Distribution. Specifically, the 1998 PwC Opinion stated
that, based solely on the facts, representations, and assumptions stated
therein, the Distribution would qualify for tax-free treatment under sections
368(a)(1)(D) and 355.
The Distribution was undertaken for three corporate business purposes. These
business purposes were (i) to allow for U-Turn to raise substantially more
capital through the IPO, (ii) to retain key employees of U-Turn, including the
Chief Executive Officer of U-Turn, by allowing such key employees to participate
in the corporate growth of U-Turn while U-Turn is a stand alone publicly traded
entity, and (iii) to resolve certain vendor/competitor conflicts that have
arisen between Creature's direct sales business and U-Turn's auction sales
business. Each of these corporate business purposes was a real and substantial
nonfederal tax purpose germane to the business of Holdings, Creative, and
U-Turn./7/ These business purposes are detailed in Appendix A. The discussion in
Appendix A is taken from the PwC tax memorandum dated May 18, 1999 which
provides supporting documentation to the 1998 PwC Opinion.
- --------------------
/7/ This summary of the corporate business purposes was listed in the 1999 PwC
Opinion.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 6
It has been represented to us by Creative, as to Creative and its shareholders,
and by U-Turn, as to U-Turn and its shareholders, that on the Distribution Date,
the management and five-percent shareholders of Creative and U-Turn did not
intend that one or more persons would acquire a fifty percent of greater
interest in Creative or U-Turn during the two-year period following the
Distribution. Instead at such time, the management and five-percent shareholders
of Creative and U-Turn intended for U-Turn to pursue opportunities to expand its
auction sales business as an independent company. The discussion of the IPO and
the Distribution in the public documents, including Form S-1 filed with the
Securities and Exchange Commission, is consistent with this intent to remain an
independent company, and does not implicitly or explicitly express any
expectation that U-Turn would be acquired after the Distribution.
Immediately after the Distribution, none of the executive officers of Holdings
were executive officers of U-Turn. However immediately after the Distribution,
Frank Khulusi was a member of the Board of Directors of U-Turn and a member of
the Board of Directors of Holdings. On November 26, 1999, Frank Khulusi resigned
as a member of the Board of Directors of U-Turn.
U-TURN SECONDARY OFFERING
At the time of the IPO, U-Turn anticipated that the proceeds from the IPO,
together with its existing capital accounts at such time, would be sufficient to
meet its capital requirements through the twelve month period subsequent to the
IPO. Thereafter, U-Turn expected that it would be required to raise additional
funds. Accordingly, on September 24, 1999 (the "Secondary Offering Date"),
U-Turn completed a follow-on public offering of 2,300,000 shares of common stock
(the "Secondary Offering").
On the Secondary Offering Date, U-Turn's objective was to leverage its
technology, brand name, and customer base to enhance its position as a leading
online auction marketplace for consumers and businesses. The key elements of
U-Turn's strategy on the Secondary Offering Date were: (1) to continue to
increase traffic to its site, (2) to enter additional markets, (3) to broaden
category offerings, and (4) to increase revenue sharing and commission based
arrangements.
U-Turn intended to use, and in fact used, the Secondary Offering proceeds in
furtherance of these goals. Specifically, U-Turn used the proceeds for general
corporate purposes, including increased sales and marketing expenditures,
working capital, capital expenditures, investments in systems and
infrastructure.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 7
Creative received the 1999 PwC Opinion regarding certain federal income tax
consequences of the Secondary Offering. Specifically, the PwC tax opinion stated
that, based solely on the facts, representations, and assumptions stated
therein, section 355(e) should not apply to the Distribution as a result of the
Secondary Offering. If section 355(e) had applied as a result of the Secondary
Offering, Creative and/or Holdings would have been required to recognize gain on
the Distribution
Immediately before the Secondary Offering, U-Turn had options outstanding to
acquire approximately 2,397,223 shares of its stock and no options previously
granted had been exercised. If these options had been exercised, then the stock
issued upon such exercise would have represented approximately 20.8 percent of
the U-Turn outstanding stock immediately before the Secondary Offering.
Immediately before the Secondary Offering, the stock sold by U-Turn in the IPO
and the shares subject to option totaled 4,214,223 shares, and would have
constituted 36.5 percent of the outstanding stock had all of the options been
exercised before the Secondary Offering.
Immediately after the Secondary Offering, the public shareholders resulting from
the IPO, the holders of shares attributable to option exercises, and the public
shareholders resulting from the Secondary Offering owned 4,117,000 shares,
constituting 36.0 percent, of the U-Turn outstanding stock. If all the
outstanding options were exercised immediately after the Secondary Offering, the
public shareholders resulting from the IPO, the holders of shares attributable
to option exercises, and the public shareholders resulting from the Secondary
Offering would have owned 6,514,223 shares, constituting 47.0 percent, of the
U-Turn outstanding stock.
As of January 31, 2000, there were options outstanding to acquire 2,790,971
shares of U-Turn stock, of which 441,975 were received by Holdings option
holders upon the Distribution. During the period beginning on the Distribution
Date and ending January 31, 2000, 146,512 options were exercised, of which
67,887 were received by Holdings option holders upon the Distribution.
Since June 7, 1999, U-Turn has only had two five-percent shareholders, Frank
Khulusi and Sam Khulusi. As of September 24, 1999, Frank Khulusi and Sam Khulusi
owned approximately 11.6 percent and 12.1 percent, respectively, of the
outstanding U-Turn stock.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 8
BACKGROUND OF THE PROPOSED ACQUISITION
- --------------------------------------
On January 12, 2000, Mr. Greg Jones, the Chief Executive Officer of U-Turn, made
initial contact with Mr. David Wetherell, the President and Chief Executive
Officer of CMGI, to discuss and explore potential business arrangements which
would be mutually beneficial to U-Turn and to CMGI. This conversation was made
via an "out-of-the-blue" telephone call made by Mr. Jones to Mr. Wetherell.
Prior to this conversation, Mr. Jones and Mr. Wetherell had never met or spoken.
During the course of this conversation or thereafter, Mr. Wetherell stated that
CMGI might have an interest in pursuing an acquisition of all of the outstanding
stock of U-Turn (the "Proposed Acquisition"). On January 14, 2000, CMGI executed
a confidentiality agreement with U-Turn.
During the period beginning June 7, 1999 and ending January 12, 2000, Mr. Jones
would often contact and often be contacted by the management of other companies
to discuss and explore potential business arrangements which would be mutually
beneficial to U-Turn and to such other companies. Often, these contacts would
result in business arrangements not involving equity interests in U-Turn. U-Turn
did not pursue any substantial discussions, negotiations, agreements,
understandings or other arrangements with these companies with respect to equity
ownership in U-Turn.
Some examples of business arrangements are: (1) U-Turn entered into an agreement
with Cahners Business Information, and Surplus Record, Inc. to create co-branded
websites that provide auction services for industrial equipment; (2) U-Turn
entered into an agreement with LibertyOne to provide LibertyOne access to its
auction technology and brand name in exchange for a licensing fee, payments for
professional services and future royalties from its auction sales; and (3)
U-Turn established marketing relationships with AOL, MSN/LinkExchange, PCWorld
Online, LookSmart, Prodigy, and Infoseek.
On January 21, 2000, Mr. Jones, made initial contact with Merrill Lynch,
U-Turn's investment banker and advisor, to discuss the potential business
relationship with CMGI. U-Turn had developed a relationship with Merrill Lynch
during the course of the IPO and the Secondary Offering. Before this call,
neither Mr. Jones, nor any other representative or agent of U-Turn ever
substantially discussed a transaction involving an acquisition or issuance of
U-Turn stock with Merrill Lynch or any other investment banker or similar
institutions, except with respect to the IPO and Secondary Offering.
On January 26, 2000, the Board of Directors of U-Turn ratified the appointment
of Merrill Lynch as U-Turn's investment banker with regard to the potential
business relationship with CMGI. On January 27, 2000, U-Turn executed a
engagement letter with Merrill Lynch.
As of the date of this letter, CMGI and U-Turn are still in discussions
regarding the Proposed Acquisition.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 9
REPRESENTATIONS
The management and five-percent shareholders of U-Turn and Creative/8/ and the
management of CMGI have made the following representations in connection with
this opinion letter:
1. There were no discussions, negotiations, agreements, understandings, or
other arrangements between the management of U-Turn or Creative and CMGI
or, to the knowledge of U-Turn or Creative, between any five-percent
shareholder of U-Turn or Creative and CMGI prior to January 1, 2000
regarding an acquisition, merger, investment (including private and public
offering of stock or securities convertible into stock), partnership, or
any other investment relationship (a "CMGI Transaction") between Creative
and CMGI.
2. Prior to January 1, 2000, CMGI and to the knowledge of CMGI, any
five-percent shareholder of CMGI had no intention of entering into a CMGI
Transaction between CMGI and U-Turn or Creative.
3. There were no substantial discussions, negotiations, agreements,
understandings, or other arrangements between the management of Creative
and any other party or, to the knowledge of Creative, between any
five-percent shareholder of Creative and any other party during the time
period beginning June 1, 1997 and ending January 1, 2000 regarding an
acquisition, merger, or stock investment (including private and public
offering of stock or securities convertible into stock, but excluding the
grant or exercise of employee stock options) involving ten percent or more
of the stock of Creative (a "Creative Ten Percent Transaction").
4. There were no substantial discussions, negotiations, agreements,
understandings, or other arrangements between the management of Creative
and any other party or, to the knowledge of Creative, between any
five-percent shareholder of Creative and any other party during the time
period beginning June 1, 1997 and ending June 7, 1999 regarding an
acquisition, merger, or stock investment (including private and public
offering of stock or securities convertible into stock, but excluding the
grant and
- --------------------
/8/ For purposes of the Representations, any references to Creative should be
interpreted to include both Creative and Holdings.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 10
exercise of employee stock options) involving ten percent or more of the
stock of U-Turn (a "U-Turn Ten Percent Transaction"), with the exception of
the IPO, the pre-IPO discussions with Merrill Lynch, the Distribution, and
the Secondary Offering.
5. There were no substantial discussions, negotiations, agreements,
understandings, or other arrangements between the management of U-Turn and
any other party or, to the knowledge of U-Turn, between any five-percent
shareholder of U-Turn and any other party during the time period beginning
June 1, 1997 and ending January 1, 2000 regarding a U-Turn Ten Percent
Transaction, with the exception of the IPO, the Distribution, and the
Secondary Offering.
6. Neither U-Turn or Creative nor, to the knowledge of U-Turn or Creative, any
five-percent shareholder of U-Turn or Creative had any discussions with an
investment banker, advisor, or other agent prior to January 1, 2000
regarding a CMGI Transaction with CMGI.
7. The Distribution was not motivated in whole or substantial part by an
intention to increase the likelihood or facilitate a Creative Ten Percent
Transaction or, with the exception of the IPO and the Secondary Offering, a
U-Turn Ten Percent Transaction.
8. The Distribution was not motivated in whole or substantial part by an
intention to decrease the likelihood of an acquisition of Creative or
U-Turn by separating Creative and U-Turn.
9. On the date of the Distribution, neither U-Turn, Creative nor any
five-percent shareholder of U-Turn or Creative intended that one or more
persons would acquire a fifty percent or greater interest in Creative or
U-Turn during the two-year period following the Distribution.
10. Except for open market transactions typical of any company with securities
traded on the NASDAQ market, all dispositions of Creative and U-Turn shares
occurring during the period beginning June 7, 1997 through the date of this
letter which are known to U-Turn are disclosed in the above STATEMENT OF
FACTS.
11. All representations made by U-Turn and Creative in the 1998 PwC Opinion
were true and accurate as of the date of the Distribution, and the
management of U-Turn and Creative are not aware of any events or conditions
occurring subsequent to the Distribution which would make any of the
representations not true and accurate as of the date of the Distribution.
The representations made in the 1998 PwC Opinion are listed on Appendix B.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 11
12. All representations made by U-Turn and Creative in 1999 PwC Opinion were
true and accurate as of the date of the Secondary Offering, and the
management of U-Turn and Creative are not aware of any events or conditions
occurring subsequent to the Distribution which would make any of the
representations not true and accurate as of the date of the Secondary
Offering. The representations made in the 1999 PwC Opinion are listed on
Appendix C.
SCOPE OF OPINION
The opinions contained in this letter are based on the facts, assumptions and
representations stated herein. You represented to us that you have provided us
with all facts and circumstances that you know or have reason to know are
pertinent to this opinion letter. If any of these facts, assumptions or
representations are not entirely complete or accurate, it is imperative that we
be informed immediately in writing as the incompleteness or inaccuracy could
cause us to change our opinions.
We have not reviewed all the documents necessary to effectuate the transactions
described in this letter, and we assume that all necessary documents will be
executed properly under applicable law and that all necessary steps will be
taken to effectuate the transactions as required by applicable federal, state or
local law.
In various sections of this letter, for ease of understanding and as a stylistic
matter, we may use language (such as "will"), which might suggest that we
reached a conclusion on an issue at a standard different from "should prevail."
Such language should not be so construed. Our conclusions on any issue discussed
in this opinion letter do not exceed a "should prevail" standard.
Our opinions in this letter are limited to those specifically set forth herein
under the heading OPINION. KPMG expresses no opinion with respect to any other
federal, state, local, or foreign tax or legal aspect of the IPO, Distributions,
Secondary Offering, Proposed Acquisition, or any other transactions described
herein. No inference should be drawn on any other matter not expressly addressed
under the heading OPINION.
In rendering our opinions, we are relying upon the relevant provisions of the
internal revenue laws, including the Internal Revenue Code of 1986, as amended,
the regulations thereunder, and judicial and administrative interpretations
thereof -- all as in effect on the date of this letter. These authorities are
subject to change or modification retroactively and/or prospectively and any
such change could affect the validity or correctness of our
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 12
opinions. We will not update our advice for subsequent changes or modifications
to the law and regulations or to the judicial and administrative interpretations
thereof, unless you separately engage us to do so in writing after such
subsequent change or modification.
These opinions are not binding on the Internal Revenue Service, any other tax
authority, or any court, and no assurance can be given that a position contrary
to that expressed herein will not be asserted by a tax authority and ultimately
sustained by a court.
This opinion is solely directed to the Board of Directors of CMGI. Therefore,
this opinion cannot be relied upon by any person or persons other than CMGI.
The opinion is restricted to the internal use of CMGI. The opinion may not be
included in any documents available to any third parties, or be incorporated by
reference in any documents available to such third parties, without the express
written consent of KPMG.
OPINION
Based solely upon the STATEMENT OF FACTS and REPRESENTATIONS listed above, as
limited by the SCOPE OF OPINION above, and assuming that the Distributions
qualified as a tax-free distributions pursuant to sections 368(a)(1)(D) and 355,
it is the opinion of KPMG that:
The Proposed Acquisition of all of the outstanding stock of U-Turn by
CMGI should not result in an adverse impact under section 355(e) which
would require Creative and/or Holdings to recognize taxable gain on the
Distributions.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 13
If you have any question, please contact me at (617) 988-1008.
Very truly yours,
KPMG LLP
/s/ Robert B. Haran
Robert B. Haran
Principal, Boston Mergers and Acquisitions Tax Group
cc: Stan Wiseberg, KPMG LLP - Washington
William Connolly, KPMG LLP - Boston
Steven Krohn, KPMG LLP - Boston
Lisa Kelloway, KPMG LLP, Washington National Tax
John Geracimos, KPMG LLP, Washington National Tax
Tas Parafestas, The Bollard Group LLC
William Caporizzo, Hale and Dorr
Alfred L. Browne III, CMGI, Inc.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 14
APPENDIX A: CORPORATE BUSINESS PURPOSES
- ----------------------------------------
The following discussion is taken from the PwC tax memorandum dated May 18, 1999
which provides supporting documentation to the 1998 PwC Opinion.
The distribution of the stock of U-Turn by Creative to Holdings, and the
distribution of the stock of U-Turn by Holdings to Holdings shareholders is
being completed for three main business purposes. The business purposes for the
distribution of U-Turn are (i) to allow for U-Turn to raise substantially more
capital through a public offering, (ii) to retain key employees, including the
Chief Executive Officer of U-Turn, by allowing such key employees to participate
in the corporate growth of U-Turn while U-Turn is a stand alone publicly traded
entity, and (iii) to resolve certain vendor/competitor conflicts that have
arisen between Creative's direct sales business and U-Turn's auction sales
business. Each of these three corporate business purposes are discussed in
detail below.
1. U-Turn Public Offering
---------------------------
Prior to the spin-off, U-Turn offered a portion of its stock for sale
to the market in an initial public offering. In this initial public
offering which occurred on December 9, 1998, U-Turn sold its common
stock, such that, immediately prior to the distribution of U-Turn
stock by Creative and then Holdings, Creative and then Holdings will
own at least 80% of the outstanding common stock of U-Turn taking into
account common stock issued in U-Turn's initial public offering, and,
if any, common stock issued upon exercise of options to acquire U-Turn
stock. As discussed below, the stock offering was necessary to provide
U-Turn with the magnitude of capital necessary to become a market
leader in the Auction Sales Business, with such offering generating
substantially more capital since completed with investors having a
guarantee that U-Turn would be distributed by Creative and Holdings,
and would be a stand alone entity, rather than a controlled subsidiary
of Holdings, following the distribution.
The Auction Sales Business represents cutting edge technology in the
sales field. Currently, although there are over 100 auction sites on
the internet, there are only a handful of companies generating
revenues of over $2,000,000 per month. U-Turn is already generating
revenues of this magnitude. However, the barriers to entry into the
internet auction sales business are relatively low, thereby allowing
new competitors into the market on a regular basis. Thus, there is an
immediate need to quickly expand the Auction Sales Business and become
a dominant market leader in the business of internet auction sales.
This expansion is planned
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 15
to be completed through adding additional auction sites, of which
U-Turn currently has only one. Further, U-Turn is attempting to
increase the number of weekly auctions conducted in each site. In
order to be dominant in the marketplace, the management of U-Turn
believe that it is necessary to increase brand recognition, attract
new and repeat customers, and continue to provide a compelling
shopping experience. Such activities require substantial capital
infusions, to an extent not possible through funding by the Direct
Sales Business. For this reason, the management of U-Turn and Holdings
have determined that it is necessary to complete a public offering of
the U-Turn stock, thus raising capital from the public market.
An example of an online auction company that recently completed its
initial public offering is Onsale, Inc. ("Onsale"). Onsale began
business during May, 1995, and sold its shares to the public during
the first quarter of 1997. Other securities offerings by other
internet retailing companies that have been completed during the past
year include Amazon.com, Cdnow, N2K, and Preview Travel.
Based on information provided by Holdings' investment banking firm, a
stock offering by U-Turn as a stand alone entity would have raised
substantially more capital than such an offering while U-Turn was a
controlled subsidiary of Holdings. This amount of capital could have
been raised efficiently while U-Turn was a wholly owned subsidiary of
Creative, given that the prospectus for U-Turn's initial public
offering stated that the U-Turn stock would be distributed within six
months following such offering. This statement provided investors with
strong assurance that U-Turn would not be operating as a subsidiary of
Holdings and Creative following the spin-off.
As documented in a letter from Holdings' investment banking firms,
William Blair & Company and Merrill Lynch & Company, the firms
believed that an offering of the stock of U-Turn could be priced at a
multiple which exceeded Creative's trading multiple at the time of the
analysis. William Blair & Company further stated that an offering of
the stock of U-Turn at these levels would have lowered U-Turn's
overall cost of capital and substantially reduced dilution to the
U-Turn shareholders.
William Blair & Company has concluded that if there is a concern that
Creative would continue to control U-Turn for the foreseeable future
through ownership of stock, the commitments of U-Turn's management,
employees, lenders, vendors, suppliers and investors could be withheld
and U-Turn's business plan thereby
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 16
undermined. Additionally, if Creative's commitment to spinning off
U-Turn was not made clear, potential equity investors and debt holders
might be suspicious of Creative's motives with respect to the control
of U-Turn, and thus follow through investments in, or extension of
credit to, U-Turn may be difficult to obtain.
William Blair & Company also has concluded that with respect to
management and other personnel, a new board of directors, not merely
an extension of Creative's current board, was necessary in order to
attract the talent needed to achieve U-Turn's objectives. The
investment banking firm also stated that it was necessary to represent
to lenders, creditors and vendors that U-Turn would be completely
independent of Creative after the spin-off in order to reduce or
eliminate the tendency to seek indemnities, cross collateralizations,
and credit support from Creative where there is a continuing
relationship. Lastly, William Blair & Company has concluded that if
Creative was not committed to the spin-off of U-Turn, investors in
U-Turn would demand a discount on the stock of U-Turn if purchased
while a subsidiary of Creative, because only the stock of U-Turn
issued in the subsidiary offering would have been freely tradable,
thereby making the investment fairly illiquid.
It is anticipated that the spin-off of the U-Turn stock by Holdings to
the Holdings shareholders will occur not sooner than six months and
not later than twelve months from the date of U-Turn's initial public
offering.
2. Retention of Key Employees
-------------------------------
Although the Auction Sales Business represents an expansion of the
Direct Sales Business, the nature of the Auction Sales Business
requires specialized talents not necessarily required in the Direct
Sales Business. The Auction Sales Business is characterized by the use
of cutting edge technology to allow customers to purchase products at
prices that are truly market driven.
While the Auction Sales Business was an idea formulated by Frank
Khulusi, the President and Chief Executive Officer of Holdings, the
time and attention needed to launch the Auction Sales Business was
problematic. The Auction Sales Business was developing slowly during
early to mid-1997, with the management of Holdings realizing an
urgency to bring the Auction Sales Business to the market. As with any
newly created high tech business operation, the Auction Sales Business
needed significant capital investment, as well as an executive to
develop what were largely only ideas of new sales technology.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 17
In order to launch the Auction Sales Business, it was necessary for
Holdings to locate an executive with both deep technical skills in the
computer and information technology fields, but also a proven
marketing track record. Further, since the Auction Sales Business
represents a newly created, fast growing business, any executive
chosen to oversee the Auction Sales Business must have knowledge of
the capital markets in the event of an initial public offering.
After an extensive executive search, Holdings identified Gregory K.
Jones ("Jones") as the President and Chief Executive Officer of
U-Turn, which now held the Auction Sales Business. Jones was hired by
U-Turn due to his unique combination of customer service, and sales
and operational experience with companies that have experienced
significant growth. In order to lure Jones to U-Turn, it was necessary
for U-Turn to offer Jones options to acquire an equity interest in
U-Turn. Instead, Jones sought an equity interest in U-Turn that allows
him to realize the benefits of U-Turn stock ownership as U-Turn grows
and prospers under his management. Other key employees followed suit
with Jones, and accepted employment with U-Turn, taking options to
acquire U-Turn stock as incentive compensation.
After joining U-Turn during November, 1997, Jones first launched the
U-Turn web site, a process that had been stalled for six months prior
to his arrival. While launching the U-Turn web site, Jones also
assembled his team of key management and employees. Jones negotiated
employment agreements with all new employees. Jones was also initially
responsible for all new business of U-Turn. In this capacity, Jones
led the advertising and marketing function for U-Turn, and also
selected and procured all merchandise that U-Turn was to sell in its
auction business.
As a primary business purpose for the distribution of the stock of
U-Turn by Creative and Holdings, U-Turn completed its public offering
on December 9, 1998. Under the terms of the stock option plan, key
employees could exercise their options to acquire U-Turn's stock,
subject to the option's vesting schedule, upon the earlier of the
Distribution, or 18 months following the offering date. Upon exercise
of all his options, Jones would hold approximately 5 percent of the
value of the currently outstanding U-Turn stock, with the key
employees as a group holding approximately 12.5 percent of the value
of the outstanding U-Turn stock, all subject to dilution provisions,
with such percentages decreasing due to the issuance of additional
shares in U-Turn's public offering. Since over 60 percent of the
U-Turn stock is publicly held following the spin-off, ownership of
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 18
approximately 12.5 percent (subject to dilution as a result of the
offering) of the U-Turn stock by U-Turn key employees represents a
substantial stock holding./9/
Compensating key employees with U-Turn stock cannot be accomplished
via an alternative nontaxable transaction. For example, awarding
U-Turn's key employees with Holdings' stock options represents a
substantially different compensation award. This is due to the
substantially large size of the Direct Sales Business as compared to
U-Turn. Due to this disparity in size of the two businesses, the value
of the Holdings stock does not reflect the activities of U-Turn to the
degree necessary to allow key employees of U-Turn to be adequately
compensated for their own efforts within U-Turn. Additionally, the
stock of U-Turn, while U-Turn is a controlled subsidiary of Holdings,
does not represent as valuable an asset in the hands of the key
employees as stock in a stand alone U-Turn. This is due to the lack of
a market for the U-Turn stock even after the initial public offering
of U-Turn common stock. The marketability of U-Turn common stock will
increase following the spin-off of U-Turn due to the receipt of U-Turn
common stock by public shareholders of Holdings. Further, while a
controlled subsidiary of Holdings, the key employees have no assurance
that Holdings will not attempt to extract value and corporate earnings
from U-Turn into the Direct Sales Business. Such an action could
reduce the growth of U-Turn, while also preventing the key employees
from realizing the value of their efforts in expanding U-Turn
business.
While the auction sales business of U-Turn represented an extension of
the direct sales business of Creative, the unique nature of the
U-Turn's selling processes, when coupled with Creative's existing
distributor relationships, presented obstacles to U-Turn's continued
growth and success.
3. Vendor/Competitor Issues
-----------------------------
Certain manufacturers of the computers and computer related products
sold by both the Creative direct sales business and the U-Turn auction
sales business view a conflict of interest between U-Turn and
Creative. The conflict of interest arises from the fact that Creative
sells computers and computer related products at discounted prices
through its direct mail catalogs and the internet. Certain
manufacturers are hesitant to sell their excess inventory to U-Turn,
where U-Turn would provide an efficient means of disposition of such
excess inventory, due to a
- --------------------
/9/ It should be noted that approximately 20 percent of the outstanding uBid
stock options will be vested, and thus could be exercised, immediately
after the spin-off of uBid.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 19
fear on the manufacturers' behalf that the excess inventory will be
sold in Creative's catalogs, thereby directly competing with the
manufacturers. Likewise, other manufacturers do not want to jeopardize
any existing catalog sales that their products may have through the
direct sales business by having their products sold via U-Turn's
auction sales business. A complete separation of U-Turn from Creative
resolved this potential conflict.
Another inhibitor to U-Turn's success resulting from U-Turn's
relationship with Creative arises from certain manufacturer
restrictions placed on all members of the Creative affiliated group.
Creative, which sells computers and computer related products at
discounted prices, is restricted on selling many current products.
These restrictions prevent Creative from advertising certain products
at discounted prices. If Creative were to violate these restrictions,
Creative would lose substantial advertising revenue that would
otherwise be generated from the manufacturers. As part of its normal
business operations, U-Turn may have the opportunity to obtain new
products for sale on its auction web site. These products may be
obtained by U-Turn through sales returned to retailer, or through the
purchase of new products from a liquidating business. These new
products often offer the possibility of substantial revenues and
profits to U-Turn. However, due to the potential loss of advertising
revenue under the affiliated group-wide contracts with manufacturers,
U-Turn cannot sell these new products. Thus, U-Turn must turn down
potential new product purchases, which ultimately wind up in the hands
of U-Turn's competition. As a separate stand alone entity, U-Turn
would not be subject to the restrictions placed upon the direct sales
business of Creative, and would therefore be able to acquire new
products for resale in the auction sales business.
Additionally, under Creative's contractual relationships with its
vendors, Creative cannot sell any of its products outside the United
States. This restriction is common to companies in the direct sales
business, such as Creative, in order to allow the vendors to control
the distribution channels for their products. However, because
Creative cannot sell its products outside the United States, U-Turn is
also currently prevented from selling its products outside the United
States. It is estimated that the amount of lost revenue to U-Turn as a
result of this restriction could be as high as 50 percent of its
current revenue. If U-Turn were to be distributed by Creative and
Holdings, as a stand alone entity U-Turn would no longer be subject to
these restrictions to selling products solely within the United
States.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 20
A final vendor/competitor conflict could potentially arise as U-Turn
attempts to purchase products from other computer resellers. Although
this conflict has not occurred to date, the management of Creative and
U-Turn believe that this conflict could arise as U-Turn's volume
increases. Creative's direct sales business purposes products from
manufacturers, and then resells such product through direct mail
catalogs, the internet, and other conventional means. When Creative
determined that it holds excess inventory of a particular product,
Creative may sell such product to U-Turn, which in turn sells the
excess product on its auction sales web site./10/ This method of
disposing of excess inventory has proved very cost efficient to both
Creative and U-Turn. Other computer and computer related product
resellers also have the problem of excess inventory, and are thus
potential customers of U-Turn's. However, because U-Turn is currently
an affiliate of Creative, and the third party resellers view Creative
as a competitor in the market, such third party resellers may not be
willing to sell their excess inventory to U-Turn. As a stand alone
company following the spin-off, U-Turn would have access to these
third party resellers, and could therefore tap what otherwise may be
an unavailable market for obtaining products to sell in its auction
sales business.
Following the spin-off of U-Turn by Creative and Holdings, U-Turn and
Holdings will share one board member. Frank Khulusi will remain a
member of the U-Turn board and the Holdings board. However, Frank
Khulusi's membership on the U-Turn board will be temporary, with Frank
Khulusi removing himself from the U-Turn board once a replacement
member is found. It is currently anticipated that Frank Khulusi will
remain a member of the U-Turn board for less than one year following
the spin-off of U-Turn. U-Turn and Holdings will not share any other
management.
- --------------------
/10/ It should be noted that Creative also sells its excess products to
competitors of U-Turn.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 21
APPENDIX B: REPRESENTATIONS MADE IN THE 1998 PwC OPINION
- --------------------------------------------------------
1. Holdings, Creative, U-Turn, and the shareholders of Holdings will each pay
their own expenses, if any, incurred in connection with the Distribution.
2. Any indebtedness owed by U-Turn to Creative after the Distribution will not
constitute stock or securities.
3. No part of the consideration to be distributed by Holdings or Creative is
being received by a shareholder as a creditor, employee, or in any capacity
other than that of a shareholder of the distributing corporation.
4. The 5 years of financial information submitted on behalf of Creative is
representative of Creative's present operation, and with regard to
Creative, there have been no substantial operational changes since the date
of the last financial statements.
5. The financial information submitted on behalf of the Auction Sales Business
(for each year of its existence) is representative of the Auction Sales
Business' present operations, and with regard to the Auction Sales
Business, there have been no substantial operational changes since the date
of the last financial statements submitted.
6. Immediately after the Distribution, at least 90 percent of the fair market
value of the gross assets of Holdings will consist of the stock and
securities of Creative and Computability Limited.
7. Following the Distribution, other than U-Turn's use of certain Creative
employees for which U-Turn will compensate Creative at an arms length
price, Holdings, Creative and U-Turn will each continue the active conduct
of its business, independently and with its separate employees.
8. The distribution of the stock of U-Turn is carried out for the following
corporate business purposes: (i) to attract and retain key employees, (ii)
to facilitate an offering of the stock of U-Turn, and (ii) to resolve
certain competitive restraints with vendors. The distribution of the stock,
or stock and securities, of U-Turn is motivated, in whole or substantial
part, by one or more of these corporate business purposes.
9. There is no plan or intention by any shareholder who owns five percent or
more of the stock of Holdings, and the management of Holdings, to the best
of its knowledge, is not aware of any plan or intention on the part of any
particular remaining shareholder
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 22
of Holdings to sell, exchange, transfer by gift, or otherwise dispose of
any stock in, or securities of, either Holdings or U-Turn after the
Distribution.
10. There is no plan or intention by either Holdings or U-Turn, directly or
through any subsidiary corporation, to purchase any of its outstanding
stock after the Distribution.
11. There is no plan or intention to liquidate either Holdings, Creative or
U-Turn, to merge any of the corporations with any other corporation, or to
sell or otherwise dispose of the assets of any of the corporations after
the Distribution, except in the ordinary course of business.
12. Holdings, Creative, and U-Turn neither accumulated their receivables nor
made extraordinary payments of their payables in anticipation of the
Distribution.
13. Other than trade account indebtedness created in the ordinary course of
business through continuing arms-length transactions or through execution
of certain intercompany agreements entered into between Holdings, Creative,
and U-Turn, no intercorporate debt will exist between Holdings, Creative,
and U-Turn at the time of, or subsequent to, the distribution of U-Turn's
stock.
14. Immediately before the distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the
applicable intercompany transaction regulations.
15. Payments made in connection with all continuing transactions between
Holdings, Creative, and U-Turn will be for fair market value based upon
terms and conditions arrived at by the parties bargaining at arm's length.
16. No two parties to the transaction are investment companies as defined in
section 368(a)(2)(F)(iii) and (iv).
17. The payment of cash in lieu of fractional share interests of U-Turn common
stock, if any, is solely to avoid the expense and inconvenience to Holdings
of issuing fractional share interests, and does not represent separately
bargained for consideration. The total amount of cash received in lieu of
fractional share interests of U-Turn stock will be less than 1 percent of
the total fair market value of the U-Turn stock distributed by Holdings.
18. The distribution of the stock of U-Turn by Creative and the distribution of
the stock of U-Turn by Holdings, will occur within twelve months from the
date of U-Turn's initial public offering.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 23
19. Taking into account stock issued under U-Turn's stock option plan prior to
the distribution of U-Turn's stock, and U-Turn stock sold in U-Turn's
initial public offering, Creative will be in control of U-Turn, as defined
in section 368(c), at the time of Creative's distribution of the U-Turn
stock.
20. Taking into account stock issued under U-Turn's stock option plan prior to
the distribution of U-Turn's stock, and U-Turn stock sold in U-Turn's
initial public offering, Holdings will be in control of U-Turn, as defined
in section 368(c), at the time of Holdings' distribution of the U-Turn
stock.
21. In no event will 50 percent or more of the total combined voting power of
all classes of stock entitled to vote or 50 percent or more of the total
value of shares of all classes of stock of Holdings or U-Turn, directly or
indirectly, be offered to the public, acquired by or issued to one or more
persons, or issued through option exercises during the four-year period
beginning on the date which is two years before the date of the
Distribution, unless it is established that the Distribution and the
offering of the Holdings or U-Turn stock to the public, the acquisition or
issuance of the Holdings or U-Turn stock by or to one or more persons, or
the issuance of the Holdings or U-Turn stock through option exercises are
not pursuant to a plan or series of related transactions.
22. Following the four year period beginning two years before the date of the
Distribution, there is no plan or intention for 50 percent or more of the
total combined voting power of all classes of stock entitled to vote or 50
percent or more of the total value of shares of all classes of stock of
Holdings or U-Turn, directly or indirectly, to be offered to the public,
acquired by or issued to one or more persons, or to be issued through
option exercises.
23. No liabilities will be transferred to U-Turn or assumed by U-Turn, and
other than the contribution of certain software contracts, no assets will
be transferred to U-Turn in connection with the distribution.
<PAGE>
The Board of Directors
CMGI, Inc.
February 10, 2000
Page 24
APPENDIX C: REPRESENTATIONS MADE IN THE 1999 PWC OPINION
- --------------------------------------------------------
1. To the best of the knowledge of the management of Holdings, Creative, and
U-Turn, each sale of Holdings shares by Amre Youness and SC Fundamental
L.P. was: (a) effected on the open market and completed with unrelated
purchaser(s); (b) not placed to a single buyer or group of buyers; (c) made
pursuant to an independent investment decision of each seller; and (d) not
part of plan or series of transactions in which one or more persons
acquired control of either Holdings or U-Turn.
2. Shares of U-Turn issued under the U-Turn stock option plan are not issued
pursuant to a plan or series of related transactions intended to allow a
person or persons to acquire control of U-Turn. All stock options issued
under U-Turn's stock option plan were issued to employees of U-Turn in the
ordinary course of U-Turn's business.
3. Except for open market transactions typical of any company with securities
traded on the NASDAQ market, all dispositions of Holdings, Creative, and
U-Turn shares occurring during the four year period beginning two years
prior to the Distribution have been disclosed to PwC.
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement of CMGI, Inc. on Form S-4 of our report, dated
June 17, 1997, except for Note 6, for which the date is June 9, 1999, relating
to the financial statements of Shopping.com, which appear in Form 8-K of
CMGI, Inc. dated June 29, 1999. We also consent to the reference to our Firm
under the caption "Experts" in the prospectus, which is part of this
Registration Statement.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 24, 2000
<PAGE>
Exhibit 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "uBid Selected
Historical Condensed Financial Information" and "Experts" and to the use of our
report dated January 17, 2000, except for Note 9, as to which the date is
February 9, 2000, with respect to the financial statements of uBid, Inc.
included in the Proxy Statement of uBid, Inc. that is made part of this
Amendment No. 1 to the Registration Statement (Form S-4) and related Prospectus
of CMGI, Inc. for the registration of 3,549,979 shares of its common stock.
/s/ Ernst & Young LLP
Chicago, Illinois
March 24, 2000
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1
to the Registration Statement on Form S-4 (no. 333-32158) of our reports dated
as follows:
. June 29, 1999 relating to the financial statements of AltaVista,
. April 2, 1999 relating to the financial statements of Zip2 Corporation, and
. June 9, 1999, except as to Note 12, which is as of July 2, 1999, relating to
the financial statements of Shopping.com
which appear in the CMGI, Inc. Current Report on Form 8-K dated June 29, 1999.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
March 24, 2000
<PAGE>
EXHIBIT 23.9
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-4 of CMGI, Inc. of our report dated
January 25, 2000 relating to the financial statements of Tallan, Inc., which
appears in the Current Report on Form 8-K of CMGI, Inc. dated March 9, 2000. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 24, 2000
<PAGE>
Exhibit 23.10
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our reports of yesmail.com, inc. included in or made a part of this Registration
Statement in yesmail.com, inc.'s Form S-4 and to all references to our Firm
included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 24, 2000
<PAGE>
EXHIBIT 23.11
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
CMGI, Inc.
We consent to the use of our reports included and incorporated by reference
herein and to the reference to our firm under the headings "Experts,"
"Background to the Merger" and "Amendment to Tax Indemnification Agreement" in
the prospectus.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
March 24, 2000
<PAGE>
Exhibit 23.13
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-32158 of CMGI, Inc. of our report dated
October 18, 1999, accompanying the consolidated financial statements of Flycast
Communications Corporation and subsidiary as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998, included in
the Current Report on Form 8-K of CMGI, Inc. dated December 17, 1999. We also
consent to the reference to us under the heading "Experts" in the proxy
statement/prospectus, which is a part of this Registration Statement.
/s/ Deloitte & Touche LLP
San Jose, California
March 23, 2000
<PAGE>
EXHIBIT 99.2
-- --
uBid, Inc.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. 0
[ ]
1. Proposal to approve and adopt the Agreement and For Against Abstain
Plan of Merger and Reorganization, dated as of [_] [_] [_]
February 9, 2000, by and among CMGI, Inc.,
Senlix Corporation, a wholly owned subsidiary
of CMGI, and uBid, Inc., and the Merger.
In their discretion, the proxies are authorized to vote
upon such other matter or matters which may properly come
before the Special Meeting or any and all or adjournment(s)
thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL.
This Proxy should be marked, dated and signed by the stockholder(s) exactly as
his, her or its name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. If a
corporation, please sign in full corporate name by an authorized officer. If a
partnership, please sign in partnership name by an authorized person. If
shares are held by joint tenants or as community property, both should sign.
Signature(s)
-------------------------------------------------------------------
Dated: , 2000
------------------------------------------------------------
Signature(s)
-------------------------------------------------------------------
Dated: , 2000
------------------------------------------------------------
- -------------------------------------------------------------------------------
PLEASE MARK, DATE AND RETURN THIS PROXY PROMPTLY.
- -------------------------------------------------------------------------------
/\ FOLD AND DETACH HERE /\
YOUR VOTE IS IMPORTANT!
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE>
uBid, Inc.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of uBid, Inc., a Delaware corporation, hereby
acknowledges receipt of the Notice of Special Meeting of Stockholders and Proxy
Statement/Prospectus, each dated as of March 27, 2000, and hereby appoints
Thomas Werner and Gregory Jones, and each of them, proxies and attorneys-in-
fact, with full power to each of substitution and resubstitution, on behalf and
in the name of the undersigned, to represent the undersigned at the Special
Meeting of Stockholders of uBid, Inc. to be held on April 28, 2000, at 10:00
a.m., local time, at the Chicago O'Hare Westin Hotel, 6100 River Road,
Rosemont, Illinois 60018, and at any and all adjournment(s) thereof, and to
vote all shares of common stock which the undersigned would be entitled to
vote, if then and there personally present, on the matters set forth on the
reverse side.
Both of such attorneys or substitutes as shall be present and shall act at
said meeting or any and all adjournment(s) thereof (or if only one shall be
present and acting, then that one) shall have and may exercise all of the
powers of said attorneys-in-fact hereunder.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION, DATED AS OF FEBRUARY 9, 2000, BY AND AMONG CMGI,
INC., SENLIX CORPORATION, A WHOLLY OWNED SUBSIDIARY OF CMGI, AND UBID, INC.,
AND THE MERGER, AND, AS SAID PROXIES DEEM ADVISABLE, ON SUCH OTHER MATTERS AS
MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
(Continued and to be Signed and Dated on Reverse Side)
<PAGE>
Exhibit 99.3
[uBID LETTERHEAD]
M E M O R A N D U M
TO: [option holder]
FROM: uBid, Inc.
DATE: March __, 2000
RE: Notice of Change of Control Event
- --------------------------------------------------------------------------------
This memorandum serves as notice pursuant to your Option Award Agreement
that uBid, Inc., a Delaware corporation ("uBid"), has entered into an Agreement
and Plan of Merger and Reorganization, dated as of February 9, 2000, by and
among CMGI, Inc., a Delaware corporation ("CMGI"), Senlix Corporation, a
Delaware corporation and a wholly owned subsidiary of CMGI, and uBid (the
"Merger Agreement"). Pursuant to the Merger Agreement, at the effective time of
the merger (the "Merger") uBid will become a wholly owned subsidiary of CMGI.
The Merger is subject to stockholder approval and other approvals and
conditions. We have included a copy of the proxy statement/prospectus of CMGI
and uBid which describes the Merger, which you should be sure to read.
Pursuant to the terms of the Merger Agreement and your Option Award
Agreement, all of your options to purchase shares of uBid common stock will
terminate at the effective time of the Merger. Currently we anticipate that if
the Merger is approved at the uBid shareholder meeting, the effective time will
be on or about April 28, 2000.
You may, however, elect to have the vested portion of any unexercised uBid
option exchanged as of the effective time of the Merger for an option to
acquire, on the same terms and conditions as were applicable under the uBid
option, immediately prior to the effective time of the Merger, the same number
of shares of CMGI common stock as you would have been entitled to receive
pursuant to the Merger if you had exercised the vested portion of the option in
full immediately prior to the effective time. The exercise price per share of
this exchanged option will be equal to (y) the aggregate exercise price for the
share of uBid common stock purchasable pursuant to the respective uBid option
immediately prior to the effective time divided by (z) the number of full shares
of CMGI common stock deemed purchasable pursuant to the uBid option in
accordance with the foregoing. To make this election check Box A and complete
-----
and return the attached election form.
Alternatively, you may elect to exercise all of your vested options to
purchase shares of uBid common stock by checking Box B and completing and
-----
returning the attached election form.
<PAGE>
[option holder]
March __, 2000
Page 2
PLEASE NOTE THAT THE ATTACHED ELECTION FORM MUST BE RECEIVED BY UBID IN THE
ENCLOSED ENVELOPE ADDRESSED TO UBID BY NO LATER THAN NOON ON FRIDAY, APRIL 21,
2000. IF YOU DO NOTHING, ALL OF YOUR VESTED AND UNVESTED OPTIONS TO PURCHASE
SHARES OF UBID COMMON STOCK WILL TERMINATE UPON THE EFFECTIVE TIME OF THE
MERGER, AND YOU WILL FORFEIT ALL RIGHTS WITH RESPECT TO YOUR OPTIONS.
You are strongly encouraged to consider the tax consequences of exercising
your options and to consult your tax advisor before making an election and
completing the election form.
As of April 28, 2000, the anticipated effective time of the Merger, you
will have ____________________ vested options to purchase shares of uBid common
stock. This number reflects the vesting acceleration of certain of your options
in accordance with your Option Award Agreement upon a change of control.
In summary, you may elect to either:
. exchange your vested option to purchase shares of uBid common stock
for an option to purchase shares of CMGI common stock or;
. exercise your vested option to purchase shares of uBid common stock,
which will then be exchanged in accordance with the Merger Agreement
for .2628 of a share of CMGI common stock.
If you do nothing or if uBid does not receive your election form by noon on
April 21, 2000, all of your vested and unvested options will terminate upon the
effective time of the Merger. Please also note that in the event the Merger does
not close, your election will have no effect.
If you have any questions please contact Dan Machock at uBid at (773) 272-
4997.
<PAGE>
MUST BE RECEIVED BY uBID BY APRIL 21, 2000.
ELECTION FORM
Having researched the implications and consequences of both options and
consulted with my tax advisors, as necessary, I elect:
BOX A
[ ] To exercise all vested options to purchase shares of uBid common stock.
If you have opted to exercise, please indicate whether you will pay the
exercise price or conduct a cashless exercise:
[ ] Pay Exercise Price:
[ ] Pay exercise price with cash, check, or money order
enclosed herein.
[ ] Pay exercise price with shares of uBid common stock,
certificates enclosed herein.
[ ] Cashless Exercise.
OR
BOX B
[ ] To have the vested portion of any unexercised uBid option exchanged as of
the effective time of the Merger for an option to acquire on the same terms
and conditions as were application under the uBid option immediately prior
to the effective time of the Merger the same number of shares of CMGI
common stock I would have been entitled to receive pursuant to the Merger
if I had exercised the vested portion of the option in full immediately
prior to the effective time. The exercise price per share of this exchanged
option will be equal to (y) the aggregate exercise price for the shares of
uBid common stock purchasable pursuant to the respective uBid option
immediately prior to the effective time divided by (z) the number of full
shares of CMGI common stock deemed purchasable pursuant to the uBid option
in accordance with the foregoing.
Date: Option Holder Signature:
---------------- -----------------------------
Print Name:
------------------------------------------
Print Address:
---------------------------------------
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