SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Fiscal Year Ended July 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM________________ TO ________________
COMMISSION FILE 0-22846
CMG INFORMATION SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2921333
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S.EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
100 BRICKSTONE SQUARE 01810
ANDOVER, MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (978) 684-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Common Stock, $0.01 par value NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting Common Stock held by non-affiliates of the
Registrant was $774,291,912 as of October 20, 1998. The Registrant does not
have any outstanding non-voting equity.
On October 20, 1998, the Registrant had outstanding 23,057,446 shares of voting
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders are incorporated by reference
into Parts I, II and IV of this Report. Portions of the definitive proxy
statement (the "Definitive Proxy Statement") to be filed with the Securities and
Exchange Commission relative to the Company's 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1998
CMG INFORMATION SERVICES, INC.
PART I
ITEM PAGE
-----
1. Business
General....................................................................................................... 2
Interactive Marketing Industry................................................................................ 3
Products and Services......................................................................................... 3
Business Strategy............................................................................................. 9
Sales and Marketing........................................................................................... 10
Competition................................................................................................... 11
Research and Development...................................................................................... 11
Intellectual Property and Proprietary Rights.................................................................. 12
Employees..................................................................................................... 12
Segment Information........................................................................................... 12
Significant Customers......................................................................................... 12
2. Properties........................................................................................................ 12
3. Legal Proceedings................................................................................................. 13
4. Submission of Matters to Vote of Security Holders................................................................. 13
PART II
5. Market for Registrant's Common Equity and Related Stockholders Matters............................................ 13
6. Selected Consolidated Financial Data.............................................................................. 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 14
7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 14
8. Financial Statements and Supplementary Data....................................................................... 14
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 14
PART III
10. Directors and Executive Officers of the Registrant................................................................ 15
11. Executive Compensation............................................................................................ 15
12. Security Ownership of Certain Beneficial Owners and Management.................................................... 15
13. Certain Relationships and Related Transactions.................................................................... 15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 15
1
This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation, those discussed
in "Factors that May Affect Future Results" section of Item 7 of this Report.
Such forward-looking statements speak only as of the date on which they are
made, and the Company cautions readers not to place undue reliance on such
statements.
PART I
ITEM 1. - BUSINESS
GENERAL
CMG Information Services, Inc. (CMG or the Company), a Delaware
corporation, develops and operates Internet and direct marketing companies as
well as venture funds focused on the Internet.
CMG's Internet strategy includes the internal development and operation of
majority owned subsidiaries within the "CMG Internet Group" as well as the
investment in other Internet companies, either directly by CMG, or through
venture capital fund arrangements. The Company's strategy also envisions and
promotes opportunities for synergistic business relationships among the Internet
companies within its portfolio. At July 31, 1998, the CMG Internet Group
included majority-owned subsidiaries ADSmart Corporation (ADSmart), Engage
Technologies, Inc. (Engage), Accipiter, Inc. (Accipiter), InfoMation Publishing
Corporation (InfoMation), NaviSite Internet Services Corporation (NaviSite),
Planet Direct Corporation (Planet Direct) and Password Internet Publishing
Corporation (The Password). At July 31, 1998, CMG also directly held minority
investments in Magnitude Network, LLC (Magnitude Network) and Open Market, Inc.
ADSmart develops and markets online ad sales and ad serving solutions; Engage
develops and markets precision online marketing solutions; Accipiter specializes
in Internet advertising management solutions; InfoMation develops and markets a
Web-based solution for corporate knowledge management; The Password provides
tools for the creation of a personalized "mini-Web;" and Planet Direct is a
personalized Web service with over 400 Internet Service Provider (ISP) partners
which tailors members' online experience to their interests and local community.
Subsequent to July 31, 1998, the Company announced that InfoMation would become
a division of Planet Direct and that NaviSite would be split into two separate
companies NaviSite will continue to provide high-end server management and
applications solutions, providing high-availability Internet outsourcing, and
NaviNet will provide low cost, high-availability dial-up network connection
through competitive local exchange carriers (CLECs).
The Company's first Internet venture fund, its limited liability company
subsidiary, CMG@Ventures I, LLC (CMG@Ventures I, formerly CMG@Ventures L.P.),
was formed in February, 1996. CMG completed its $35 million commitment to this
fund during fiscal year 1997. The Company owns 100% of the capital and is
entitled to 77.5% of the net capital gains of CMG@Ventures I. At July 31,
1998, CMG@Ventures I held equity investments in five companies, including
Blaxxun Interactive, Inc. (Blaxxun, 81% legal ownership), GeoCities (32%),
Lycos, Inc. (Lycos, 25%), Parable LLC (Parable, 31%), and Vicinity Corporation
(Vicinity, 50%). Lycos and GeoCities shares are publicly traded on the NASDAQ
system under the symbols LCOS and GCTY, respectively. The Company's second
Internet venture fund, its limited liability company subsidiary, CMG@Ventures
II, LLC (CMG@Ventures II), was formed during fiscal year 1997. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures II. At July 31, 1998, CMG@Ventures II held equity investments in
fourteen companies, including Chemdex Corporation (Chemdex 16%), Critical Path
(7%), GeoCities (2%), KOZ, Inc. (KOZ, 14%), Mother Nature's General Store, Inc.
(Mother Nature, 24%), Parable (11%), Reel.com, Inc. (Reel.com, 36%), Sage
Enterprises, Inc. (Sage Enterprises, 29%), Silknet Software, Inc. (Silknet,
24%), Softway Systems, Inc. (Softway Systems, 9%), Speech Machines plc (Speech
Machines, 29%), TicketsLive Corporation (TicketsLive, 14%), Universal Learning
Technology (12%), and Visto Corporation (Visto, 6%). CMG@Ventures II's holdings
in Sage Enterprises and Reel.com were converted into shares of Amazon.com, Inc.
and Hollywood Entertainment Corporation, respectively, pursuant to mergers of
the respective companies subsequent to July 31, 1998.
CMG recently formed its third venture capital fund, CMG@Ventures III, LLC
(CMG@Ventures III), and has begun raising capital from outside investors for a
corresponding outside investment fund, @Ventures III, L.P. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures III, and will be entitled to 2% of the net capital gains of
@Ventures III, L.P. These two funds will co-invest in all investment candidates
based on a predetermined ratio. CMG has committed to funding CMG@Ventures III
up to the greater of $30 million or 19.9% of amounts committed to @Ventures III,
L.P.
The Company provides fulfillment services through three wholly-owned
subsidiaries, SalesLink Corporation (SalesLink, acquired in 1989), InSolutions
Incorporated, (InSolutions, acquired June, 1998), and On-Demand Solutions, Inc.
(acquired July, 1998). SalesLink's services are also provided through its
subsidiary, Pacific Direct Marketing Corporation (Pacific Link), which was
acquired in October, 1996. The Company's fulfillment services offerings include
product and literature fulfillment, turnkey outsourcing, telemarketing, and
sales/lead inquiry management. Traditional mailing list services are provided by
the Company's subsidiary, CMG Direct Corporation (CMG Direct). Recently, CMG
Direct has embarked on a strategy to also provide solutions for integrating
traditional direct marketing with Internet marketing.
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The Company has adopted a strategy of seeking opportunities to realize
significant gains through the selective sale of investments or having separate
subsidiaries or affiliates sell minority interests to outside investors. The
Company believes that this strategy provides the ability to significantly
increase shareholder value as well as provide capital to support the growth in
the Company's subsidiaries and investments. Additionally, in fiscal year 1999,
the Company will continue to develop and refine the products and services of its
businesses, with the goal of significantly increasing revenue as new products
are commercially introduced, and will continue to pursue a strong pace of
investing in new Internet opportunities.
INTERACTIVE MARKETING INDUSTRY
Direct marketing is undergoing rapid, fundamental change, as customers'
needs evolve and technology advances. Marketing channels and media outlets are
expanding in number and diversifying in scope, and powerful database
technologies are able to target both broad markets and individual customers with
ever-greater precision. The emergence of the Internet into homes and offices has
provided direct marketers with a powerful new distribution mechanism -
interactive media. Interactive marketing is a subset of direct marketing. It
differentiates itself from traditional direct marketing channels in that the
consumer has flexibility and control over what is being presented, when they
view the products or services and which types of products or services they are
viewing.
In contrast to conventional media, the Internet offers capabilities to
target advertising to specific audiences, to measure the popularity of content,
to reach worldwide audiences cost-effectively and to create innovative and
interactive advertisements. By collecting customer feedback and demographic
information, advertisers can direct highly customized marketing campaigns at
defined targets. In addition, the Internet enables advertisers to transact with
prospective customers much more rapidly than with conventional media. The
Company believes that advertisers will continue to seek to advertise on Web
sites that offer a high volume of traffic and feature flexible advertisement
programs capable of reaching targeted audiences. Likewise, the Company believes
that as advertisers increasingly embrace the Internet as an advertising vehicle,
their participation will subsidize in part the creation and expansion of the
information and resources available on the Web which in turn is expected to
stimulate further traffic flow.
Interactive marketing provides direct marketers with the ability to create
electronic databases of customer information. Using this information will
enable direct marketers to develop more effective advertising, make better
decisions about distribution methods and media selection and target customers
more effectively. The dialogue created between the marketer and the consumer
through interactive marketing creates advertising accountability, enabling
marketers to track advertisement interaction, anticipate consumer needs and make
changes immediately. It is expected that across scores of industries, the
relationship between marketers and consumers will soon be direct, and one-to-
one. When that day arrives, marketers will benefit from this newfound ability
to establish deep, intimate relationships with their customers.
PRODUCTS AND SERVICES
Products and services of the Company's majority-owned subsidiaries as of
July 31, 1998 include the following:
Investment and Development
- - - --------------------------
NaviSite Internet Services Corporation
NaviSite provides the high-performance, Internet outsourcing solutions of
Web hosting and server management, ensuring that a customer's Web presence,
database and applications are continuously operational.
In order to save money and receive better performance, security, and
availability, companies are outsourcing their Internet server management.
NaviSite's carrier-class data centers, private transit Internet connectivity
strategy, advanced monitoring tools, backup power and complete data and network
redundancy ensures that customers or end-users are receiving quality performance
and security. NaviSite monitors and supports the network and its customers'
servers around the clock, and provides detailed reports to its customers
regarding performance, availability, and activity related to their Web sites.
NaviSite's SiteHarbor Web hosting and application solutions provide
customers with the benefits of NaviSite's infrastructure as well as service,
expertise, and customization to fit a customer's unique needs. The SiteHarbor
product line consists of SiteHarbor CL, SiteHarbor MC, SiteHarbor EM and
SiteHarbor Application Solutions. SiteHarbor CL, NaviSite's co-location Web
hosting solution, is a customer-managed option for companies who wish to
maintain full responsibility for the monitoring and maintenance of their servers
while utilizing the benefits of NaviSite's infrastructure. SiteHarbor MC is a
managed co-location Web hosting solution. This option allows customers to
maintain a role in their server maintenance, but also receive management support
from NaviSite. SiteHarbor EM provides enhanced server management capabilities
and offers customers the NaviSite support
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and Web server management tailored to the customer's unique needs. SiteHarbor
Application Solutions provide hosting and management solutions for e-commerce,
content management and ad-serving applications.
In addition to the SiteHarbor product line, NaviSite's NaviNet division
focuses on building high quality, cost-effective wholesale dial-up networking
services based on the NaviNet technology platform. NaviNet's product, GeoDial
SP, enables ISPs to rapidly expand into new markets and offer the latest dial-up
technologies to their customers, at a low per-user monthly cost for unlimited
Internet access.
GeoDial SP aggregates multiple calling areas, deploys advanced switch
bypass technology to eliminate busy signals due to port congestion, and relies
on private transit Internet connectivity to bypass congested public peering
points. In addition to building a unique technology solution, NaviNet is
partnering with CLECs, a strategy that enables the offering of data services
with minimal investment. By offering quality, low cost wholesale dial-up
networking services for ISPs, GeoDial SP allows ISPs to focus on end user
acquisition, technical support, and value-added services. ISPs can more easily
grow and retain their subscriber base in an increasingly competitive Internet
service marketplace.
In September, 1998 the Company announced that NaviSite's NaviNet division
would be spun-off as a separate wholly-owned subsidiary of CMG.
NaviSite has data centers in Andover, MA and Scotts Valley, CA and
currently plans to expand its Andover data center in the near future. NaviSite
currently generates revenues primarily from monthly per-server management fees,
installation fees and bandwidth usage charges. In addition to other customers,
NaviSite manages the Internet servers for many of CMG's Internet and interactive
media affiliates, including Planet Direct, Engage, Mother Nature and Parable.
Engage Technologies, Inc. and Accipiter, Inc.
In fiscal 1998, CMG purchased Accipiter, Inc., a developer of online
management solutions. In August, 1998, Engage Technologies, Inc. and Accipiter,
Inc. (together, Engage/Accipiter) were combined, providing customers with
integrated advertising management and profiling solutions. Also, in fiscal
1998, Engage transferred its ListLab division to CMG Direct and additionally,
sold certain rights to its Engage.Fusion(TM) and Engage.Discover(TM) data
warehouse products to Red Brick Systems, Inc. (Red Brick). These products had
been developed to accelerate the design and creation of very large data
warehouses and perform high-end data query and analysis. Certain rights were
retained by the company to sell these products to interactive media markets as
components of its Engage/Accipiter product line. With the sale of the certain
data warehouse product rights and transfer of the ListLab division,
Engage/Accipiter narrowed its focus to the Internet software solutions market.
Engage/Accipiter develops and markets Web advertising and marketing
solutions, enabling customers to anonymously profile and reach online audiences.
The company's Web visitor Precision Profiling technology helps customers
increase the relevance of their Web site's advertising, editorial and commercial
content for both first-time and repeat visitors. Engage/Accipiter delivers both
Web-wide and enterprise-specific profiling of visitor interests and preferences
without tracking their identity. Engage/Accipiter sets a benchmark for privacy
on the Web, allowing Web sites to deliver messages to the targeted audiences,
while protecting individual identity. Engage/Accipiter products include the
recently developed Accipiter AdManager, Accipiter AdBureau,
DecisionSupportServer, ProfileServer and Engage Knowledge Profiles.
Accipiter AdManager is a software solution which operates the delivery of
online advertising campaigns. Accipiter AdBureau offers the database marketing
and advertising features of AdManager software as a comprehensive turnkey
service, providing an alternative to organizations who wish to outsource ad
management, yet maintain control over advertising sales. Accipiter AdManager and
Accipiter AdBureau manage the advertising processes for over 90 leading Web
sites and online ad networks.
The DecisionSupportServer software helps online marketers better understand
their Web audiences through detailed analysis and reports, enabling sites to
conduct profile-based research on individual visitors and convert the multi-
layered data into relevant marketing information. The ProfileServer software is
a one-to-one Internet marketing solution, allowing online marketers to offer
personalized advertising, custom promotions and relevant content to their
customers and prospects. Engage/Accipiter's Precision Profiling technology
allows the profiling of each Web visitor to best match the customer's marketing
needs. The Engage Knowledge Profiles provide corporations with the ability to
subscribe to in-depth anonymous profiles of over 30 million Web users to target
advertising, custom promotions or personalized content.
Planet Direct Corporation
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Planet Direct is a personal Web service that tailors users' online
experience to their interests and local community. Planet Direct integrates
brand name content, over 27,000 enhanced links to popular content, and other
service sites across 15 major interest areas. Planet Direct provides mainstream
consumers with information such as news, sports, weather, stock quotes and other
financial information, as well as phone directories, driving directions and chat
rooms, in a logical and intuitive manner for quick access to personal interests
in a community atmosphere.
Planet Direct's personal Web service is provided to, and co-branded by,
more than 420 ISPs and affinity partners nationwide. These organizations use
Planet Direct's service to enhance their own Internet offerings, giving the
local ISPs, in particular, the resources to compete with the commercial online
services. Planet Direct's service is available free to the ISPs' and affinity
partners' members, and is also directly accessible to all Web users without
disks or downloads. Planet Direct generates revenues from advertising and
commerce on its service, which it shares with its ISP and affinity partners.
Planet Direct offers advertisers a large demographic database of Internet
customers and usage patterns. Combining technology with member supplied
demographics, Planet Direct is a medium advertisers can use to target consumers
with the information on their topics of interest, at the moment they are
exploring that interest.
In September, 1998, Planet Direct announced the integration of InfoMation's
Echo technology into its operations to serve Planet Direct's customers and
business-to-business partners.
InfoMation Publishing Corporation
InfoMation seeks to solve the problem of information overload for
companies, their employees and their partners by providing knowledge management
applications. Further developing the core technology acquired under license
from BBN Corporation, InfoMation's Echo software is a Web-based knowledge
management application for filtering, organizing, and presenting information
from a variety of sources to client individuals. Echo uses standard Web
browsers to retrieve and integrate highly focused information to create
customized intranet, Internet and extranet solutions.
In addition to product solutions, its services also include customer
support and training as well as business partnerships. InfoMation has announced
business partnerships with Financial Times Information, Hewlett-Packard, Lotus
Development Corporation, News Alert, Quote.com, and Telecommunications Reports
International, Inc. (TRI).
ADSmart Corporation
ADSmart designs, develops, markets and supports complete sales and serving
solutions to manage the Internet advertising buying and selling processes.
ADSmart participates in the growth of Internet advertising by providing
comprehensive and automated expert sales representation, sales forecasting,
campaign management and revenue reporting to advertisers and Web publishers.
For advertisers, the ADSmart Network, a leading Internet advertising
network, provides direct access to key affinity audiences on quality sites. The
ADSmart Network allows advertisers to associate their brands with quality
content and build unique sponsorship and co-branding relationships. As of the
end of fiscal 1998, the ADSmart Network represented 32 premium sites organized
around key affinity areas (College, Generation X, Sports, Travel,
Business/Finance and Technology). Selected premium properties represented by
the ADSmart Network included Golf.com, The Mountain Zone, GORP and IUMA.
For Web publishers, ADSmart provides outsourced solutions for advertising
sales representation and ad management services. ADSmart Management Services
provides a turnkey solution for Web publishers to manage the infrastructure and
logistics of running an online advertising business.
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Password Internet Publishing Corporation
The Password is a Web service that packages content, commerce, community
chat and bulletin boards around specific areas of interest. Organized into a
library of over 630 subjects, The Password allows users to read, personalize and
to publish back into the library. For readers, the Password library organizes
the Web around personal interests. For personalizers, the technology allows
consumers to organize their favorite Web content into a single space. For
publishers, The Password is a place where consumers can share their view on the
Web.
The Password's service includes the features of The Password Library, My
Own Password and Password Publishing. The Password Library features magazines
organizing the Web content on a given subject. Editors select Web sites and then
define instructions for the filtering engine to ensure that pertinent, up-to-
date information is retrieved. In addition, a special interest bulletin board
allows users to access information on their special interest community. My Own
Password allows consumers to collect information in a personalized magazine.
Users can specifically build and define a single, personal gateway on the most
up-to-date information on their interests, reducing the need for extensive Web
surfing. Password Publishing allows users the tools to post their magazine on a
personal Web site, distribute the URL via e-mail or include the magazine in The
Password Library.
The Password uses the core Echo technology developed by CMG subsidiary,
InfoMation, and is complimentary to a traditional advertising strategy - namely
the desire of advertisers to speak directly to special interest groups which
they already know to be appropriate to their products. The Password offers a
wide range of advertising, sponsorship and co-marketing opportunities for
advertisers to enrich their relationship with consumers and affinity groups.
The company launched its Web site in February 1998. The Password service is
free to its users, with over 150,000 visitors and over 500,000 page views a
month as of October, 1998. The company seeks to generate revenues from
advertising, sponsorships and commerce. The company also syndicates its content
to other highly-visited Web sites.
Vicinity Corporation
Vicinity is a provider of integrated, e-retail solutions that help
corporations tap into the power of the Internet, to bring Web shoppers to real-
world store locations. Vicinity offers a practical, private-labeled solution
that allows customers to find store locations and products quickly and
conveniently using the Web. Vicinity is located in Palo Alto and San Francisco,
California as well as Lebanon, New Hampshire.
For businesses, Vicinity develops and markets its corporate locator
technology, content and services in four major product lines: Business Finder
4.0, Business Directory, Maps, and Driving Directions. Vicinity's content and
services are delivered to Web users from Vicinity's servers, but appear to
originate on the customers' Web sites under their own brand, look and feel. For
consumer Web audiences, Vicinity offers a free consumer Web site called
MapBlast!
Business Finder 4.0 provides businesses, particularly those with retail
stores, dealerships or franchises with an effective Web-based locator solution
to integrate into their sites to provide proximity and multi-attribute proximity
search capabilities. With the exact address of each of the customer's
locations, Business Finder 4.0 enhances the corporate Web site by allowing
consumers to search for the retail outlet, branch or service provider according
to their specifications (i.e., proximity, keyword, attribute or other). Upon
finding the exact location they are looking for, the consumer can then generate
maps and/or driving directions to get them there.
Business Directory provides up to 16 million U.S. business listings.
Business Directory can be implemented by companies in whole or in part as a
national Yellow Pages application or as a subject or geographically-specific
directory of businesses, events or points of interest.
Vicinity Maps are interactive, high-quality, road-level detailed electronic
maps that customers can incorporate into their Web sites to provide users with
vivid, interactive maps of specific business facilities, landmarks and other
locations of interest. Customer locations can also be plotted on maps with a
logo or other symbol. The U.S. street level maps cover more than 130 major
metropolitan areas. Street-level maps are also available for Canada. Driving
Directions provide point-to-point, turn-by-turn directions to destinations in
metropolitan areas throughout the U.S. and Canada.
MapBlast! enables users to generate interactive maps of residence or
business locations, embed them in home pages and fax or e-mail them to friends
and associates.
Blaxxun Interactive, Inc.
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Blaxxun provides software infrastructure for 3-D online communities.
Employing client/server architectures and distributed database technology,
Blaxxun creates a 3-D environment infrastructure that allows individuals to
meet, work, and play on the Web. Blaxxun is located in San Francisco,
California and Munich, Germany.
Blaxxun uses open standards as a key element necessary for the rapid
adoption of cyberspace technology. Virtual Reality Modeling Language, or VRML,
a counterpart to HTML, enables the construction of virtual worlds. Like HTML,
VRML is an open standard architecture that specifies formats and protocols for
all aspects of virtual worlds including 3-D geometry, sound, video, interactive
behavior, and avatars. Blaxxun's products, which include the Blaxxun Community
Server, Community Client software and Developer packages, are VRML-compliant.
The Blaxxun Community Server, a high-performance, multi-user server allows
companies to incorporate interaction into their Web sites, creating user
communities for business, education and entertainment. Key features include
member and place management, avatar and bot support, shared objects and various
types of chat.
In addition, the Blaxxun Community Clients and several Community Developer
software packages, allow integration of community technology with existing
servers and databases. As a Community Client, users are able to access servers
and interact with other users in the virtual 3-D environment. Community
Developer software allows users to create their own customized 3-D virtual
worlds.
Resellers build customer applications using Blaxxun's technology platform
which range from online trade shows to shopping malls, customer support to
entertainment, product promotion to corporate meetings.
Fulfillment Services
- - - --------------------
SalesLink Corporation
SalesLink, along with its subsidiary, Pacific Link, provides product and
literature fulfillment, inventory and data warehouse management, turnkey
outsourcing, sales lead/inquiry management, closed-loop telemarketing,
customized software solutions and value added services for the client's
marketing or manufacturing programs, primarily to high technology,
biotechnology, financial services, and health-care markets. SalesLink's
largest customer is Cisco Systems, Inc. (Cisco), which accounted for 64% and 47%
of SalesLink's fiscal year 1998 and 1997 revenues, respectively.
Product and Literature Fulfillment. On behalf of its fulfillment clients,
SalesLink receives orders for promotional literature and products and "fulfills"
them by assembling and shipping the items requested. Product and literature
fulfillment services begin with the receipt of orders by SalesLink's inbound
telemarketing staff via phone or electronic transmission directly into
SalesLink's computers. Orders are then generated and presented to the
production floor where fulfillment packages are assembled and shipped to either
the end-user or to a broker or distributor.
Inventory and Data Warehouse Management. As adjunct services to
fulfillment, SalesLink provides product and literature inventory control and
warehousing, offering its customer support and management reports detailing
orders, shipments, billings, back orders and returns.
Turnkey Outsourcing. SalesLink's major products include supply-based
management programs. Also known as "turnkey," these programs are a form of
outsourced manufacturing, in which clients retain SalesLink to purchase
components and manufacture customer bills of materials into products that are
either shipped to customers, channels of distribution, or to the customer's
factory for final manufacturing. These outsourced manufacturing services
primarily assist companies in the areas of accessory kits, software, literature
and promotional products.
Sales Lead/Inquiry Management. SalesLink provides prospects with
information about a product or service that one of SalesLink's clients is
marketing. In response, SalesLink receives sales inquiries and maintains
central customer databases of the names and addresses of each person inquiring
about the product. SalesLink's clients use the databases for market research,
sales follow-up and management reports. Depending on the criteria supplied by
the client, SalesLink eliminates non-productive leads, distributes sales
inquiries to the client's sales force and ships fulfillment packages containing
the client's literature or products. After the disposition of the inquiry,
SalesLink is able to produce reports allowing the client to evaluate the
effectiveness of the marketing program which generated the inquiry and evaluate
the performance of the client's sales force in handling the inquiry.
Telemarketing. SalesLink's telemarketing group offers comprehensive
inbound business-to-business telemarketing services to support its sales inquiry
management and order processing activities. Telemarketing services include lead
qualification, order
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processing fulfillment and marketing analysis. SalesLink also offers outbound
business telemarketing services that are tailored to an individual client's
needs. Outbound telemarketing programs can be used to update a client's existing
database, survey possible markets or pre-qualify sales leads.
Customized Software Solutions. SalesLink's proprietary information
management system, SL FlagShip, allows customers to better understand their
sales and product ordering information. Stored at SalesLink and/or available
on customers' file servers and PCs, the information is used by customers to
evaluate inventory, market campaigns, and distribution channel success. SL
FlagShip can solve geomarketing, budget, sales, and media problems through
campaign analysis, market demographics, sales lead and territory management,
source code analysis, market research and surveys.
InSolutions, Inc.
InSolutions was acquired by CMG in fiscal 1998 as an addition to its
fulfillment services product line. InSolutions is an integrated software
manufacturer providing comprehensive turnkey solutions for clients in the high
technology industry. InSolutions' services include:
. CD-ROM, DVD and diskette replication
. Product packaging and assembly
. Fulfillment
. Print management
. Electronic order processing and software distribution
. Inventory management
. Online operations including remote access to inventory, work-in-progress,
order status and package tracking.
On-Demand Solutions, Inc.
On-Demand Solutions was also acquired by CMG in fiscal 1998 as an addition
to its fulfillment services product line. On-Demand Solutions provides online
operations logistics solutions, offering outsourced program management that
support all aspects of the "Web to Warehouse to Customer" process, and markets
support programs for the high-tech, scholastic and sports industries. On-
Demand Solutions online operations provide service and support in the following
e-business value chain areas:
. Remote access to bills of material, "see through" inventory, work-in-
progress, order status and online package tracking.
. Online inventory supply and e-mail order confirmation
. Complete turnkey product and software manufacturing and/or assembly services
. Real-time order processing and product fulfillment
. Secure online shopping and payment functionality
. Web site design, hosting and maintenance
. Marketing capabilities including campaign support, online survey/registration
data capture for customer profiling, marketing collateral manufacturing &
fulfillment to prospective clients and customer contact strategies
List and Database Services
- - - --------------------------
CMG Direct Corporation (CMG Direct)
CMG Direct offers solutions for integrating traditional direct marketing
and Internet marketing. With extensive experience in direct marketing,
sophisticated database management, analysis and targeted mailing lists, CMG
Direct now provides clients with a range of direct and Internet marketing
services.
CMG Direct's principle products are mailing lists derived from its
databases and sold primarily to publishers. CMG Direct has three primary
mailing list databases, the College List database, the InfoBuyers List database
and the K-12 List database. The databases are highly segmented, permitting CMG
Direct to use its application software to extract specifically defined lists of
potential customers who are most likely to purchase products advertised by CMG
Direct's clients. CMG Direct is continually working to expand the size and
comprehensiveness of its database offerings based on the needs of its clients
and the availability of new lists.
The College List Database. The College List database includes
approximately 812,000 names and addresses of professors and college
administrators, university deans, faculty and librarians at every college,
university and junior college in North America.
8
CMG Direct classifies each course taught, and the faculty teaching it, into over
4,000 subject codes, which permits CMG Direct to identify all faculty teaching
any particular course or subject and create lists identifying the faculty so
they can be targeted. The College List is compiled by CMG Direct from course
schedules and other source documents published by colleges and universities and
is updated continually for new semester information.
The InfoBuyers List Database. The InfoBuyers List includes over 14 million
names and addresses of direct mail purchasers of books, journals and magazines,
as well as other pertinent information. The InfoBuyers List is assembled from
over 120 proprietary lists of over 100 publishers and other organizations.
Combining these separate customer lists into a single database permits CMG
Direct to offer its clients a larger group of potential customers across a
broader range of target categories than could be obtained from any single list.
The database is also valuable because it is limited primarily to those consumers
who have actually purchased through mail order and are therefore thought to be
more likely to do so in the future. The InfoBuyers List is segmented under the
same 4,000 subject codes as the College List, plus additional consumer oriented
segmentation.
The Kindergarten through Grade Twelve List Database (K-12 List). The K-12
List database consists of 5.8 million names including teachers, administrators
and book buying families with K-12 children in the U.S. This list also includes
the names of approximately 112,780 public and private schools and approximately
15,300 public school district offices. The K-12 List is segmented into over 30
public school district demographic categories and is used by publishers of
textbooks, supplemental educational materials and magazines and school supply
distributors, among others. The K-12 List is compiled from federal, state and
local government files and the names of school administrators and staff are
developed through state directories, mailings, telephone surveys and the
Internet.
List Management and Brokerage. CMG Direct provides list management and
list brokerage services to businesses that use direct marketing to promote their
products. As a list manager, CMG Direct acts as the exclusive marketing agent
for the postal mailing lists or e-mail lists of its list management clients. In
conjunction with performing list management services, CMG Direct also provides
list brokerage. This service allows CMG Direct to be a single source for
virtually any brokered list requested by a customer and provides opportunity to
generate additional sales of CMG Direct's other products.
Database Management and List Processing Services. CMG Direct's database
management and list processing services provide database analysis, design,
software development, testing, debugging, and maintenance for clients that want
to build a customer database. These services include processing customer data,
segmenting the processed information to provide the level of detail and
selectivity desired, storing the information, and updating it to make it readily
accessible for the client's promotional, analytical and list rental activities.
Lists may be combined and enhanced with additional demographic information and
other lists to form databases which can be used as the basis of additional
client promotions or marketed to other list users. In combining lists, CMG
Direct will offer merge/purge services to eliminate duplicate names. CMG Direct
also offers private database management as a service for large volume mailers
who mail to the same target lists regularly. A private database is a targeted
collection of mailing lists that is used repeatedly by a restricted group of
mailers.
CMGExpress.net(TM). CMGExpress.net(TM) is the Internet expansion
initiative of CMG Direct Corporation. CMGExpress.net leverages CMG Direct's
core competencies through its ExpressList(TM) and PermissionPlus(TM) services.
ExpressList is an opt-in e-mail list service which allows marketers to purchase
e-mail lists online by segments. CMG Direct's list sources are leading Web
sites including InfoBeat, Yoyodyne and Roxy.com. CMG Direct's newest service,
PermissionPlus(TM), is a Web site solution that enables companies to survey
their customers online. It then gives the company the permission and also
ability to e-mail market to their customers. This service is intended to allow
clients to convert passive Web site visitors into buying customers.
BUSINESS STRATEGY
Each CMG business unit's mission is to become the predominant services
provider within its respective market niche. The critical success factors are:
understanding, developing and applying information technology to the Internet,
interactive media markets, and data access and software tools; narrowing market
focus while consummating strategic alliances to complement product and service
offerings; investing in strategic Internet or interactive media investments or
acquisitions and, most importantly, a continued understanding of customers'
needs.
With respect to the businesses of CMG, the Company will seek to expand its
participation in the direct marketing products and services, Internet,
interactive media industries, and increase market share. Key elements of this
strategy include:
Continue to enhance and expand the Company's products and services. The
Company has invested significant resources in new subsidiaries or investments
which seek to capitalize on opportunities surrounding the growth of the Internet
and the interactive marketing industry. The Company intends to continue to
pursue the growth and development of its technologies and services and continue
to introduce its products commercially. Additionally, the Company intends to
continue to evaluate new opportunities to
9
further its investment in its direct marketing strategy and also to seek out
opportunities to realize significant shareholder value through the sale of
selected investments or technologies or having separate subsidiaries sell a
minority interest to outsiders.
Pursue innovative advertising solutions. The Company is actively seeking to
develop innovative ways for advertisers to reach their target audiences through
the Internet effectively. The Company designs and offers customized packages
which include the ability to change advertisements quickly and frequently, to
conduct advertising test campaigns with rapid result delivery and to track daily
usage statistics. The Company has developed and will continue developing
software that provides the ability to target ads based on demographics and usage
patterns.
Actively seek growth in the Company's fulfillment services segment. CMG
intends to continue to pursue the strategy of growing its fulfillment services
segment through gaining market share in its existing markets, through
acquisition, and through developing new IT based products and services for its
client base. During fiscal 1998, CMG built on its national fulfillment and
turnkey businesses with the acquisitions of InSolutions, a turnkey provider with
diskette and CD ROM manufacturing capabilities; and On-Demand Solutions, a
provider of fulfillment, turnkey and Web-based catalogue and sports e-commerce
services. These two new companies are being integrated with SalesLink's
national turnkey and fulfillment operations, while creating an e-commerce
fulfillment component that will seek to broaden the Company's market potential
in the fast-growing Internet fulfillment industry.
Augment database offerings. The Company has expended significant resources
to develop the most comprehensive and accurate databases of their kind available
to publishers. The Company believes that its College List database is the
dominant list of its kind and that the InfoBuyers List database is the only list
of its kind, complemented by the K-12 List database, which is positioned to be
cross sold to gain market share. The Company intends to maintain or improve its
market position by expanding the number, size, nature, comprehensiveness and
segmentation of its database offerings. The Company also intends to leverage its
traditional direct marketing competencies through its CMGExpress.net(TM)
Internet expansion initiative.
Cross-sell products and services. The Company is involved in many aspects
of the direct marketing sales cycle. The Company has experienced success in
fostering the cross-selling of products and services among the businesses and
its portfolio, and will increasingly continue to pursue such cross-selling.
SALES AND MARKETING
The Company markets its products and services through a marketing staff
using both telemarketing and direct sales. The Company maintains separate
marketing staffs for each product and service area, enabling the marketing
personnel to develop strong customer relationships and expertise in their
respective areas. The Company has established direct sales forces experienced in
the advertising business to address the new and evolving requirements of the
Internet advertising market. The Company believes that an experienced sales
staff is critical to initiating and maintaining relationships with advertisers
and advertising agencies and therefore has hired a significant portion of its
Internet advertising sales force from the advertising industry. The Company
advertises its products and services through direct mail, space advertising,
Internet banners, directory listings, trade shows and Company sponsored user
groups. In addition, in certain instances, the Company, has complemented the
activities of its direct sales force by retaining advertising sales agencies, to
serve as a sales representatives on a commission basis.
The Company attends numerous trade shows in the Internet, high technology,
direct marketing, mutual fund, book, and library markets, while further
supplementing its sales efforts with space advertising and product and services
listings in appropriate directories. In addition, the Company sponsors user
group meetings for its mutual fund clients and major list participants in the
InfoBuyers List database, where new products and services are highlighted.
The Company also conducts numerous mailings of list catalogs, flyers,
newsletters and other product information throughout the year to primarily book,
magazine, journal, newsletter and software publishers and resellers, seminar
companies, professional associations, business supply catalogers, consumer
electronic, high technology and financial service organizations.
10
COMPETITION
CMG's Internet investments compete in the electronic technology and
Internet service arenas which are comprised of numerous small and large
companies providing different new technologies, all with varying applications.
The market for Internet products and services is highly competitive. In
addition, the Company expects the market for Internet advertising, to the extent
it further develops, to be intensely competitive. Although the Company believes
that the diverse segments of the Internet market will provide opportunities for
more than one supplier of products and services similar to those of the Company,
it is possible that a single supplier may dominate one or more market segments.
The Company believes the principal competitive factors in this market are name
recognition, performance, ease of use, variety of value-added services,
functionality and features and quality of support. CMG's products and services
are being developed predominantly for direct marketing applications, on the
Internet or through interactive media. Competitors would include a wide variety
of companies and organizations, including Internet software, content, service
and technology companies, telecommunication companies, cable companies and
equipment/technology suppliers. In the future, the Company may encounter
competition from providers of Web browser software and other Internet products
and services that incorporate competing features into their offerings. Many of
the Company's existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical and marketing
resources than the Company.
The Company may also be affected by competition from licensees of its
products and technology. There can be no assurance that the Company's
competitors will not develop Internet products and services that are superior to
those of the Company or that achieve greater market acceptance than the
Company's offerings. Moreover, a number of the Company's current advertising
customers, licensees and partners have also established relationships with
certain of the Company's competitors and future advertising customers, licensees
and partners may establish similar relationships. The Company may also compete
with online services and other Web site operators as well as traditional off-
line media such as print and television for a share of advertisers' total
advertising budgets. There can be no assurance that the Company will be able to
compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's business,
results of operations and financial condition.
CMG's fulfillment services segment companies have several prominent
competitors for the mutual fund literature fulfillment and turnkey manufacturing
components of its businesses, and also compete with the internal fulfillment and
manufacturing operations of manufacturing and mutual fund companies themselves.
The companies in this segment also compete on the basis of pricing, geographic
proximity to their clients and the speed and accuracy with which orders are
processed. There are also many businesses that compete with SalesLink's,
InSolutions' and On-Demand Solutions' other services.
CMG Direct competes on the basis of the accuracy, size, and
comprehensiveness of its principal databases: the College List and the
InfoBuyers List. The Company believes that the College List is the dominant
database of its kind and has only one competitor, while the K-12 List is a
relatively new product offering that will compete with the same competitor as
the College List. The Company believes that the InfoBuyers List is also the
dominant list of its kind. CMG Direct's database management and list processing
services compete with numerous other service bureaus and compete on the basis of
their effectiveness in processing customer and prospect list databases for
publishers.
RESEARCH AND DEVELOPMENT
The Company develops and markets a variety of Internet related products and
services, as well as a number of database software technologies. These
industries are characterized by rapid technological development. The Company
believes that its future success will depend in large part on its ability to
continue to enhance its existing products and services and to develop other
products and services which complement existing ones. In order to respond to
rapidly changing competitive and technological conditions, the Company expects
to continue to incur significant research and development expenses during the
initial development phase of new products and services as well as on an on-going
basis.
During fiscal years 1998, 1997 and 1996, the Company expended $19,709,000,
$25,058,000 and $6,971,000, respectively, or 21.5%, 35.5% and 24.5%,
respectively, of net revenues, on research and development. In addition, during
fiscal years 1998, 1997 and 1996, the Company recognized $19,135,000, $1,312,000
and $2,691,000, respectively, of in-process research and development expenses in
connection with acquisitions of subsidiaries and investments in affiliates.
11
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its software technologies, databases and database
management software as proprietary. CMG's lists are sold under terms and
conditions which permit the Company's clients to use the list for a single
mailing only and prohibit the further use or resale of the lists or the names
included therein. The Company depends on trade secrets for protection of its
software. It has entered into confidentiality agreements with its management
and key employees with respect to this software, and limits access to, and
distribution of this, and other proprietary information.
EMPLOYEES
As of July 31, 1998, the Company employed a total of 1,024 persons on a
full-time basis. In addition, depending on client demand, the Company utilizes
manpower agencies to contract between 75 and 200 persons on a temporary, part-
time basis. None of the Company's employees are represented by a labor union.
The Company believes that its relations with its employees are good.
SEGMENT INFORMATION
Segment information is set forth in Note 3 of the Notes to Consolidated
Financial Statements referred to in Item 8(a) below and incorporated herein by
reference.
SIGNIFICANT CUSTOMERS
Significant customers information is set forth in Note 2(r) of the Notes to
Consolidated Financial Statements referred to in Item 8(a) below and
incorporated herein by reference.
ITEM 2. - PROPERTIES
FACILITIES
The location and general character of the Company's principal properties by
industry segment as of July 31, 1998 are as follows:
Lists and Database Services and Corporate Headquarters
- - - ------------------------------------------------------
The Company leases approximately 34,000 square feet of administrative,
engineering, sales and operations space in Wilmington, Massachusetts, under a
lease which expires in 2000. The Company subleases 14,000 square feet of this
facility to an outside party.
The Company also leases approximately 84,000 square feet of space in
Andover, Massachusetts, under a lease which expires in 2002. This facility
consists of executive office space for the Company's corporate headquarters, as
well as administrative, engineering, sales and operations space for certain
investment and development segment subsidiaries.
Fulfillment Services
- - - --------------------
The Company's east coast operations are conducted from an approximately
245,000 square foot leased facility in Boston, Massachusetts. The lease for
this facility expires in 1998. The Company has recently leased a 155,000
square foot facility in Charlestown, Massachusetts, under an arrangement
expiring in 2013. The Company plans to occupy the Charlestown space upon
expiration of the Boston lease. Additionally, the Company leases 49,000 square
feet in Wilmington, Massachusetts, under lease arrangements that expire through
2003.
The Company's west coast operations are conducted from leased facilities
totaling approximately 325,000 and 100,000 square feet in Newark and Santa
Clara, California, respectively. The leases for these facilities expire through
2012. Of the Newark, California facility, 39,000 square feet is subleased to an
outside party.
Additionally, the Company leases an approximately 51,000 square foot
operating facility in Bedford Park, Illinois under a lease which expires in
1999.
12
Investment and Development
- - - --------------------------
The Company leases the following significant facilities in the investment
and development segment:
- - - - 22,000 square feet in Andover, Massachusetts, under a lease that expires in
2007.
- - - - 14,000 square feet in Scotts Valley, California, under a lease that expires
in 2002.
- - - - 12,000 square feet in Raleigh, North Carolina, under agreements that expire
through 2001.
- - - - 9,500 square feet in Burlington, Massachusetts, under a lease that expires in
2000.
- - - - 7,600 square feet in Palo Alto, California, under a lease that expires in
2000.
The facilities in this segment primarily consist of engineering, sales,
operations and administrative offices.
This industry segment also shares a portion of the Company's Andover,
Massachusetts facility described in the Corporate Headquarters section above.
ITEM 3. - LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market information is set forth in Note 18 of the Notes to
Consolidated Financial Statements referred to in Item 8(a) below and
incorporated herein by reference.
(b) On October 20, 1998, there were 374 holders of record of common stock.
(c) The Company has never paid cash dividends on its common stock, and the
Company has no intention to pay cash dividends in the forseeable future.
(d) On June 16, 1998, the Company issued 185,331 shares of its common
stock to shareholders of InSolutions in consideration for the acquisition of all
of the issued and outstanding shares of capital stock of InSolutions. The shares
issued by the Company are not registered under the Securities Act of 1933, as
amended, and carry restrictions on transfer or sale for a period of one year.
On June 16, 1998, the Company issued 125,071 shares of its common
stock to shareholders of On-Demand Solutions in consideration for the
acquisition of all of the issued and outstanding shares of capital stock of On-
Demand Solutions. The shares issued by the Company are not registered under the
Securities Act of 1933, as amended, and carry restrictions on transfer or sale
for a period of two years.
The shares issued in the above mentioned transactions were issued in
private placements in reliance upon the exemption provided by section 4 (2) of
the Securities Act of 1933.
13
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth in the 1998 Annual Report to Shareholders is
incorporated herein by reference and is filed herewith as Exhibit 13.1.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth in the 1998 Annual Report to Shareholders,
referred to in Item 8(a) below, is incorporated herein by reference and is filed
herewith as Exhibit 13.2.
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and notes payable,
approximate fair value because of the short maturity of these instruments. The
carrying value of long-term debt approximates its fair value, as estimated by
using discounted future cash flows based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in interest rates on its borrowing
arrangements. The Company does not enter into derivative financial instruments
for trading purposes. As a matter of policy all derivative positions are used
to reduce risk by hedging underlying economic exposure. The derivatives the
Company uses are straightforward instruments with liquid markets. At July 31,
the Company was primarily exposed to the London Interbank Offered Rate (LIBOR)
interest rate on the outstanding borrowings under its line of credit and other
bank borrowing arrangements. Information about the Company's borrowing
arrangements including principal amounts and related interest rates appears in
Note 12 to the Consolidated Financial Statements included herein.
The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may
dramatically increase. Therefore, in the future, the Company may consider
utilizing derivative instruments to mitigate such risks.
ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following consolidated financial statements of the Company and
independent auditors' report set forth in the 1998 Annual Report to Shareholders
are incorporated herein by reference and are filed herewith as Exhibit 13.3:
- Consolidated Balance Sheets as of July 31, 1998 and 1997
- Consolidated Statements of Operations for the three years ended July
31, 1998
- Consolidated Statements of Stockholders' Equity for the three years
ended July 31, 1998
- Consolidated Statements of Cash Flows for the three years ended July
31, 1998
- Notes to Consolidated Financial Statements
- Independent Auditors' Report
(b) Selected Quarterly Financial Data (unaudited) is set forth in Note 18
of the Notes to Consolidated Financial Statements referred to in Item 8 (a)
above and incorporated herein by reference.
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Proposal 1--Election of Directors," "Additional
Information," and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. - EXECUTIVE COMPENSATION
Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Executive Compensation,"
and "Additional Information Compensation of Directors."
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Security Ownership by Management and Principal
Stockholders."
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Certain Relationships and Related Transactions."
PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Financial Statements, Financial Statement Schedule, and Exhibits
1. Financial Statements. The financial statements as set forth under
Item 8 of this report on Form 10-K are incorporated herein by
reference. The following financial statements of Lycos, Inc. as
required by Regulation S-X, Rule 3-09 are filed herewith as
Exhibit 99.1:
--Consolidated Balance Sheets as of July 31, 1998 and 1997
--Consolidated Statements of Operations for the three years
ended July 31, 1998
--Consolidated Statements of Stockholders' Equity for the
three years ended July 31, 1998
--Consolidated Statements of Cash Flows for the three years
ended July 31, 1998
--Notes to Consolidated Financial Statements
--Independent Auditors' Report
2. Financial Statement Schedule. Financial Statement Schedule II of
the Company and the corresponding Report of Independent Auditors
on Financial Statement Schedule are included in this report.
All other financial statement schedules have been omitted since
they are either not required, not applicable, or the information
is otherwise included.
3. Exhibits. The following Exhibits are required to be filed with
this Report by Item 14 and are incorporated by reference to the
source cited in the Exhibit Index below or are filed herewith.
15
EXHIBIT INDEX
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
3 (i)(1) Amendment to the Restated Certificate of Incorporated by reference to Exhibit 3 (i) (1) to the
Incorporation. Registrant's quarterly report on Form 10-Q for the quarter
ended April 30, 1996
3 (i) (2) Restated Certificate of Incorporation. Incorporated by reference from Registration Statement on Form
S-1, as amended, filed on November 10, 1993 (Registration No.
33-71518)
3 (ii) Restated By-Laws. Incorporated by reference from Registration Statement on Form
S-1, as amended, filed on November 10, 1993 (Registration No.
33-71518)
4 Specimen Stock Certificate representing the Incorporated by reference from Registration Statement on Form
Common Stock. S-1, as amended, filed on November 10, 1993 (Registration No.
33-71518).
10.01 Form of Indemnification Agreement executed Filed herewith.
between the Company and each of the members of
its Board of Directors (David S. Wetherell,
William H. Berkman, Craig D. Goldman, John A.
McMullen and Robert J. Ranalli) in June 1998.
10.02 Lease, dated November 21, 1991, Between the Incorporated by reference from Registration Statement on Form
Registrant and Ballardvale Park Associates II S-1, as amended, filed on November 10, 1993 (Registration No.
Limited Partnership. 33-71518).
10.03 Lease Agreement, dated September 2, 1992, between Incorporated by reference from Registration Statement on Form
SalesLink Corporation, the subsidiary of the S-1, as amended, filed on November 10, 1993 (Registration No.
Registrant, and American National Bank & Trust 33-71518).
Company of Chicago as Trustee under Trust No.
1001971-01.
10.04 Amendment to Lease, dated May 10, 1992, between Incorporated by reference from Registration Statement on Form
SalesLink Corporation, the subsidiary of the S-1, as amended, filed on November 10, 1993 (Registration No.
Registrant, and Drydock Associates Limited 33-71518).
Partnership.
10.05* Employment Agreement, dated August 1, 1993, Incorporated by reference from Registration Statement on Form
between the Registrant and David S. Wetherell. S-1, as amended, filed on November 10, 1993 (Registration No.
33-71518).
10.06 Fulfillment and Inventory Management Agreement Incorporated by reference from Registration Statement on Form
between SalesLink Corporation, the subsidiary of S-1, as amended, filed on November 10, 1993 (Registration No.
the Registrant, and MFS Financial Services, Inc. 33-71518).
10.07 Fulfillment and Mailing Agreement, dated January Incorporated by reference from Registration Statement on Form
1, 1993, between SalesLink Corporation, the S-1, as amended, filed on November 10, 1993 (Registration No.
subsidiary of the Registrant and Kemper Financial 33-71518).
Services, Inc.
16
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
10.08 Agreement, dated January 15, 1991, between Incorporated by reference from Registration Statement on Form
ListLab, a division of the Registrant, and S-1, as amended, filed on November 10, 1993 (Registration No.
Prentice-Hall, Business and Professional 33-71518).
Publishing Division.
10.09 Account Indebtedness Letter Agreement, dated as Incorporated by reference from Registration Statement on Form
of November 9, 1993, between the Registrant and S-1, as amended, filed on November 10, 1993 (Registration No.
David S. Wetherell. 33-71518).
10.10 Amendment to Account Indebtedness Letter Incorporated by reference from Registration Statement on Form
Agreement, dated as of January 10, 1994, between S-1, as amended, filed on November 10, 1993 (Registration No.
the Registrant and David S. Wetherell. 33-71518).
10.11* Amendment No. 1 to the Employment Agreement, Incorporated by reference from Registration Statement on Form
dated January 20, 1994, between the Registrant S-1, as amended, filed on November 10, 1993 (Registration No.
and David S. Wetherell. 33-71518).
10.12 Amendment No. 2 to Account Indebtedness Letter Incorporated by reference from Registration Statement on Form
Agreement, dated January 25, 1994 between the S-1, as amended, filed on November 10, 1993 (Registration No.
Registrant and David S. Wetherell. 33-71518).
10.13 Extension Agreement dated August 4, 1995 to Incorporated by reference to Exhibit 10.24 to the Registrant's
Fulfillment and Mailing Agreement dated January annual report on Form 10-K for the year ended July 31, 1995 .
1, 1993, between SalesLink Corporation and Kemper
Financial Services, Inc.
10.14 Fulfillment Master Purchase Agreement dated March Incorporated by reference to Exhibit 10.25 to the Registrant's
28, 1994, between SalesLink Corporation and annual report on Form 10-K for the year ended July 31, 1995.
Fidelity Investments Institutional Service
Company, Inc.
10.15 Literature Fulfillment Agreement dated August 1, Incorporated by reference to Exhibit 10.26 to the Registrant's
1995, between SalesLink Corporation and Vista annual report on Form 10-K for the year ended July 31, 1995.
Capital Management.
10.16 License Agreement dated June 16, 1995, as Incorporated by reference to Exhibit 10.27 to the Registrant's
amended, between the Registrant, CMG@Ventures, annual report on Form 10-K for the year ended July 31, 1995.
L.P., Carnegie Mellon University, and Lycos, Inc.
10.17 Agreement and Plan of Reorganization dated as of Incorporated by reference from report on Form 8-K as filed
November 8, 1994, as amended, among the with the Commission 01/01/95 (File No. 0-22846).
Registrant, BookLink Technologies, Inc., America
Online, Inc. and BLT Acquisition Corporation.
10.18* 1995 Employee Stock Purchase Plan, as amended. Incorporated by reference to Exhibit 10.1 to the Registrant's
quarterly report on Form 10-Q for the quarter ended October
31, 1997.
10.19* 1986 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.2 to the Registrant's
quarterly report on Form 10-Q for the quarter ended October
31, 1997.
17
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
10.20 Master Agreement dated as of February 13, 1996 Incorporated by reference to Exhibit 10.33 to the Registrant's
between BBN Corporation and the Registrant. quarterly report on Form 10-Q for the quarter ended January
31, 1996.
10.21* 1995 Stock Option Plan for Non-Employee Incorporated by reference to Exhibit 10.3 to the Registrant's
Directors, as amended. quarterly report on Form 10-Q for the quarter ended October
31, 1997.
10.22 Amendments dated February 9, 1996 and March 4, Incorporated by reference to Exhibit 10.35 to the Registrant's
1996 to License Agreement dated June 16, 1995, quarterly report on Form 10-Q for the quarter ended January
between the Registrant, CMG@Ventures L.P., 31, 1996.
Carnegie Mellon University and Lycos, Inc.
10.23 Sublease, dated September 26, 1996 between the Incorporated by reference to Exhibit 10.1 to the Registrant's
Registrant and FTP Software, Inc. quarterly report on Form 10-Q for the quarter ended October
31, 1996.
10.24* Amendment No. 2 to Employment Agreement, dated Incorporated by reference to Exhibit 10.2 to the Registrant's
October 25, 1996, between the Registrant and quarterly report on Form 10-Q for the quarter ended October
David S. Wetherell. 31, 1996.
10.25 Supplement #1 to Sublease, dated September 26, Incorporated by reference to Exhibit 10.1 to the Registrant's
1996 between the Registrant and FTP Software, Inc. quarterly report or Form 10-Q for the quarter ended January
31, 1997.
10.26 CMG Stock Purchase Agreement, dated as of Incorporated by reference to Exhibit 99.1 to the Registrant's
December 10, 1996 by and between the Registrant current report on Form 8-K dated January 31, 1997, filed on
and Microsoft Corporation. February 14, 1997.
10.27* CMG @Ventures, Inc. Deferred Compensation Plan. Incorporated by reference to Exhibit 10.1 to the Registrant's
quarterly report on Form 10-Q for the quarter ended April 30,
1997.
10.28 Stock Purchase Agreement dated as of October 24, Incorporated by reference to Exhibit 2 to the Registrant's
1996, among SalesLink Corporation, CMG report on Form 8-K as filed with the commission 10/24/96 (File
Information Services, Inc., Pacific Direct No. 0-022846).
Marketing Corp., d/b/a Pacific Link and all the
stockholders of Pacific Link.
10.29 Warrant Purchase Agreement by and among SalesLink Incorporated by reference to Exhibit 10.37 to the Registrant's
Corporation and BankBoston, N.A., dated as of annual report on Form 10-K for the year ended July 31, 1997.
October 24, 1996.
10.30 Common Stock Purchase Warrant issued by SalesLink Incorporated by reference to Exhibit 10.38 to the Registrant's
Corporation to BankBoston, N.A., dated as of annual report on Form 10-K for the year ended July 31, 1997.
October 24, 1996.
10.31 Revolving Credit Agreement, dated May 14, 1997, Incorporated by reference to Exhibit 10.49 to the Registrant's
between the Registrant and BankBoston, N.A. annual report on Form 10-K for the year ended July 31, 1997.
10.32 Revolving Credit Note, dated May 14, 1997, Incorporated by reference to Exhibit 10.50 to the Registrant's
between the Registrant and BankBoston, NA. annual report on Form 10-K for the year ended July 31, 1997.
18
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
10.33 First Amendment, dated as of May 26, 1998, to Filed herewith.
Revolving Credit Agreement, dated May 14, 1997 by
and among CMG Information Services, Inc. and
BankBoston, N.A. and the other lending
institutions listed on Schedule 1 to the Credit
Agreement.
10.34 Second Amendment, dated as of April 9, 1998, to Filed herewith.
Revolving Credit Agreement, dated May 14, 1997,
by and among CMG Information Services, Inc. and
BankBoston, N.A. and the other lending
institutions listed on Schedule 1 to the Credit
Agreement.
10.35 Third Amendment, dated as of May 31, 1998, to Filed herewith.
Revolving Credit Agreement, dated May 14, 1997,
by and among CMG Information Services, Inc. and
BankBoston, N.A. and the other lending
institutions listed on Schedule 1 to the Credit
Agreement.
10.36 Fourth Amendment, dated as of August 14, 1998, to Filed herewith.
Revolving Credit Agreement, dated May 14, 1997,
by and among CMG Information Services, Inc. and
BankBoston, N.A. and the other lending
institutions listed on Schedule 1 to the Credit
Agreement.
10.37 Fifth Amendment, dated as of September 30, 1998, Filed herewith.
to Revolving Credit Agreement, dated May 14,
1997, by and among CMG Information Services, Inc.
and BankBoston, N.A. and the other lending
institutions listed on Schedule 1 to the Credit
Agreement.
10.38 Common Stock Purchase Agreement dated as of Incorporated by reference to Exhibit 99.1 to the Registrant's
December 19, 1997 by and between CMG Information current report on Form 8-K dated December 19, 1997, filed
Services, Inc. and Intel Corporation. December 29, 1997.
10.39 ISDA Master Swap Agreement (the "Swap Incorporated by reference to Exhibit 10.1 to the Registrant's
Agreement"), dated January 13, 1998, between quarterly report on Form 10-Q for the quarter ended January
BankBoston, N.A. and the Registrant. 31, 1998.
10.40 Schedule to the Swap Agreement, dated January 13, Incorporated by reference to Exhibit 10.2 to the Registrant's
1998. quarterly report on Form 10-Q for the quarter ended January
31, 1998.
10.41 Confirmation to the Swap Agreement, dated January Incorporated by reference to Exhibit 10.3 to the Registrant's
13, 1998. quarterly report on Form 10-Q for the quarter ended January
31, 1998.
10.42 ISDA Credit Support Annex, dated January 13, Incorporated by reference to Exhibit 10.4 to the Registrant's
1998, between BankBoston, N.A. and the Registrant. quarterly report on Form 10-Q for the quarter ended January
31, 1998.
19
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
10.43 Agreement for the Assignment of Voting Rights, Incorporated by reference to Exhibit 10.5 to the Registrant's
dated January 13, 1998, between the Registrant quarterly report on Form 10-Q for the quarter ended January
and Long Lane Master Trust. 31, 1998.
10.44 Repurchase Agreement, dated January 13, 1998, Incorporated by reference to Exhibit 10.6 to the Registrant's
between the Registrant and Long Lane Master Trust. quarterly report on Form 10-Q for the quarter ended January
31, 1998.
10.45 Common Stock Purchase Agreement dated as of Incorporated by reference to Exhibit 99.1 to the Registrant's
February 15, 1998 by and between CMG Information current report on Form 8-K dated February 27, 1998, filed
Services, Inc. and Sumitomo Corporation. March 19, 1998.
10.46 CMG @Ventures I, LLC Limited Liability Company Incorporated by reference to Exhibit 10.1 to the Registrant's
Agreement, dated December 18, 1997. quarterly report on Form 10-Q for the quarter ended April 30,
1998.
10.47 Agreement and Plan of Merger dated as of April 8, Incorporated by reference to Exhibit 2.1 to the Registrant's
1998 among CMG Information Services, Inc., CMGI current report on Form 8-K dated April 8, 1998, filed on April
Acquisition Corporation, Accipiter, Inc., and 23, 1998.
Certain Stockholders of Accipiter, Inc. Named
Herein.
10.48 Employee Stockholder Escrow Agreement dated April Incorporated by reference to Exhibit 2.2 to the Registrant's
8, 1998. current report on Form 8-K dated April 8, 1998, filed on April
23, 1998.
10.49 Non-Employee Stockholder Escrow Agreement dated Incorporated by reference to Exhibit 2.3 to the Registrant's
April 8, 1998. current report on Form 8-K dated April 8, 1998, filed on April
23, 1998.
10.50 Employee Investment Representation and Lockup Incorporated by reference to Exhibit 2.4 to the Registrant's
Letters dated April 8, 1998. current report on Form 8-K dated April 8, 1998, filed on April
23, 1998.
10.51 Non-Employee Investment Representation and Lockup Incorporated by reference to Exhibit 2.5 to the Registrant's
Letters dated April 8, 1998. current report on Form 8-K dated April 8, 1998, filed on April
23, 1998.
10.52 Registration Rights Agreement dated April 8, 1998. Incorporated by reference to Exhibit 2.6 to the Registrant's
current report on Form 8-K dated April 8, 1998, filed on April
23, 1998.
10.53 Lease, dated January 6, 1998, between the 425 Incorporated by reference to Exhibit 10.2 to the Registrant's
Medford Nominee Trust and SalesLink Corporation quarterly report on Form 10-Q for the quarter ended April 30,
for premises at 425 Medford Street, Boston, 1998.
Massachusetts.
10.54 CMG Information Services, Inc. Guaranty of Incorporated by reference to Exhibit 10.3 to the Registrant's
SalesLink Corporation Lease for 425 Medford quarterly report on Form 10-Q for the quarter ended April 30,
Street, Boston, Massachusetts. 1998.
10.55 Supplement No. 2 to the Registrant's Lease for Incorporated by reference to Exhibit 10.4 to the Registrant's
100 Brickstone Square, Andover, Massachusetts. quarterly report on Form 10-Q for the quarter ended April 30,
1998.
20
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
10.56 Supplement No. 3 to the Registrant's Lease for Incorporated by reference to Exhibit 10.5 to the Registrant's
100 Brickstone Square, Andover, Massachusetts. quarterly report on Form 10-Q for the quarter ended April 30,
1998.
10.57 Amended and Restated Revolving Credit and Term Filed herewith.
Loan Agreement, dated as of June 11, 1998, among
SalesLink Corporation, InSolutions Incorporated,
Pacific Direct Marketing Corp., BankBoston, N.A.
and the other lending institutions set forth in
Schedule 1.
10.58 Amended and Restated Term Note, dated June 11, Filed herewith.
1998, between SalesLink Corporation and
InSolutions Incorporated and Imperial Bank.
10.59 Amended and Restated Term Note, dated June 11, Filed herewith.
1998, between SalesLink Corporation and
InSolutions Incorporated and BankBoston, N.A.
10.60 Fourth Amended and Restated Revolving Credit Filed herewith.
Note, dated June 11, 1998, between SalesLink
Corporation and InSolutions Incorporated and
Imperial Bank.
10.61 Fourth Amended and Restated Revolving Credit Filed herewith.
Note, dated June 11, 1998, between SalesLink
Corporation and InSolutions Incorporated and
BankBoston, N.A.
10.62 Amended and Restated Stock Pledge Agreement, Filed herewith.
dated June 11, 1998, between SalesLink
Corporation and BankBoston, N.A.
10.63 Amended and Restated Guaranty, dated as of June Filed herewith.
11, 1998, by Pacific Direct Marketing Corp. in
favor of BankBoston, N.A.
10.64 Amended and Restated Security Agreement, dated as Filed herewith.
of June 11, 1998, among SalesLink Corporation,
InSolutions Incorporated and BankBoston, N.A.
10.65 Amended and Restated Security Agreement, dated as Filed herewith.
of June 11, 1998, between Pacific Direct
Marketing Corp. and BankBoston, N.A.
10.66 Amended and Restated Trademark Collateral Filed herewith.
Security and Pledge Agreement, dated as of June
16, 1998, between SalesLink Corporation and
BankBoston, N.A.
10.67 Trademark Collateral Security and Pledge Filed herewith.
Agreement, dated as of June 11, 1998, between
InSolutions Incorporated and BankBoston, N.A.
21
EXHIBIT NO. TITLE METHOD OF FILING
- - - ----------- ----- ----------------
10.68 Registration Rights Agreement, dated June 16, Filed herewith.
1998, between the listed shareholders and CMG
Information Services, Inc.
10.69 CMG@Ventures II, LLC Operating Agreement, dated Filed herewith.
as of February 26, 1998
13.1 Selected Consolidated Financial Data. Filed herewith.
13.2 Management's Discussion and Analysis of Financial Filed herewith.
Condition and Results of Operations.
13.3 Consolidated Financial Statements, Supplementary Filed herewith.
Data, and Independent Auditors' Report.
21 Subsidiaries of the Registrant. Filed herewith.
23.1 Consent of Independent Auditors. Filed herewith.
23.2 Consent of Independent Auditors for Lycos, Inc. Filed herewith.
27.1 Restated Financial Data Schedule for the year Filed herewith.
ended July 31, 1997.
27.2 Financial Data Schedule for the year ended July Filed herewith.
31, 1998.
99.1 Consolidated Financial Statements and Independent Filed herewith.
Auditors' Report Thereon of Lycos, Inc.
* Management contracts and compensatory plans or arrangements.
(B) Reports on Form 8-K
On June 12, 1998, the Company filed a report on Form 8-K/A amending the
Form 8-K dated April 8, 1998 in conjunction with the acquisition of all the
issued and outstanding shares of capital stock of Accipiter, Inc. in
exchange for approximately 1,264,000 shares of the Company's common stock.
On July 1, 1998, the Company filed a report on Form 8-K dated June 16, 1998
in conjunction with the acquisition of all the issued and outstanding
shares of capital stock of InSolutions, Incorporated in exchange for
approximately 185,000 shares of the Company's common stock, $5 million in
cash and a note payable to a former employee shareholder.
22
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
CMG Information Services, Inc.:
Under date of September 22, 1998, except for Note 19 which is as of October 27,
1998, we reported on the Consolidated Balance Sheets of CMG Information
Services, Inc. as of July 31, 1998 and 1997, and the related Consolidated
Statements of Operations, Stockholders' Equity, and Cash Flows for each of the
years in the three-year period ended July 31, 1998, which are included in the
Form 10-K for the year ended July 31, 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule of Valuation and Qualifying Accounts
in the Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 22, 1998
23
CMG INFORMATION SERVICES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1996, 1997, 1998
Additions Deductions
---------------------------- ----------------------------------
Additions Deductions
Accounts Receivable, Charged to (Charged
Allowance for Balance at Costs and against (a) Balance at
Doubtful beginning of Expenses (Bad Accounts Deconsolidation/ end
Accounts period Acquisitions Debt Expense) Receivable) Dispositions of period
-------- ------ ------------ ------------ ---------- ------------ ---------
1996 $ 148,000 $ -- $ 294,000 $ -- $ $ 442,000
1997 $ 442,000 $ 395,000 $ 442,000 $ 186,000 $ 10,000 $ 1,083,000
1998 $ 1,083,000 $ 264,000 $ 466,000 $ 99,000 $ 659,000 $ 1,055,000
(a) Amount of $659,000 in fiscal 1998 relates to the effect of deconsolidation
of Lycos, Inc. on November 1, 1997. Amount of $10,000 in fiscal 1997
relates to the disposition of the Company's subsidiary, NetCarta
Corporation in January 1997.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CMG INFORMATION SERVICES, INC.
(Registrant)
Date: October 29, 1998 By /s/ David S. Wetherell
--------------------------
David S. Wetherell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and on the date set forth above.
Signature Title
- - - --------- -----
/s/ David S. Wetherell Chairman of the Board, President, Chief
- - - --------------------------------
David S. Wetherell Executive Officer and Director (Principal
Executive Officer)
/s/ Andrew J. Hajducky, III Chief Financial Officer and Treasurer
- - - --------------------------------
Andrew J. Hajducky III, CPA (Principal Financial and Accounting
Officer)
/s/ John A. McMullen Director
- - - --------------------------------
John A. McMullen
/s/ Craig D. Goldman Director
- - - --------------------------------
Craig D. Goldman
/s/ William H. Berkman Director
- - - --------------------------------
William H. Berkman
/s/ Robert J. Ranalli Director
- - - --------------------------------
Robert J. Ranalli
25
EXHIBIT 10.01
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement is made as of this ____ day of ____, 199_, between CMG
Information Services, Inc., a Delaware corporation (the "Company"), and
_________________ (the "Indemnitee").
WITNESSETH THAT:
WHEREAS, it is essential to the Company to retain and attract as Directors
the most capable people available; and
WHEREAS, the Indemnitee is a Director of the Company and in such capacity
provides valuable services to the Company; and
WHEREAS, both the Company and the Indemnitee recognize that the Indemnitee,
while serving as a Director of the Company is exposed to a substantial risk of
expensive litigation at a time when liability insurance may not continue to be
available to insure adequately against such risk, and at a time when the Company
and the Indemnitee recognize that the Indemnitee is not being paid sufficient
compensation by the Company to compensate for such risk; and
WHEREAS, it is now and has always been the express policy of the Company to
indemnify its Directors and Officers; and
WHEREAS, the Company has adopted an Article in its Restated Certificate of
Incorporation and a By-Law providing for the indemnification of Officers and
Directors of the Company as authorized by Section 145 of the Delaware General
Corporation Law; and
WHEREAS, such Article and By-Law and the Delaware General Corporation Law
specifically provide that they are not exclusive, and thereby contemplate that
individual indemnification agreements may be entered into between the Company
and its Directors; and
WHEREAS, in accordance with the authorization provided by law, the Company
intends to purchase and maintain a policy or policies of Directors and Officers
Liability Insurance ("D&O Insurance"), providing certain basic protection
against risk of personal liability of Directors and Officers at a reasonable
cost, and Indemnitee has relied on the availability of such coverage, but such
coverage may become increasingly difficult to obtain on terms providing
reasonable protection at a reasonable cost for all risks; and
WHEREAS, to induce Indemnitee to serve or to continue to serve as a
Director of the Company and to provide Indemnitee with specific contractual
assurance of substantial protection against personal liability (regardless of,
among other things, any amendment to or revocation of any provision of the
Company's Restated Certificate of Incorporation or By-Laws concerning
indemnification or any change in the composition of the Company's Board of
Directors or any acquisition of the Company), the Company desires to enter into
this Agreement; and
1
WHEREAS, in order to induce Indemnitee to become, or to remain in
Indemnitee's position as, a Director of the Company and in consideration of
Indemnitee's so becoming or remaining, the Company desires to indemnify
Indemnitee according to the terms and conditions set forth below; and
WHEREAS, the form of this Indemnification Agreement has been ratified and
approved by the stockholders of the Company.
NOW, THEREFORE, in consideration of the foregoing premises and of the
Indemnitee's serving or continuing to serve the Company, and for other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto, for themselves, their successors and assigns, hereby agree as follows:
1. AGREEMENT TO SERVE. Indemnitee agrees to serve or to continue to serve
------------------
as a Director of the Company for so long as he is duly elected or until such
time as he tenders his resignation in writing or his status as a Director is
terminated.
2. DEFINITIONS. For purposes of this Agreement, the following terms shall
-----------
have the meanings set forth below:
(a) "Change in Control" shall be deemed to have occurred when (i) there has
been a change in control of the Company, not approved by a resolution of the
Company's Board of Directors, of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including in
any event the acquisition by any "person" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act) of beneficial ownership, directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities, (ii)
followed within a period of not more than two years by a change in the identity
of a majority of the members of the Company's Board of Directors otherwise than
through death, disability or retirement in accordance with the Company's
retirement policies.
(b) The term "Claim" shall include any threatened, pending or completed
action, suit or proceeding, or any inquiry or investigation, whether brought by
or in the right of the Company or by any other party and whether of a civil,
criminal, administrative or investigative nature, including any inquiry or
investigation which the Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding, in which Indemnitee may be or may
have been involved as a party, witness or otherwise, by reason of the fact that
Indemnitee is or was a Director of the Company, by reason of any action taken by
him or of any inaction on his part while acting as such a Director, or by reason
of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise; in each case whether or not he is acting or
serving in any such capacity at the time any liability or expense is incurred
for which indemnification or reimbursement can be provided under this Agreement.
(c) The term "Expenses" shall include, without limitation, expenses of
investigations, judicial or administrative proceedings or appeals, amounts paid
in settlement of
2
any Claim by or on behalf of Indemnitee, attorneys, fees and disbursements, any
expenses of establishing a right to indemnification or Expense Advances under
Sections 9 and 10 of this Agreement, and all other costs, expenses and
obligations paid or incurred in connection with investigating, defending, being
a witness in or participating in (including on appeal), or preparing to defend,
be a witness in or participant in, any Claim, but shall not include the amount
of judgments, fines or penalties against Indemnitee.
(d) References to "other enterprise" shall include employee benefit plans;
references to "fines" shall include any excise tax assessed with respect to any
employee benefit plan; references to "serving at the request of the Company"
shall include any service as a director, officer, employee or agent of the
Company which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries.
(e) "Potential Change in Control" shall be deemed to have occurred if (i)
any person publicly announces an intention to take or to consider taking such
actions which if consummated might result in a Change in Control, (ii) any
"person" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act) acquires beneficial ownership, directly or indirectly, of securities of the
Company representing 25% or more of the combined voting power of the Company's
then outstanding securities, or (iii) the Company's Board of Directors in its
sole discretion adopts a resolution to the effect that, for purposes of this
Agreement, a Potential Change in Control has occurred.
3. BASIC INDEMNIFICATION. The Company hereby agrees to hold harmless and
---------------------
indemnify Indemnitee and Indemnitee's successors referred to in Section 17
hereof to the fullest extent authorized or permitted by the General Corporation
Law of the State of Delaware, or any other applicable law, or by any amendment
thereof or other statutory provision authorizing or permitting such
indemnification which is adopted after the date hereof.
4. INDEMNITY IN THIRD-PARTY CLAIMS. The Company shall indemnify
-------------------------------
Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee
is a party or witness to, or threatened to be made a party or witness to, or
otherwise involved in any Claim (other than a Claim by or in the right of the
Company to procure a judgment in its favor) by reason of the fact that
Indemnitee is or was a Director of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against all
Expenses, judgments, fines and penalties, actually incurred by Indemnitee in
connection with such Claim; provided that such indemnification shall not apply
to any Claim (i) in which Indemnitee shall have been finally adjudged to have
engaged in willful misconduct or to have acted in a manner which was knowingly
fraudulent or deliberately dishonest, or (ii) in the case of a criminal
proceeding, in which Indemnitee had reasonable cause to believe that his conduct
was unlawful. The Indemnitee shall be presumed to be entitled to
indemnification hereunder to the fullest extent possible, and the burden of
proving otherwise shall be on the party claiming to diminish such
indemnification. The termination of any Claim by judgment, order of court,
settlement, conviction or upon a plea of nolo contendre, or its equivalent,
shall not create a presumption that Indemnitee engaged in willful misconduct or
acted in a manner which was knowingly fraudulent or deliberately dishonest, and
with respect to any criminal proceedings, shall not create a presumption that
Indemnitee had reasonable cause to believe that his conduct was unlawful.
3
5. INDEMNITY IN CLAIMS BY OR IN THE RIGHT OF THE COMPANY. The Company
-----------------------------------------------------
shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5
if Indemnitee is a party or witness to, or threatened to be made a party or
witness to, or otherwise involved in any Claim by or in the right of the Company
to procure a judgment in its favor by reason of the fact that Indemnitee is or
was a Director of the Company, or is or was serving at the request of the
Company as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all Expenses
actually incurred by Indemnitee in connection with such Claim provided that such
indemnification for Expenses shall not apply to any Claim in which Indemnitee
shall have been finally adjudged to have engaged in willful misconduct or to
have acted in a manner which was knowingly fraudulent or deliberately dishonest,
unless (and only to the extent that) any court in which such Claim was brought
shall determine upon application, that despite the adjudication of liability but
in view of all the circumstances of the case, Indemnitee is fairly and
reasonably entitled to indemnity for such Expenses as such court shall deem
proper. The Indemnitee shall be presumed to be entitled to indemnification
hereunder to the fullest extent possible and the burden of proving otherwise
shall be on the party claiming to diminish such indemnification.
6. INSURANCE. In the event the Company's D&O Insurance shall terminate or
---------
the scope or amount of coverage of the Company's D&O Insurance shall be reduced
from the scope and coverage in effect during the first year of this Agreement,
the Company agrees to hold harmless and indemnify the Indemnitee to the fullest
extent permitted by applicable law to the full extent of the coverage which is
in effect during the first year of this Agreement. Notwithstanding the
foregoing, the Company is not obligated to maintain any D&O Insurance.
7. SECTION 16(B) LIABILITY. The Company shall not be liable under this
-----------------------
Agreement to make any payment in connection with any claim made against
Indemnitee for an accounting of profits made from the purchase or sale by
Indemnitee of securities of the Company within the meaning of Section 16(b) of
the Securities Exchange Act of 1934 and amendments thereto or similar provisions
of any state statutory law or common law.
8. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any
-----------------------------------------------
other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise, including the dismissal of an action
without prejudice or the settlement of an action without admission of liability,
in defense of any Claim or in defense of any claim, issue or matter therein,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith without the necessity of authorization in the specific case.
9. ADVANCEMENT OF EXPENSES. Expenses incurred by the Indemnitee in
-----------------------
connection with any Claim or in connection with any proceeding brought by
Indemnitee under Section 10 or 13 hereof, must be paid by the Company in advance
("Expense Advances") immediately upon the written request of the Indemnitee
provided Indemnitee shall undertake the repay such Expense Advances to the
extent that it is ultimately determined that Indemnitee is not entitled to
indemnification.
4
10. RIGHT OF INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION.
----------------------------------------------------------------------
Any payment hereunder with respect to any judgment, fine or penalty shall be
made no later than 45 days after receipt by the Company of the written request
of Indemnitee, unless a determination has been made by a court of competent
jurisdiction, or unless a determination is made within said 45-day period by
independent legal counsel (appointed by the Company and approved by the
Indemnitee) in a written opinion that the Indemnitee has not met the relevant
standards for indemnification. All payments of Expense Advances must be made
immediately in accordance with the terms and conditions of Section 9 except as
provided in this Section 10.
The right to indemnification and the immediate right to Expense Advances
pending final determination of the right to indemnification or lack thereof, as
provided by this Agreement shall be enforceable by the Indemnitee in any court
of competent jurisdiction. The burden of proving that indemnification is not
appropriate as provided in this Agreement or otherwise shall be on the party
claiming to diminish such indemnification. The failure of the Company
(including its Board of Directors or independent legal counsel) to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because Indemnitee has met the applicable standard
of conduct, shall not be a defense to the action or create a presumption that
Indemnitee has not met the applicable standard of conduct. Indemnitee's
expenses reasonably incurred in connection with successfully establishing has
right to indemnification, in whole or in part, with respect to any such Claim
shall also be paid by the Company under this Agreement immediately upon written
request in advance in accordance with the terms and conditions of Section 9.
In the event of any demand by the Indemnitee for the indemnification with
respect to any judgment, fine or penalty hereunder or under the Company's By-
Laws, the Board of Directors of the Company shall either approve the
indemnification or shall designate independent legal counsel referred to above.
The obligations of the Company hereunder with respect to the payment of any
judgment, fine or penalty shall be subject to the condition that the independent
legal counsel shall not have determined (in a written opinion) that the
Indemnitee is not permitted to be indemnified under Applicable law. The
obligation of the Company to make Expense Advances pursuant to this Agreement
shall be subject to the condition that, if, when and to the extent that the
independent legal counsel determines that the Indemnitee is not permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by the Indemnitee (who hereby agrees to reimburse the Company) for
all such amounts theretofore paid. If the Indemnitee has commenced legal
proceedings (either before or after the determination by independent legal
counsel) in a court of competent jurisdiction to secure a determination that the
Indemnitee may be indemnified under this Agreement or otherwise, any
determination made by the independent legal counsel that the Indemnitee is not
permitted to be indemnified under applicable law shall not be binding, and the
Indemnitee shall not be required to reimburse the Company for any Expense
Advances and shall continue to be entitled to Expense Advances until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). If there has been no
determination by the independent legal counsel or if the independent legal
counsel determines that the Indemnitee is not permitted to be indemnified in
whole or in part under applicable law, the Indemnitee shall have the right to
commence litigation in any court in the states of Massachusetts or Delaware
having subject matter jurisdiction thereof and in which venue is proper seeking
an initial determination by the court or challenging any such determination by
the independent legal counsel or any aspect thereof, and the Company hereby
consents to service of process and to appear in any such proceeding.
5
11. CHANGE IN CONTROL. The Company agrees that if there is a Change in
-----------------
Control of the Company, then with respect to all matters thereafter arising
concerning the rights of the Indemnitee to indemnify payments and Expense
Advances under this Agreement or any other agreement or Company By-Law now or
hereafter in effect relating the Claims, the Company shall seek legal advice
only from independent counsel selected by the Indemnitee and approved by the
Company (which approval shall not be unreasonably withheld) who has not
otherwise performed services for the Company within the last ten years (other
than in connection with such matters) or for the Indemnitee. Such counsel,
among other things, shall render its written opinion to the Company and the
Indemnitee as to whether and to what extent the Indemnitee is permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of such independent counsel and to indemnify such counsel against any and all
expenses (including attorneys, fees), claims, liabilities and damages relating
to this Agreement or its engagement pursuant hereto.
12. ESTABLISHMENT OF TRUST. In the event of a Potential Change in
----------------------
Control, the Company may, and upon the request of the Indemnitee shall, create a
Trust for the benefit of the Indemnitee (either alone or together with one or
more other indemnities) and from time to time fund such Trust in such amounts as
the Company's Board of Directors may determine to satisfy Expenses reasonably
anticipated to be incurred in connection with investigating, preparing for and
defending any Claim (which determination shall be made by the Company's Board of
Directors in good faith from time to time upon the request of the Indemnitee),
and all judgments, fines, penalties and settlement amounts of all Claims from
time to time paid or claimed, reasonably anticipated or proposed to be paid.
The term of any Trust established pursuant hereto shall provide that upon a
Change in Control (i) the Trust shall not be revoked or the principal thereof
invaded, without the written consent of the Indemnitee, (ii) the Trustee shall
advance, within two business days of a request by the Indemnitee, all Expenses
to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under
the circumstances under which the Indemnitee would be required to reimburse the
Company under this Agreement), (iii) the Trustee shall promptly pay to the
Indemnitee all amounts for which the Indemnitee shall be entitled to
indemnification pursuant to this Agreement or otherwise, and (iv) all unexpended
funds in such Trust shall revert to the Company upon a final determination by
the independent legal counsel or a court of competent jurisdiction, as the case
may be, that the Indemnitee has been fully indemnified under the terms of this
Agreement. The Trustee shall be a person or entity satisfactory to the
Indemnitee. Nothing in this Section 12 shall relieve the Company of any of its
obligations under this Agreement.
13. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify
---------------------------------------
the Indemnitee against all expenses (including attorneys, fees) and, if
requested by the Indemnitee, shall immediately advance such expenses to the
Indemnitee, which are incurred by the Indemnitee in connection with any claim
asserted or action brought by the Indemnitee for (i) indemnification or payment
of Expense Advances by the Company under this Agreement or any other agreement
or Company By-Law now or hereafter in effect relating to Claims, or (ii)
recovery under any D&O Insurance policies maintained by the Company, provided
the Indemnitee undertakes to repay such expenses to the extent that it is
ultimately determined that Indemnitee is not entitled to such indemnification,
Expense Advances, or insurance recovery, as the case may be.
6
14. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines or penalties actually and reasonably
incurred by him in the investigation, defense, appeal or settlement of any Claim
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses, judgments, fines or
penalties to which Indemnitee is entitled.
15. AGREEMENT NOT EXCLUSIVE: SUBROGATION RIGHTS ETC. This Agreement shall
-----------------------------------------------
not be deemed exclusive of and shall not diminish any other rights Indemnitee
may have to be indemnified or insured by the Company, any subsidiary of the
Company or any other person or entity under any certificate of incorporation,
by-law, agreement, policy of insurance, surety, vote of stockholders or
disinterested directors or otherwise, whether or not now in effect, and shall
continue as to Indemnitee after Indemnitee has ceased to be a Director and shall
inure to the benefit of Indemnitee's successors referred to in Section 17
hereof.
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee, who shall execute all such papers and do all such things as may be
necessary or desirable to secure such rights. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against the Indemnitee to the extent the Indemnitee has otherwise received
payment (under any insurance policy, By-law or otherwise) of the amounts
otherwise indemnifiable hereunder.
16. CONTINUATION OF INDEMNITY. All agreements and obligations of the
-------------------------
Company contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of the Company (or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise) and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative, by reason of the fact that Indemnitee was a Director
of the Company or serving in any other capacity referred to herein.
17. SUCCESSOR; BINDING AGREEMENT. The Company shall require any successor
----------------------------
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance reasonably satisfactory to Indemnitee, expressly
to assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place.
This Agreement shall inure to the benefit of and be enforceable by
Indemnitee's personal or legal representatives, executors, administrators,
successors, heirs, devisee and legatees. If Indemnitee should die while any
amounts would still be payable to Indemnitee hereunder if Indemnitee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to Indemnitee's devisee,
legatees, or other designees, or if there be no such devisee, legatees or
designees, to Indemnitee's estate.
7
18. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt of
---------------------------------
Indemnitee of notice of the commencement of any Claim, Indemnitee will, if a
claim in respect thereof is to be made against the Company under this Agreement,
notify the Company of the commencement thereof, but the omission so to notify
the Company will not relieve it from any liability which it may have to
Indemnitee hereunder. With respect to any such Claim as to which Indemnitee
notifies the Company of the commencement thereof.
(a) The Company will be entitled to participate therein at its own
expense; and
(b) Except as otherwise provided below, to the extent that it may
wish, the Company jointly with any other indemnifying party
similarly notified will be entitled to assume the defense
thereof, with counsel satisfactory to Indemnitee. After notice
from the Company to Indemnitee of its election so to assume the
defense thereof, the Company will not be liable to Indemnitee
under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof
other than reasonable costs of investigation or as otherwise
provided below. Indemnitee shall have the right to employ its
own counsel with respect to such Claim, but the fees and expenses
of such counsel incurred after notice from the Company of its
assumption of the defense thereof with counsel satisfactory to
Indemnitee shall be at the expense of Indemnitee unless (i) the
employment of counsel by Indemnitee has been authorized by the
Company (ii) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and
Indemnitee in the conduct of the defense of such Claim, or (iii)
the Company shall not in fact have employed counsel to assume the
defense of such Claim, in each of which cases the fees and
expenses of counsel for the Indemnitee shall be paid immediately
by the Company. The Company shall not be entitled to assume the
defense of any Claim brought by or on behalf of the Company or as
to which Indemnitee shall have made the conclusion provided for
in (ii) above; and
(c) The Company shall not be liable to indemnify the Indemnitee under
his Agreement for any amounts paid in settlement of any Claim
effected without its written consent. The Company shall not
settle any Claim in any manner which would impose any penalty or
limitation on Indemnitee without Indemnitee's written consent.
Neither the Company nor Indemnitee will unreasonably withhold
their consent to any proposed settlement.
19. ENFORCEMENT. The Company expressly confirms and agrees that it has
-----------
entered into this Agreement and assumed the obligations imposed on the Company
hereby in order to induce Indemnitee to continue as a Director of the Company,
and acknowledges that Indemnitee is relying upon this Agreement in continuing in
such capacity.
8
20. SEPARABILITY. Each of the provisions of this Agreement is a separate
------------
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason; such
invalidity or unenforceability shall not affect the validity or enforceability
of the provisions hereof, which other provisions shall remain in full force and
effect.
21. MISCELLANEOUS. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by Indemnitee and either the Company's Chief Executive Officer
or another officer of the Company specifically designated by the Board of
Directors. No waiver by either party hereto at any time of any breach by the
other party hereto of, or of compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Delaware, without giving effect to the principals of
conflicts of laws thereof.
22. NOTICES. For the purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requests, postage prepaid as follows:
If to Indemnitee:
If to the Company:
CMG Information Services, Inc.
100 Brickstone Square
1st Floor
Andover, MA 01810
With a copy to Counsel:
William Williams II, Esquire
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
9
23. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
------------
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
24. EFFECTIVENESS. This Agreement shall be effective as of the date it is
-------------
executed.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed
as of the day and year first above written.
CMG INFORMATION SERVICES, INC.
By:
---------------------------------
Title:
Indemnitee
10
EXHIBIT 10.33
FIRST AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
First Amendment dated as of May 26, 1998 to Revolving Credit Agreement (the
"First Amendment"), by and among CMG INFORMATION SERVICES, INC., a Delaware
corporation (the "Borrower"), BANKBOSTON, N.A. (FORMERLY KNOWN AS THE FIRST
NATIONAL BANK OF BOSTON) and the other lending institutions listed on Schedule 1
----------
to the Credit Agreement (as hereinafter defined) (the "Banks"), amending certain
provisions of Revolving Credit Agreement dated as of May 14, 1997 (as amended
and in effect from time to time, the "Credit Agreement") by and among the
Borrower, the Banks and BankBoston, N.A. as agent for the Banks (the "Agent").
Terms not otherwise defined herein which are defined in the Credit Agreement
shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms and
conditions of the Credit Agreement as specifically set forth in this First
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
(S)1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended by deleting the date "May 14, 1998" which
appears in the definition of "Revolving Credit Loan Maturity Date" and
substituting in place thereof the date "August 14, 1998".
(S)2. AMENDMENT TO SECTION 2 OF THE CREDIT AGREEMENT. Section 2.4 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended by deleting the words "at the rate of two and
one-half percent (2 1/2%) per annum above the LIBOR Rate" and substituting in
place thereof the words "at the rate of two percent (2%) per annum above the
LIBOR Rate".
(S)3. AMENDMENT TO SCHEDULE 1 OF THE CREDIT AGREEMENT. Schedule 1 of the
--------- -- ---------- -- --------------------
Credit Agreement is hereby amended by deleting Schedule 1 in its entirety and
substituting in place thereof the Schedule 1 attached hereto.
(S)4. CONDITIONS TO EFFECTIVENESS. This First Amendment shall not become
---------------------------
effective until the Agent receives the following:
(a) a counterpart of this First Amendment, executed by the Borrower and
the Banks; and
(b) evidence that all necessary corporate action has been taken on the
part of the Borrower to authorize the transactions contemplated hereby.
(S)5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats, on and
------------------------------
as of the date hereof, each of the representations and warranties made by it in
(S)5 of the Credit Agreement, and such representations and warranties remain
true as of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an earlier date),
-2-
provided, that all references therein to the Credit Agreement shall refer to
- - - --------
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower of this
First Amendment and the performance by the Borrower of all of its agreements and
obligations under the Credit Agreement as amended hereby are within the
corporate authority of each the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
(S)6. RATIFICATION, ETC. Except as expressly amended hereby, the Credit
------------ ---
Agreement and all documents, instruments and agreements related thereto are
hereby ratified and confirmed in all respects and shall continue in full force
and effect. The Credit Agreement and this First Amendment shall be read and
construed as a single agreement. All references in the Credit Agreement or any
related agreement or instrument to the Credit Agreement shall hereafter refer to
the Credit Agreement as amended hereby.
(S)7. NO WAIVER. Nothing contained herein shall constitute a waiver of,
---------
impair or otherwise affect any Obligations, any other obligation of the Borrower
or any rights of the Agent or the Banks consequent thereon.
(S)8. COUNTERPARTS. This First Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)9. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF COMMONWEALTH OF MASSACHUSETTS (WITHOUT
REFERENCE TO CONFLICT OF LAWS).
-3-
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as a
document under seal as of the date first above written.
CMG INFORMATION SERVICES, INC.
By:
---------------------------------
Title:
BANKBOSTON, N.A.
By:
---------------------------------
Title:
SCHEDULE 1
----------
BANKS/COMMITMENTS
-----------------
Revolving Credit Commitment Percentage of
Banks Loan Commitment Revolving Credit Loans
================================================================================
BANKBOSTON, N.A. $4,000,000 100%
Domestic Lending Office:
100 Federal Street, 01-08-06
Boston, Massachusetts 02110
Attn: High Technology Division
Eurodollar Lending Office:
Same as above
================================================================================
Totals: $4,000,000 100%
- - - --------------------------------------------------------------------------------
EXHIBIT 10.34
SECOND AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
Second Amendment dated as of April 9, 1998 to Revolving Credit Agreement
(the "Second Amendment"), by and among CMG INFORMATION SERVICES, INC., a
Delaware corporation (the "Borrower"), BANKBOSTON, N.A. (FORMERLY KNOWN AS THE
FIRST NATIONAL BANK OF BOSTON) and the other lending institutions listed on
Schedule 1 to the Credit Agreement (as hereinafter defined) (the "Banks"),
- - - ----------
amending certain provisions of Revolving Credit Agreement dated as of May 14,
1997 (as amended and in effect from time to time, the "Credit Agreement") by and
among the Borrower, the Banks and BankBoston, N.A. as agent for the Banks (the
"Agent"). Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms and
conditions of the Credit Agreement as specifically set forth in this Second
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
(S)1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended by inserting the following definition in the
appropriate alphabetical order:
Accipiter Acquisition. The merger of the Borrower's wholly-owned
---------------------
Subsidiary with and into Accipiter, Inc., with Accipiter, Inc. being the
surviving entity, all on such terms and conditions as are satisfactory to
the Agent.
(S)2. AMENDMENT TO SECTION 7.2 OF THE CREDIT AGREEMENT. Section 7.2 of
--------- -- ----------- -- --------------------
the Credit Agreement is hereby amended as follows:
(a) Section 7.2(c)(iv) of the Credit Agreement is hereby amended by
inserting immediately after the words "Investments made by the Borrower in
compliance with its Investment Policy" the words "and Investments consisting of
acquisitions permitted by (S)7.2(e) hereof".
(b) Section 7.2(e) of the Credit Agreement is hereby amended by deleting
(S)7.2(e) in its entirety and restating it as follows:
(e) become party to a merger or sale-leaseback transaction, or to
effect any disposition of assets other than in the ordinary course, and
other than the sale of shares of a wholly-owned Subsidiary of the Borrower
so long as the net cash proceeds of such sale received by the Borrower are
equal to or greater than the carrying costs of the remaining shares of such
Subsidiary after giving effect to such sale, or to purchase, lease or
otherwise acquire assets other than in the ordinary course (with the
parties hereto hereby acknowledging that minority Investments by the
Borrower in CMG @ Ventures 1 and CMG @ Ventures II shall be considered
acquisitions of assets in the ordinary course); provided, however, the
-------- -------
Borrower shall be permitted to acquire assets and/or stock of another
entity so long as (i) such entity is in the same or a similar line of
-2-
business as the Borrower; (ii) other than in connection with the Accipiter
Acquisition, the Borrower has provided the Bank with five (5) Business Days
prior written notice of such acquisition, which notice shall include a
reasonably detailed description of such acquisition; (iii) the business
and/or entity to be acquired would not subject the Agent or any Bank to
regulatory or third party approvals in connection with the exercise of its
rights and remedies under this Agreement or the other Loan Documents; (iv)
other than in connection with the Accipiter Acquisition, the Borrower has
demonstrated to the satisfaction of the Agent and the Banks, based on a pro
---
forma Compliance Certificate, compliance with (S)7.3 on a pro forma basis
----- ---------
immediately prior to and after giving effect to any such acquisition; (v)
the business and assets so acquired in each such acquisition shall be
acquired by the Borrower free and clear of all liens and Indebtedness; and
(vi) the aggregate purchase price of all acquisitions permitted hereunder
does not exceed the greater of (1) $11,000,000 and (2) the aggregate
purchase price of the Accipiter Acquisition during the term of this
Agreement.
(S)3. AMENDMENT TO SECTION 7.3 OF THE CREDIT AGREEMENT. Section 7.3(a) of
--------- -- ----------- -- --------------------
the Credit Agreement is hereby amended by deleting (S)7.3(a) in its entirety and
restating it as follows:
(a) make capital expenditures which in the aggregate and on a
consolidated basis exceed (i) $10,000,000 in the 1998 fiscal year; and (ii)
$3,700,000 in any fiscal year ending thereafter; provided, however, that if
during any fiscal year, other than the 1998 fiscal year, the amount of
capital expenditures permitted for that fiscal year is not so utilized,
such unutilized amount may be utilized in the next succeeding fiscal year,
but not in any subsequent year;
(S)4. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall not become
---------------------------
effective until the Agent receives a counterpart of this Second Amendment,
executed by the Borrower and the Banks.
(S)5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats, on and
------------------------------
as of the date hereof, each of the representations and warranties made by it in
(S)5 of the Credit Agreement, and such representations and warranties remain
true as of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an earlier date),
provided, that all references therein to the Credit Agreement shall refer to
- - - --------
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower of this
Second Amendment and the performance by the Borrower of all of its agreements
and obligations under the Credit Agreement as amended hereby are within the
corporate authority of each the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
(S)6. RATIFICATION, ETC. Except as expressly amended hereby, the Credit
------------ ---
Agreement and all documents, instruments and agreements related thereto are
hereby ratified and confirmed in all respects and shall continue in full force
and effect. The Credit Agreement and this Second Amendment shall be read and
construed as a single agreement. All references in the Credit Agreement or any
related agreement or instrument to the Credit Agreement shall hereafter refer to
the Credit Agreement as amended hereby.
-3-
(S)7. NO WAIVER. Nothing contained herein shall constitute a waiver of,
---------
impair or otherwise affect any Obligations, any other obligation of the Borrower
or any rights of the Agent or the Banks consequent thereon.
(S)8. COUNTERPARTS. This Second Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)9. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF COMMONWEALTH OF MASSACHUSETTS (WITHOUT
REFERENCE TO CONFLICT OF LAWS).
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as a document under seal as of the date first above written.
CMG INFORMATION SERVICES, INC.
By:
---------------------------------
Title:
BANKBOSTON, N.A.
By:
---------------------------------
Title:
EXHIBIT 10.35
THIRD AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
Third Amendment dated as of May 31, 1998 to Revolving Credit Agreement (the
"Third Amendment"), by and among CMG INFORMATION SERVICES, INC., a Delaware
corporation (the "Borrower"), BANKBOSTON, N.A. (FORMERLY KNOWN AS THE FIRST
NATIONAL BANK OF BOSTON) and the other lending institutions listed on Schedule 1
----------
to the Credit Agreement (as hereinafter defined) (the "Banks"), amending certain
provisions of Revolving Credit Agreement dated as of May 14, 1997 (as amended
and in effect from time to time, the "Credit Agreement") by and among the
Borrower, the Banks and BankBoston, N.A. as agent for the Banks (the "Agent").
Terms not otherwise defined herein which are defined in the Credit Agreement
shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms and
conditions of the Credit Agreement as specifically set forth in this Third
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
(S)1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended by inserting the following definition in the
appropriate alphabetical order:
InSolutions Acquisition. The merger of InSolutions Incorporated with
-----------------------
and into the Borrower's wholly-owned Subsidiary, with such wholly-owned
Subsidiary being the surviving entity and thereafter changing its name to
InSolutions Incorporated, all on such terms and conditions as are
satisfactory to the Agent.
Lee Note. That certain Term Note to be dated as of June 16, 1998 from
--------
the Borrower to Robert Lee in the original principal amount of $4,249,845
issued in connection with the InSolutions Acquisition, which Term Note
shall be in form and substance satisfactory to the Agent.
Servercast Acquisition. The acquisition by NaviSite, Inc., a wholly-
----------------------
owned Subsidiary of the Borrower, on or prior to July 1, 1998 of the
membership interests of Servercast Communications, L.L.C., all on such
terms and conditions as are satisfactory to the Agent.
OnDemand Acquisition. The merger of the Borrower's wholly-owned
--------------------
Subsidiary with and into On-Demand Solutions, Inc. on or prior to July 31,
1998, with On-Demand Solutions, Inc. being the surviving entity, all on
such terms and conditions as are satisfactory to the Agent.
SalesLink Intercompany Note. That certain Intercompany Note to be
---------------------------
dated as of June 16, 1998 from the Borrower to SalesLink in the original
principal amount of $5,000,000, which Intercompany Note shall be in form
and substance satisfactory to the Agent.
-2-
(S)2. AMENDMENT TO SECTION 7 OF THE CREDIT AGREEMENT. Section 7 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended as follows:
(a) Section 7.1(a)(viii) of the Credit Agreement is hereby amended by
inserting immediately before the words "from time to time" the words
"simultaneously with the Borrower making an acquisition which is permitted
pursuant to (S)7.2(e) hereof, or incurring Indebtedness which is permitted to be
incurred pursuant to (S)7.2(a), as the case may be, information evidencing the
aggregate purchase price of all acquisitions made to date (including the
contemplated acquisition), in the case of an acquisition, or information
detailing the outstanding Indebtedness of the Borrower on such date (including
the Indebtedness to be incurred), in the event of the incurrence of any
Indebtedness, and, in addition,";
(b) Section 7.2(a) of the Credit Agreement is hereby amended by inserting
immediately after the roman numeral (iv) the words "(a) Indebtedness of the
Borrower to SalesLink in an aggregate principal amount not to exceed $5,000,000
pursuant to the SalesLink Intercompany Note; (b) Indebtedness of the Borrower to
Robert Lee in an aggregate principal amount not to exceed $4,249,845 pursuant to
the Lee Note; (c) Indebtedness of Blaxxun in an aggregate principal amount not
to exceed (1) $1,000,000 pursuant to certain promissory notes dated prior to the
date hereof from Blaxxun to CMG @ Ventures I, and ERM/EBIT; and (2) 6,400,000 DM
pursuant to certain promissory notes dated prior to the date hereof from Blaxxun
to Technologie-Beteiligungsgesellschaft der Deutschen Ausgleichsbank and Bayern
Kapital; and (d)";
(c) Section 7.2(c)(iv) of the Credit Agreement is hereby amended by
deleting the text of (S)7.2(c)(iv) in its entirety and restating it as follows:
"(iv) Investments made by the Borrower in compliance with its Investment
Policy, Investments consisting of acquisitions permitted by (S)7.2(e) hereof and
an Investment by the Borrower in Open Market, Inc., provided such Investment is
made on or prior to July 31, 1998 and is in an aggregate amount of not more than
$5,000,000".
(d) Section 7.2(e) of the Credit Agreement is hereby amended by deleting
(S)7.2(e) in its entirety and restating it as follows:
(e) become party to a merger or sale-leaseback transaction, or to
effect any disposition of assets other than in the ordinary course, and
other than the sale of shares of a wholly-owned Subsidiary of the Borrower
so long as the net cash proceeds of such sale received by the Borrower are
equal to or greater than the carrying costs of the remaining shares of such
Subsidiary after giving effect to such sale, or to purchase, lease or
otherwise acquire assets other than in the ordinary course (with the
parties hereto hereby acknowledging that minority Investments by the
Borrower in CMG @ Ventures 1 and CMG @ Ventures II shall be considered
acquisitions of assets in the ordinary course); provided, however, the
-------- -------
Borrower shall be permitted to merge Accipiter, Inc. with and into Engage
Technology, Inc. and shall be permitted to acquire assets and/or stock of
another entity so long as (i) such entity is in the same or a similar line
of business as the Borrower; (ii) other than in connection with the
Accipter Acquisition and the Servercast Acquisition, the Borrower has
provided the Bank with five (5) Business Days prior written notice of such
acquisition, which notice shall include a reasonably detailed description
of such acquisition; (iii) the business and/or entity to be acquired would
not subject the Agent or any Bank to regulatory or third party approvals in
connection with the exercise of its rights and remedies under this
Agreement or the other Loan Documents; (iv) other than in connection with
the Accipiter Acquisition, the InSolutions Acquisition or the Servercast
Acquisition, the Borrower has demonstrated to the satisfaction of the Agent
and the Banks, based on a pro forma Compliance Certificate, compliance with
---------
(S)7.3 on a pro forma basis immediately prior to and after giving effect to
---------
-3-
any such acquisition; (v) the business and assets so acquired in each such
acquisition shall be acquired by the Borrower free and clear of all liens
and Indebtedness; and (vi) the aggregate purchase price of all acquisitions
permitted hereunder does not exceed the greater of (1) $11,000,000 and (2)
the aggregate purchase price of each of the Accipiter Acquisition, the
Servercast Acquisition, the InSolutions Acquisition and the OnDemand
Acquisition during the term of this Agreement.
(S)3. AMENDMENT TO SCHEDULE 7.2(A). Schedule 7.2(a) of the Credit
---------------------------- ---------------
Agreement is hereby amended by deleting Schedule 7.2(a) in its entirety and
---------------
replacing it with the Schedule 7.2(a) attached hereto.
---------------
(S)4. CONDITIONS TO EFFECTIVENESS. This Third Amendment shall not become
---------------------------
effective until the Agent receives a counterpart of this Third Amendment,
executed by the Borrower and the Banks.
(S)5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats, on and
------------------------------
as of the date hereof, each of the representations and warranties made by it in
(S)5 of the Credit Agreement, and such representations and warranties remain
true as of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an earlier date),
provided, that all references therein to the Credit Agreement shall refer to
- - - --------
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower of this
Third Amendment and the performance by the Borrower of all of its agreements and
obligations under the Credit Agreement as amended hereby are within the
corporate authority of each the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
(S)6. RATIFICATION, ETC. Except as expressly amended hereby, the Credit
------------ ---
Agreement and all documents, instruments and agreements related thereto are
hereby ratified and confirmed in all respects and shall continue in full force
and effect. The Credit Agreement and this Third Amendment shall be read and
construed as a single agreement. All references in the Credit Agreement or any
related agreement or instrument to the Credit Agreement shall hereafter refer to
the Credit Agreement as amended hereby.
(S)7. NO WAIVER. Nothing contained herein shall constitute a waiver of,
---------
impair or otherwise affect any Obligations, any other obligation of the Borrower
or any rights of the Agent or the Banks consequent thereon.
(S)8. COUNTERPARTS. This Third Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)9. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF COMMONWEALTH OF MASSACHUSETTS (WITHOUT
REFERENCE TO CONFLICT OF LAWS).
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment
as a document under seal as of the date first above written.
CMG INFORMATION SERVICES, INC.
By:
---------------------------------
Title:
BANKBOSTON, N.A.
By:
---------------------------------
Title:
EXHIBIT 10.36
FOURTH AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
Fourth Amendment dated as of August 14, 1998 to Revolving Credit Agreement
(the "Fourth Amendment"), by and among CMG INFORMATION SERVICES, INC., a
Delaware corporation (the "Borrower"), BANKBOSTON, N.A. (FORMERLY KNOWN AS THE
FIRST NATIONAL BANK OF BOSTON) and the other lending institutions listed on
Schedule 1 to the Credit Agreement (as hereinafter defined) (the "Banks"),
- - - ----------
amending certain provisions of Revolving Credit Agreement dated as of May 14,
1997 (as amended and in effect from time to time, the "Credit Agreement") by and
among the Borrower, the Banks and BankBoston, N.A. as agent for the Banks (the
"Agent"). Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms and
conditions of the Credit Agreement as specifically set forth in this Fourth
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
(S)1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended by deleting the date "August 14, 1998" which
appears in the definition of "Revolving Credit Loan Maturity Date" and
substituting in place thereof the date "August 13, 1999".
(S)2. AMENDMENT TO SECTION 7 OF THE CREDIT AGREEMENT. Section 7.2(e) of
--------- -- --------- -- --------------------
the Credit Agreement is hereby amended as follows:
(e) become party to a merger or sale-leaseback transaction, or to
effect any disposition of assets other than in the ordinary course, and
other than the sale of shares of a wholly-owned Subsidiary of the Borrower
so long as the net cash proceeds of such sale received by the Borrower are
equal to or greater than the carrying costs of the remaining shares of such
Subsidiary after giving effect to such sale, or to purchase, lease or
otherwise acquire assets other than in the ordinary course (with the
parties hereto hereby acknowledging that minority Investments by the
Borrower in CMG @ Ventures 1, CMG @ Ventures II and CMG @ Ventures III,
L.P. shall be considered acquisitions of assets in the ordinary course);
provided, however, the Borrower shall be permitted to (1) merge Accipiter,
-------- -------
Inc. with and into Engage Technology, Inc.; (2) sell or otherwise transfer
the shares of the capital stock of each of InSolutions Incorporated and On-
Demand Solutions, Inc. to SalesLink; and (3) acquire assets and/or stock of
another entity so long as (i) such entity is in the same or a similar line
of business as the Borrower; (ii) other than in connection with the
Accipiter Acquisition and the Servercast Acquisition, the Borrower has
provided the Bank with five (5) Business Days prior written notice of such
acquisition, which notice shall include a reasonably detailed description
of such acquisition; (iii) the business and/or entity to be acquired would
not subject the Agent or any Bank to regulatory or third party approvals in
connection with the exercise of its rights and remedies under this
Agreement or the other Loan Documents; (iv) other than in connection with
the Accipiter Acquisition, the InSolutions
-2-
Acquisition or the Servercast Acquisition, the Borrower has demonstrated to
the satisfaction of the Agent and the Banks, based on a pro forma
---------
Compliance Certificate, compliance with (S)7.3 on a pro forma basis
---------
immediately prior to and after giving effect to any such acquisition; (v)
the business and assets so acquired in each such acquisition shall be
acquired by the Borrower free and clear of all liens and Indebtedness,
except those expressly permitted by the Agent pursuant to that certain
consent letter dated as of July 31, 1998 pertaining to the OnDemand
Acquisition; and (vi) the aggregate purchase price of all acquisitions
permitted hereunder does not exceed the greater of (1) $11,000,000 and (2)
the aggregate purchase price of each of the Accipiter Acquisition, the
Servercast Acquisition, the InSolutions Acquisition and the OnDemand
Acquisition during the term of this Agreement.
(S)3. AMENDMENT TO SCHEDULE 1 OF THE CREDIT AGREEMENT. Schedule 1 of the
--------- -- ---------- -- -------------------- -------- -
Credit Agreement are each hereby amended by deleting Schedule 1 in its entirety
and substituting in place thereof Schedule 1 attached hereto.
-------- -
(S)4. AMENDMENT TO JULY 31, 1998 CONSENT LETTER. The letter dated as of
--------- -- ----------------------------
July 31, 1998 from the Agent and the Banks to the Borrower consenting to the
OnDemand Acquisition is hereby amended by deleting the reference to "thirty (30)
days" which appears in subparagraphs (e) and (f) of such letter and substituting
in place thereof a reference to "sixty (60) days".
(S)5. CONDITIONS TO EFFECTIVENESS. This Fourth Amendment shall not become
---------------------------
effective until the Agent receives a counterpart of this Fourth Amendment,
executed by the Borrower and the Banks.
(S)6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats, on and
------------------------------
as of the date hereof, each of the representations and warranties made by it in
(S)5 of the Credit Agreement, and such representations and warranties remain
true as of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an earlier date),
provided, that all references therein to the Credit Agreement shall refer to
- - - --------
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower of this
Fourth Amendment and the performance by the Borrower of all of its agreements
and obligations under the Credit Agreement as amended hereby are within the
corporate authority of each the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
(S)7. RATIFICATION, ETC. Except as expressly amended hereby, the Credit
------------ ---
Agreement and all documents, instruments and agreements related thereto are
hereby ratified and confirmed in all respects and shall continue in full force
and effect. The Credit Agreement and this Fourth Amendment shall be read and
construed as a single agreement. All references in the Credit Agreement or any
related agreement or instrument to the Credit Agreement shall hereafter refer to
the Credit Agreement as amended hereby.
(S)8. NO WAIVER. Nothing contained herein shall constitute a waiver of,
---------
impair or otherwise affect any Obligations, any other obligation of the Borrower
or any rights of the Agent or the Banks consequent thereon.
-3-
(S)9. COUNTERPARTS. This Fourth Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)10. GOVERNING LAW. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF COMMONWEALTH OF MASSACHUSETTS (WITHOUT
REFERENCE TO CONFLICT OF LAWS).
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment
as a document under seal as of the date first above written.
CMG INFORMATION SERVICES, INC.
By:
---------------------------------
Title:
BANKBOSTON, N.A.
By:
---------------------------------
Title:
SCHEDULE 1
----------
BANKS/COMMITMENTS
-----------------
Revolving Credit Commitment Percentage of
Banks Loan Commitment Revolving Credit Loans
================================================================================
BANKBOSTON, N.A. $5,000,000 100%
Domestic Lending Office:
100 Federal Street, 01-08-06
Boston, Massachusetts 02110
Attn: High Technology Division
Eurodollar Lending Office:
Same as above
================================================================================
Totals: $5,000,000 100%
- - - --------------------------------------------------------------------------------
EXHIBIT 10.37
FIFTH AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
Fifth Amendment dated as of September 30, 1998 to Revolving Credit
Agreement (the "Fifth Amendment"), by and among CMG INFORMATION SERVICES, INC.,
a Delaware corporation (the "Borrower"), BANKBOSTON, N.A. (FORMERLY KNOWN AS THE
FIRST NATIONAL BANK OF BOSTON) and the other lending institutions listed on
Schedule 1 to the Credit Agreement (as hereinafter defined) (the "Banks"),
- - - ----------
amending certain provisions of Revolving Credit Agreement dated as of May 14,
1997 (as amended and in effect from time to time, the "Credit Agreement") by and
among the Borrower, the Banks and BankBoston, N.A. as agent for the Banks (the
"Agent"). Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the same respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms and
conditions of the Credit Agreement as specifically set forth in this Fifth
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
(S)1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended by inserting the following definition in the
appropriate alphabetical order:
Hollywood Entertainment Acquisition. The acquisition by the Borrower of
-----------------------------------
approximately 2,327,934 shares of the capital stock of Hollywood
Entertainment Corporation for a cash purchase price of approximately $13.50
per share for a total cash consideration of not more than $31,623,020.20,
with the terms of such acquisition all to be on substantially the terms and
conditions contained in the Stock Purchase Agreement dated July 30, 1998
among Hollywood Entertainment Corporation, the Borrower and certain other
parties thereto, as amended and the Transfer Agreement dated on or about
October 1, 1998 among Scott Beck, the Borrower and certain other parties
thereto and satisfactory to the Agent.
(S)2. AMENDMENT TO SECTION 7 OF THE CREDIT AGREEMENT. Section 7 of the
--------- -- --------- -- --------------------
Credit Agreement is hereby amended as follows:
(a) Section 7.2(c)(iv) of the Credit Agreement is hereby amended by
deleting the text of (S)7.2(c)(iv) in its entirety and restating it as follows:
"(iv) Investments made by the Borrower in compliance with its Investment Policy,
Investments consisting of acquisitions permitted by (S)7.2(e) hereof, the
Investment by the Borrower in Open Market, Inc. provided such Investment is made
on or prior to July 31, 1998 and is in the aggregate amount of not more than
$5,000,000 and the Investment made by the Borrower on or about July 16, 1998 in
Magnitude Network, LLC provided such Investment is in the aggregate amount of
not more than $500,000."
(b) Section 7.2(e) of the Credit Agreement is hereby amended by deleting
(S)7.2(e) in its entirety and restating it as follows:
-2-
(e) become party to a merger or sale-leaseback transaction, or to
effect any disposition of assets other than in the ordinary course, and
other than the sale of shares of a wholly-owned Subsidiary of the Borrower
so long as the net cash proceeds of such sale received by the Borrower are
equal to or greater than the carrying costs of the remaining shares of such
Subsidiary after giving effect to such sale, or to purchase, lease or
otherwise acquire assets other than in the ordinary course (with the
parties hereto hereby acknowledging that minority Investments by the
Borrower in CMG @ Ventures 1, CMG @ Ventures II and CMG @ Ventures III,
L.P. shall be considered acquisitions of assets in the ordinary course);
provided, however, the Borrower shall be permitted to (1) merge Accipiter,
-------- -------
Inc. with and into Engage Technology, Inc.; (2) sell or otherwise transfer
the shares of the capital stock of each of InSolutions Incorporated and On-
Demand Solutions, Inc. to SalesLink; and (3) acquire assets and/or stock of
another entity so long as (i) such entity is in the same or a similar line
of business as the Borrower; (ii) other than in connection with the
Accipiter Acquisition and the Servercast Acquisition, the Borrower has
provided the Bank with five (5) Business Days prior written notice of such
acquisition, which notice shall include a reasonably detailed description
of such acquisition; (iii) the business and/or entity to be acquired would
not subject the Agent or any Bank to regulatory or third party approvals in
connection with the exercise of its rights and remedies under this
Agreement or the other Loan Documents; (iv) other than in connection with
the Accipiter Acquisition, the InSolutions Acquisition or the Servercast
Acquisition, the Borrower has demonstrated to the satisfaction of the Agent
and the Banks, based on a pro forma Compliance Certificate, compliance with
---------
(S)7.3 on a pro forma basis immediately prior to and after giving effect to
---------
any such acquisition; (v) the business and assets so acquired in each such
acquisition shall be acquired by the Borrower free and clear of all liens
and Indebtedness, except those expressly permitted by the Agent pursuant to
that certain consent letter dated as of July 31, 1998 pertaining to the
OnDemand Acquisition; and (vi) the aggregate purchase price of all
acquisitions permitted hereunder does not exceed the greater of (1)
$11,000,000 and (2) the aggregate purchase price of each of the Accipiter
Acquisition, the Servercast Acquisition, the InSolutions Acquisition, the
OnDemand Acquisition and the Hollywood Entertainment Acquisition during the
term of this Agreement.
(S)3. AMENDMENT TO JULY 31, 1998 CONSENT LETTER. The letter dated as of
--------- -- ----------------------------
July 31, 1998 from the Agent and the Banks to the Borrower consenting to the
OnDemand Acquisition is hereby amended by deleting the reference to "sixty (60)
days" which appears in subparagraphs (e) and (f) of such letter and substituting
in place thereof a reference to "ninety (90) days".
(S)4. LIMITED WAIVER. The Agent and the Banks hereby waive as of the date
--------------
hereof, to the limited extent necessary to permit any noncompliance for the
period of July 16, 1998 through the date hereof, any Default or Event of Default
of (S)7.2(c)(iv) of the Credit Agreement which occurred as a result of the
Borrower's $500,000 Investment on or about July 16, 1998 in Magnitude Network,
LLC.
(S)5. CONDITIONS TO EFFECTIVENESS. This Fifth Amendment shall not become
---------------------------
effective until the Agent receives a counterpart of this Fifth Amendment,
executed by the Borrower and the Banks.
(S)6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats, on and
------------------------------
as of the date hereof, each of the representations and warranties made by it in
(S)5 of the Credit Agreement, and such representations and warranties remain
true as of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents and
-3-
changes occurring in the ordinary course of business that singly or in the
aggregate are not materially adverse, and to the extent that such
representations and warranties relate expressly to an earlier date),
provided, that all references therein to the Credit Agreement shall refer to
- - - --------
such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower of this
Fifth Amendment and the performance by the Borrower of all of its agreements and
obligations under the Credit Agreement as amended hereby are within the
corporate authority of each the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
(S)7. RATIFICATION, ETC. Except as expressly amended hereby, the Credit
------------ ---
Agreement and all documents, instruments and agreements related thereto are
hereby ratified and confirmed in all respects and shall continue in full force
and effect. The Credit Agreement and this Fifth Amendment shall be read and
construed as a single agreement. All references in the Credit Agreement or any
related agreement or instrument to the Credit Agreement shall hereafter refer to
the Credit Agreement as amended hereby.
(S)8. NO WAIVER. Nothing contained herein shall constitute a waiver of,
---------
impair or otherwise affect any Obligations, any other obligation of the Borrower
or any rights of the Agent or the Banks consequent thereon.
(S)9. COUNTERPARTS. This Fifth Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
(S)10. GOVERNING LAW. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF COMMONWEALTH OF MASSACHUSETTS (WITHOUT
REFERENCE TO CONFLICT OF LAWS).
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment
as a document under seal as of the date first above written.
CMG INFORMATION SERVICES, INC.
By:
---------------------------------
Title:
BANKBOSTON, N.A.
By:
---------------------------------
Title:
EXHIBIT 10.57
- - - --------------------------------------------------------------------------------
AMENDED AND RESTATED
---------------------
REVOLVING CREDIT AND TERM LOAN AGREEMENT
----------------------------------------
Dated as of June 11, 1998
among
SALESLINK CORPORATION,
INSOLUTIONS INCORPORATED,
PACIFIC DIRECT MARKETING CORP.
BANKBOSTON, N.A.
AND THE OTHER LENDING
INSTITUTIONS SET FORTH ON SCHEDULE 1 HERETO
and
BANKBOSTON, N.A. as Agent
- - - --------------------------------------------------------------------------------
1
TABLE OF CONTENTS
-----------------
1. DEFINITIONS:......................................................... 1
2. REVOLVING CREDIT FACILITY............................................ 11
2.1. Commitment to Lend........................................... 11
2.2. Requests for Loans........................................... 12
2.3. Conversion Options........................................... 13
2.3.1. Conversion to Different Loan Type.................. 13
2.3.2. Continuation of Loan Type.......................... 14
2.3.3. LIBOR Rate Loans................................... 14
2.4. Interest..................................................... 14
2.5. Repayments and Prepayments................................... 15
2.6. Funds for Revolving Credit Loan.............................. 15
2.6.1. Funding Procedures................................. 15
2.6.2. Advances by Agent.................................. 16
3. THE TERM LOAN........................................................ 16
3.1. Commitment to Lend........................................... 16
3.2. The Term Notes............................................... 16
3.3. Schedule of Installment Payments of Principal of Term Loan... 17
3.4. Optional Prepayment of Term Loan............................. 17
3.5. Interest on Term Loan........................................ 17
3.5.1. Interest Rates..................................... 18
3.5.2. Notification by Borrower........................... 18
3.5.3. Amounts, Etc....................................... 18
4. LETTER OF CREDIT FACILITY............................................ 18
4.1. Letter of Credit Commitment.................................. 18
4.2. Reimbursement Obligation of the Borrower..................... 20
4.3. Letter of Credit Payments.................................... 20
4.4. Obligations Absolute......................................... 21
4.5. Reliance by Issuer........................................... 22
4.6. Letter of Credit Fees........................................ 22
5. CHANGES IN CIRCUMSTANCES, ETC........................................ 22
5.1. Inability to Determine LIBOR Rate............................ 22
5.2. Illegality................................................... 22
5.3. Changes in Circumstances..................................... 23
5.4. Certificate.................................................. 24
5.5. Indemnity.................................................... 24
6. FEES AND PAYMENTS.................................................... 24
7. REPRESENTATIONS AND WARRANTIES....................................... 25
8. CONDITIONS PRECEDENT................................................. 27
9. COVENANTS............................................................ 29
9.1. Affirmative Covenants........................................ 29
9.2. Negative Covenants........................................... 31
9.3. Financial Covenants.......................................... 32
10. EVENTS OF DEFAULT; ACCELERATION...................................... 33
11. SETOFF............................................................... 35
12. THE AGENT............................................................ 36
12.1. Authorization................................................ 36
-ii-
12.2. Employees and Agents............................................. 37
12.3. No Liability..................................................... 37
12.4. No Representations............................................... 37
12.5. Payments......................................................... 38
12.5.1. Payments to Agent...................................... 38
12.5.2. Distribution by Agent.................................. 38
12.5.3. Delinquent Banks....................................... 38
12.6. Holders of Notes................................................. 39
12.7. Indemnity........................................................ 39
12.8. Agent as Bank.................................................... 39
12.9. Resignation...................................................... 39
12.10. Notification of Defaults and Events of Default................... 40
12.11. Duties in the Case of Enforcement................................ 40
13. ASSIGNMENT AND PARTICIPATION................................................ 40
13.1. Conditions to Assignment by Banks................................ 40
13.2. Certain Representations and Warranties; Limitations; Covenants... 41
13.3. Register......................................................... 42
13.4. New Notes........................................................ 42
13.5. Participations................................................... 43
13.6. Disclosure....................................................... 43
13.7. Assignee or Participant Affiliated with the Borrower............. 43
13.8. Miscellaneous Assignment Provisions.............................. 44
13.9. Assignment by Borrower........................................... 44
14. MISCELLANEOUS............................................................... 44
AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT
-------------------------------------------------------------
This AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT (this
"Agreement") is made as of June 11, 1998, by and among (a) SALESLINK CORPORATION
("SalesLink"), a Delaware corporation having its principal place of business at
25 Drydock Avenue, Boston, Massachusetts 02210, (b) INSOLUTIONS INCORPORATED
("InSolutions" and, collectively with SalesLink, the "Borrowers" and each
individually, a "Borrower"), a Delaware corporation having its principal place
of business at 2940 Kifer Road, Santa Clara, CA 95051, (c) PACIFIC DIRECT
MARKETING CORP. ("Pacific Direct"), a California corporation having its
principal place of business at 8356 Thornton Avenue, Newark, California 94520,
(d) BANKBOSTON, N.A. (FORMERLY KNOWN AS THE FIRST NATIONAL BANK OF BOSTON), a
national banking association, and the other lending institutions listed on
Schedule 1 hereto and (e) BANKBOSTON, N.A. as agent for itself and such other
- - - ----------
lending institutions.
WHEREAS, pursuant to a Revolving Credit and Term Loan Agreement dated as of
October 24, 1996 (as amended from time to time, the "Original Credit Agreement")
by and among SalesLink, the Parent (as hereinafter defined), certain of the
Banks (as hereinafter defined) and the Agent, the lenders party thereto made
loans available to SalesLink for, among other things, financing a portion of the
acquisition of Pacific Direct and for general corporate and working capital
purposes; and
WHEREAS, SalesLink has requested, among other things, to amend and restate
the Original Credit Agreement and to provide additional financing, to refinance
certain Indebtedness (as hereinafter defined) and to provide funds for working
capital and general corporate purposes, and the Banks are willing to amend and
restate the Original Credit Agreement and to provide such additional financing
on the terms and conditions set forth herein;
NOW, THEREFORE, the Borrowers, the Banks and the Agent agree that on and as
of the Closing Date (as hereinafter defined) the Original Credit Agreement is
hereby amended and restated in its entirety and shall remain in full force and
effect only as expressly set forth herein.
1. DEFINITIONS AND RULES OF INTERPRETATION:
---------------------------------------
1.1 DEFINITIONS: Certain capitalized terms are defined below:
-----------
Accounts: All rights of the Borrowers or any of their Subsidiaries to any
--------
payment of money for goods sold, leased or otherwise marketed in the ordinary
course of business, whether evidenced by or under or in respect of a contract or
instrument, and to all proceeds in respect thereof.
-2-
Acquisition: The acquisition by the Parent on the Acquisition Closing Date
-----------
of all of the outstanding shares of capital stock of InSolutions pursuant to the
Acquisition Documents.
Acquisition Closing Date: The first date on which the conditions set forth
------------------------
in the Merger Agreement have been satisfied and the Acquisition has occurred.
Acquisition Documents: Collectively, the Merger Agreement and all
---------------------
agreements and documents required to be entered into or delivered pursuant
thereto or in connection with the Acquisition, each in the form delivered to the
Agent on the Acquisition Closing Date.
Adjustment Date: The first day of the month immediately following the
---------------
month in which a Compliance Certificate is to be delivered by the Borrowers to
the Agent pursuant to (S)9.1(a)(iv).
Affiliate: Any Person that would be considered an affiliate of any
---------
Borrower under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if such Borrower were
issuing securities.
Agent: BankBoston, N.A., acting as agent for the Banks.
-----
Agent's Head Office: The Agent's head office located at 100 Federal
------- ---- ------
Street, Boston, Massachusetts 02110, or at such other location as the Agent may
designate from time to time.
Agreement: See the preamble, which term shall include this Agreement and
---------
the Schedules and Exhibits hereto, all as amended and in effect from time to
time.
Applicable Margin: For each period commencing on an Adjustment Date
-----------------
through the date immediately preceding the next Adjustment Date (each a "Rate
Adjustment Period"), the Applicable Margin shall be the applicable margin set
forth below with respect to the Borrowers' Leverage Ratio, as determined for the
fiscal period of the Borrowers and their Subsidiaries ending immediately prior
to the applicable Rate Adjustment Period:
BASE RATE LIBOR RATE
---------------------------------------------------------------------
LEVERAGE RATIO LOANS LOANS
---------------------------------------------------------------------
---------------------------------------------------------------------
Greater than or equal to 2.00:1.00 .50% 2.00%
---------------------------------------------------------------------
---------------------------------------------------------------------
Less than 2.00:1.00 but greater
than or equal to 1.50:1.00 .25% 1.75%
---------------------------------------------------------------------
---------------------------------------------------------------------
Less than 1.50:1.00 0% 1.50%
---------------------------------------------------------------------
-3-
Notwithstanding the foregoing, (a) for Loans outstanding during the period
commencing on the Closing Date through the date immediately preceding the first
Adjustment Date to occur after the fiscal quarter ending July 31, 1998, the
Applicable Margin shall be at the highest level set forth above and (b) if the
Borrowers fail to deliver any Compliance Certificate pursuant to (S)9.1(a)(iv)
hereof, then, for the period commencing on the next Adjustment Date to occur
subsequent to such failure through the date immediately following the date on
which such Compliance Certificate is delivered, the Applicable Margin shall be
the highest Applicable Margin set forth above.
Assignment and Acceptance: See (S)13.
-------------------------
Banks: BKB and the other lending institutions listed on Schedule 1 hereto
----- -------- -
and any other Person who becomes an assignee of any rights and obligations of a
Bank pursuant to (S)13.
Base Rate: The higher of (a) the annual rate of interest announced from
---------
time to time by BKB at its head office as it's "base rate" and (b) one-half of
one percent (1/2%) above the Federal Funds Effective Rate.
Base Rate Loans: Revolving Credit Loans and all or any portion of the Term
---------------
Loan bearing interest calculated by reference to the Base Rate.
BKB: BankBoston, N.A., in its individual capacity.
---
Borrowers: See the preamble.
---------
Borrowing Base: At the relevant time of reference thereto, an amount
--------------
determined by the Agent by reference to the most recent Borrowing Base Report
delivered to the Banks and the Agent pursuant to (S)9.1(a)(v), which is equal to
80% of Eligible Accounts Receivable for which invoices have been issued and are
payable. The Agent may, in its discretion, from time to time, upon five (5)
days' prior notice to the Borrowers, (a) reduce the lending formula with respect
to Eligible Accounts Receivable to the extent that the Agent determines that:
(i) the dilution with respect to the Accounts for any period has increased in
any material respect or may be reasonably anticipated to increase in any
material respect above historical levels, or (ii) the general creditworthiness
of account debtors or other obligors of the Borrowers have declined. In
determining whether to reduce the lending formula, the Agent may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts Receivable.
Borrowing Base Report: A Borrowing Base Report signed by the chief
---------------------
financial officer of each Borrower and in form and substance acceptable to the
Agent.
Business Day: Any day on which banking institutions in Boston,
------------
Massachusetts, are open for the conduct of a substantial part of its commercial
-4-
banking business generally and, in the case of LIBOR Rate Loans, also a day
which is a LIBOR Business Day.
Capitalized Leases: Leases under which the Borrowers or any of their
------------------
Subsidiaries are the Lessee or obligor, the discounted, future rental payment
obligations under which are required to be capitalized on the combined balance
sheet of the Borrowers and their Subsidiaries in accordance with GAAP.
Charter Documents: In respect of any entity, the certificate or articles
-----------------
of incorporation or organization and the by-laws of such entity, or other
constitutive documents of such entity.
Closing Date: The first date on which the conditions set forth in (S)8
------------
have been satisfied and any Revolving Credit Loans and the Term Loan are to be
made or any Letter of Credit is to be issued hereunder.
Collateral: All of the property, rights and interests of the Borrowers and
----------
their Subsidiaries that are or are intended to be subject to the security
interests and mortgages created by the Security Documents.
Combined or combined: With reference to any term defined herein, shall
--------------------
mean that term as applied to the accounts of the Borrowers and their
Subsidiaries, combined in accordance with GAAP.
Combined Current Assets: All assets of the Borrowers and their
-----------------------
Subsidiaries on a combined basis that in accordance with GAAP are properly
classified as current assets, excluding bad debts and inventory not yet
saleable.
Combined Current Liabilities: All liabilities of the Borrowers and their
----------------------------
Subsidiaries on a combined basis payable on demand or maturing within one (1)
year from the date as of which current liabilities are to be determined, and
such other liabilities that in accordance with GAAP are properly classified as
current liabilities; provided, however, for purposes of calculating compliance
-------- -------
with (S)9.3(d) hereof, so long as (a) the Parent and the Borrowers file all
required income tax returns pursuant to a consolidated federal income tax
return and (b) the Parent is not obligated, on a consolidated basis, to make any
cash federal income tax payments in the period of determination, Combined
Current Liabilities shall exclude all accrued federal income tax liabilities for
such period of determination.
Combined Net Income (or Deficit): The combined net income (or deficit) of
--------------------------------
the Borrowers and their Subsidiaries, after deduction of all expenses, taxes and
other proper charges, determined in accordance with GAAP.
Combined Operating Cash Flow: For any Reference Period, the amount equal
----------------------------
to (a) the EBITDA for such period, minus (b) cash payments for all taxes paid
-----
during such period, minus (c) capital expenditures made during such period to
-----
the extent permitted hereunder.
-5-
Combined Total Debt Service: For any Reference Period, all scheduled
---------------------------
mandatory payment of principal on Indebtedness of the Borrowers and their
Subsidiaries made or required to be made in that period, plus the Combined Total
----
Interest Expense of the Borrowers and their Subsidiaries for that period.
Combined Total Interest Expense. For any period, the aggregate amount of
-------------------------------
interest required to be paid or accrued by the Borrowers and their Subsidiaries
during such period on all Indebtedness of the Borrowers and their Subsidiaries
outstanding during all or any part of such period, whether such interest was or
is required to be reflected as an item of expense or capitalized, including
payments consisting of interest in respect of Capitalized Leases and including
commitment fees, agency fees, facility fees, balance deficiency fees and similar
fees or expenses in connection with the borrowing of money.
Commitment: Collectively, the Revolving Credit Loan Commitment and the
----------
Term Loan Commitment.
Commitment Percentage: With respect to each Bank, the percentage set forth
---------------------
on Schedule 1 hereto as such Bank's percentage of the aggregate Commitments of
----------
all the Banks.
Compliance Certificate: See (S)9.1(a)(iv) hereof.
----------------------
Consent: In respect of any person or entity, any permit, license or
-------
exemption from, approval, consent of, registration or filing with any local,
state or federal governmental or regulatory agency or authority, required under
applicable law.
Conversion Request: A notice by any Borrower to the Agent of such
------------------
Borrower's election to convert or continue a Loan in accordance with (S)2.3
hereof.
Default: An event or act which with the giving of notice and/or the lapse
-------
of time, would become an Event of Default.
Domestic Lending Office: Initially, the office of each Bank designated as
-----------------------
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
----------
located within the United States that will be making or maintaining Base Rate
Loans.
Drawdown Date: The date on which any Revolving Credit Loan or the Term
-------------
Loan is made or is to be made, and the date on which any Revolving Credit Loan
is converted or continued in accordance with (S)2.3 or all or any portion of the
Term Loan is converted or continued in accordance with (S)3.5.
EBITDA: With respect to any fiscal period, an amount equal to the sum of
------
(a) Combined Net Income for such period, plus (b) to the extent deducted in the
----
calculation of such Person's Combined Net Income and without duplication, (i)
depreciation and amortization for such period, plus (ii) other noncash charges,
----
including, without limitation, in process research and development expenses or
-6-
charges, made in calculating Combined Net Income for such period, plus (iii) tax
----
expense for such period, plus (iv) Combined Total Interest Expense paid or
----
accrued during such period, all as determined in accordance with GAAP.
Eligible Accounts Receivable: The aggregate of the unpaid portions of
----------------------------
Accounts (net of any credits, rebates, offsets, holdbacks or other adjustments
or commissions payable to third parties that are adjustments to such Accounts)
(a) that the Borrowers reasonably and in good faith determine to be collectible;
(b) that are with account debtors or other obligors that (i) are not Affiliates
of the Borrowers, (ii) purchased the goods or services giving rise to the
relevant Account in an arm's length transaction, (iii) are not insolvent or
involved in any case or proceeding, whether voluntary or involuntary, under any
bankruptcy, reorganization, arrangement, insolvency, adjustment of debt,
dissolution, liquidation or similar law of any jurisdiction and (iv) are, in the
Agent's reasonable judgment, creditworthy; (c) that are in payment of
obligations that have been fully performed, do not consist of progress billings
or bill and hold invoices and are not subject to dispute or any other similar
claims that would reduce the cash amount payable therefor; (d) that are not
subject to any pledge, restriction, security interest or other lien or
encumbrance other than those created by the Loan Documents; (e) in which the
Agent has a valid and perfected first priority security interest; (f) that are
not outstanding for more than ninety (90) days past the earlier to occur of (i)
the date of the respective invoices therefor and (ii) the date of shipment
thereof in the case of goods or the end of the calendar month following the
provision thereof in the case of services; (g) that are not due from an account
debtor or other obligor located in Minnesota unless the applicable Borrower (i)
has received a certificate of authority to do business and is in good standing
in such state or (ii) has filed a notice of business activities report with the
appropriate office or agency of such state for the current year; (h) that are
not due from any single account debtor or other obligor if more than thirty
percent (30%) of the aggregate amount of all Accounts owing from such account
debtor or other obligor would otherwise not be Eligible Accounts Receivable; (i)
that are payable in Dollars; (j) that are not payable from an office outside of
the United States; (k) that are not secured by a letter of credito unless the
Agent has a prior, perfected security interest in such letter of credit; and (i)
to the extent the account debtor on such Account is Cisco, are not more than 25%
of the aggregate amount of all Accounts..
Eligible Assignee: Any of (a) a commercial bank or finance company
-----------------
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (b) a
savings and loan association or savings bank organized under the laws of the
Untied States, or any State thereof or the District of Columbia, and having a
net worth of at least $100,000,000, calculated in accordance with GAAP; (c) a
commercial bank organized under the laws of any other country which is a member
of the Organization for Economic Cooperation and Development ( the "OECD"), or a
political subdivision of any such country, and having total assets in excess of
$1,000,000,000, provided, that such bank is acting through a branch or agency
--------
located in the country in which it is organized or another country
-7-
which is also a member of the OECD; (d) the central bank of any country which is
a member of the OECD; and (e) if, but only if, any Event of Default has occurred
and is continuing, any other bank, insurance company, commercial finance company
or other financial institution or other Person approved by the Agent, such
approval not to be unreasonably withheld.
Environmental Laws: All laws pertaining to environmental matters,
------------------
including without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water
Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case
as amended, and all rules, regulations, judgments, decrees, orders and licenses
arising under all such laws.
ERISA: The Employee Retirement Income Security Act of 1974, as amended,
-----
and all rules, regulations, judgments, decrees, and orders arising thereunder.
Eurocurrency Reserve Rate: For any day with respect to a LIBOR Rate Loan,
-------------------------
the maximum rate (expressed as a decimal) at which any lender subject thereto
would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor or similar regulations
relating to such reserve requirements) against "Eurocurrency Liabilities" (as
that term is used in Regulation D), if such liabilities were outstanding. The
Eurocurrency Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in the Eurocurrency Reserve Rate.
Event of Default: Any of the events listed in (S)10 hereof.
----------------
Federal Funds Effective Rate: For any day, the rate per annum equal to the
----------------------------
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average of the
quotations for such day on such transactions received by the Agent from three
funds brokers of recognized standing selected by the Agent.
Financials: In respect of any period, the combined balance sheet of the
----------
Borrower and their Subsidiaries as at the end of such period, and the related
statement of income and combined statement of cash flow for such period, each
setting forth in comparative form the figures for the previous comparable fiscal
period, all in reasonable detail and prepared in accordance with GAAP.
GAAP: Generally accepted accounting principles consistent with those
----
adopted by the Financial Accounting Standards Board and its predecessor, (a)
generally, as in effect from time to time, and (b) for purposes of determining
compliance by the Borrowers with their financial covenants set forth herein, as
-8-
in effect for the fiscal year therein reported in the most recent Financials
submitted to the Agent prior to execution of this Agreement.
Guarantors: Each Subsidiary of any Borrower existing on the Closing Date
----------
and each other Person which is required to be or become guarantors from time to
time pursuant to (S)9.1(h) hereof.
Guaranty: Collectively, (a) the Amended and Restated Guaranty, dated or to
--------
be dated on or prior to the Closing Date, made by Pacific Direct in favor of the
Banks and the Agent pursuant to which Pacific Direct guaranties to the Banks and
the Agent the payment and performance of the Obligations in form and substance
satisfactory to the Banks and the Agent and (b) any other guaranty dated
subsequent to the Closing Date made by any other Guarantor in favor of the Banks
and the Agent pursuant to which each Guarantor guaranties to the Banks and the
Agent the payment and performance of the Obligations in form and substance
satisfactory to the Banks and the Agent.
Indebtedness: In respect of any entity, all obligations, contingent and
------------
otherwise, that in accordance with GAAP should be classified upon the obligor's
balance sheet as liabilities, or to which reference should be made by footnotes
thereto, including in any event and whether or not so classified, but without
duplication with respect liabilities under swap arrangements where the
underlying obligation appears on the balance sheet of such entity: (a) all debt
and similar monetary obligations, whether direct or indirect, (b) all
liabilities secured by Liens, whether or not the liability secured thereby shall
have been assumed, (c) all guarantees, endorsements and other contingent
obligations whether direct or indirect in respect of indebtedness of others,
including any obligation to supply funds to or in any manner to invest in,
directly or indirectly, the debtor, to purchase indebtedness, or to assure the
owner of indebtedness against loss, through an agreement to purchase goods,
supplies or services for the purpose of enabling the debtor to make payment of
the indebtedness held by such owner or otherwise and (d) all liabilities in
respect of bankers' acceptances or letters of credit.
Interest Payment Date: (a) As to any Base Rate Loan, the last day of the
---------------------
calendar month which includes the Drawdown Date thereof; and (b) as to any LIBOR
Rate Loan in respect of which the Interest Period is (i) ninety (90) days or
less, the last day of such Interest Period and (ii) more than ninety (90) days,
the date that is ninety (90) days from the first day of such Interest Period
and, in addition, the last day of such Interest Period.
Interest Period: With respect to each Revolving Credit Loan or all or any
---------------
relevant portion of the Term Loan, (a) initially, the period commencing on the
Drawdown Date of such Loan and ending on the last day of one of the periods set
forth below, as selected by the Borrowers in a Loan Request (i) for any Base
Rate Loans, the last day of the calendar month; and (ii) for any LIBOR Rate
Loan, 1, 2, 3, or 6 months; and (b) thereafter each period commencing on the
last day of the immediately preceding Interest Period applicable to such Loan
and ending
-9-
on the last day of one of the periods set forth above, as selected by the
Borrowers in a Conversion Request; provided that all of the foregoing provisions
--------
relating to Interest Periods are subject to the following:
(a) if any Interest Period with respect to a LIBOR Rate Loan would
otherwise end on a day that is not a LIBOR Business Day, that Interest
Period shall be extended to the next succeeding LIBOR Business Day unless
the result of such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period shall end on
the immediately preceding LIBOR Business Day;
(b) if any Interest Period with respect to a Base Rate Loan would end
on a day that is not a Business Day, that Interest Period shall end on the
next succeeding Business Day;
(c) If the Borrowers shall fail to give notice as provided in (S)2.3,
the Borrowers shall be deemed to have requested a conversion of the
affected LIBOR Rate Loan to a Base Rate Loan and the continuance of all
Base Rate Loans as Base Rate Loans on the last day of the then current
Interest Period with respect thereto;
(d) any Interest Period relating to any LIBOR Rate Loan that begins
on the last LIBOR Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last LIBOR Business Day of a
calendar month; and
(e) any Interest period relating to any LIBOR Rate Loan that would
otherwise extend beyond the Revolving Credit Loan Maturity Date (if
comprising a Revolving Credit Loan) or the Term Loan Maturity Date (if
comprising the Term Loan or a portion thereof) shall end on the Revolving
Credit Loan Maturity Date or, as the case may be, the Term Loan Maturity
Date.
Letter of Credit: See (S)4.1(a).
----------------
Letter of Credit Application: See (S)4.1(a).
----------------------------
Letter of Credit Fee: See (S)4.7.
--------------------
Letter of Credit Participation: See (S)4.1(d).
-------------------------------
Leverage Ratio: As at any date of determination, the ratio of (a) Total
--------------
Funded Indebtedness of the Borrowers and their Subsidiaries outstanding on such
date to (b) the EBITDA of the Borrowers and their Subsidiaries for the Reference
Period ending on such date.
LIBOR Business Day: Any day on which commercial banks are open for
------------------
international business (including dealings in U.S. dollar deposits) in London or
-10-
such other eurodollar interbank market as may be selected by the Agent in its
sole discretion acting in good faith.
LIBOR Lending Office: Initially, the office of each Bank designated as
--------------------
such in Schedule 1 hereto; thereafter, such other office of such Bank, if any,
-------- -
that shall be making or maintaining LIBOR Rate Loans.
LIBOR Rate: For any Interest Period with respect to a LIBOR Rate Loan, the
----------
rate of interest equal to (a) the rate determined by the Agent at which U.S.
dollar deposits for such Interest Period are offered based on information
presented on Telerate Page 3750 (or any successor publication or source selected
by the Bank in its reasonable discretion) at 11:00 a.m. (London time) on the
second LIBOR Business Day, prior to the first day of such Interest Period,
divided by (b) a number equal to 1.00 minus the Eurocurrency Reserve Rate, if
-----
applicable.
LIBOR Rate Loans: Revolving Credit Loans and all or any portion of the
----------------
Term Loan bearing interest calculated by reference to the LIBOR Rate.
Liens: Any encumbrance, mortgage, pledge, hypothecation, charge,
-----
restriction or other security interest of any kind securing any obligation of
any entity or person.
Loan Documents: This Agreement, the Notes, the Letter of Credit
--------------
Applications, the Letters of Credit and the Security Documents, in each case as
from time to time amended or supplemented.
Loan Request: See (S)2.1.
------------
Loans: The Revolving Credit Loans and the Term Loan.
-----
Majority Banks: As of any date, (a) if there are only two (2) Banks,
--------------
Majority Banks shall mean all the Banks, and (b) if there are three (3) or more
Banks the Banks whose aggregate Commitments constitute at least sixty six and
two thirds percent (66 2/3%) of the Total Commitment.
Materially Adverse Effect: Any materially adverse effect on the financial
-------------------------
condition or business operations of the Borrowers and their Subsidiaries
taken together or material impairment of the ability of the Borrowers or any of
their Subsidiaries to perform its obligations hereunder or under any of the
other Loan Documents.
Maximum Drawing Amount: The maximum aggregate amount from time to time
----------------------
that the beneficiary may draw under the outstanding Letters of Credit, as such
aggregate amount may be reduced from time to time pursuant to the terms of the
Letters of Credit.
Merger Agreement: The Agreement and Plan of Merger dated as of June 15,
----------------
1998 among the Parent, CMG-InSolutions Merger Corporation, InSolutions
-11-
Incorporated and the shareholders of InSolutions Corporation identified therein,
together with all schedules, exhibits and annexes thereto.
Notes: The Term Notes and the Revolving Credit Notes.
-----
Obligations: All indebtedness, obligations and liabilities of the
-----------
Borrowers and their Subsidiaries to any of the Banks and the Agent, existing on
the date of this Agreement or arising thereafter, direct or indirect, joint or
several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, arising or incurred under this Agreement or any other Loan Document
or in respect of any of the Loans made or Reimbursement Obligations incurred or
any of the Notes, Letter of Credit Applications, Letters of Credit, or arising
or incurred in connection with any interest rate protection arrangements
contemplated by (S)9.1(g) or any documents, agreements or instruments executed
in connection therewith, or other instruments at any time evidencing any
thereof.
Parent: CMG Informations Services Inc, a Delaware corporation, and the
------
parent corporation of each of the Borrowers.
Perfection Certificates: Each of the Perfection Certificates of the
-----------------------
Borrowers and the Guarantors as defined in the Security Agreements.
Person: Any individual, corporation, partnership, trust, unincorporated
------
association, business or other legal entity, and any government or any
governmental agency or political subdivision thereof.
Rate Adjustment Period: See the definition of Applicable Margin.
----------------------
Record: See (S)3.2 hereof.
------
Reference Period: The period of (a) four (4) consecutive fiscal quarters
----------------
of SalesLink ending on the relevant date or (b) until four (4) full fiscal
quarters of SalesLink have elapsed after April 30, 1998, such shorter period of
one (1), two (2) or three (3) full fiscal quarters elapsed since April 30, 1998,
with the relevant amount applicable to such shorter period annualized for the
period of four (4) consecutive fiscal quarters for which the applicable covenant
or test calculation is being performed by multiplying such relevant amount by a
fraction whose numerator is four (4) and whose denominator is such actual number
of elapsed full fiscal quarters.
Reimbursement Obligation: The Borrowers' joint and several obligation to
------------------------
reimburse the Agent and the Banks on account of any drawing under any Letter of
Credit as provided in (S)4.2.
Requirement of Law: In respect of any person or entity, any law, treaty,
------------------
rule, regulation or determination of an arbitrator, court, or other governmental
authority, in each case applicable to or binding upon such person or entity or
affecting any of its property.
-12-
Restricted Payment: In relation to any Borrower and its Subsidiaries, any
------------------
(a) Distribution; and (b) payment by such Borrower or any of its Subsidiaries to
the Parent or any Affiliate of the Parent or such Borrower or its Subsidiaries
other than payments to any such Affiliates for goods and services in the
ordinary course of business on terms equivalent to those obtainable in arms
length transactions.
Revolving Credit Loan Commitment: With respect to each Bank, the amount
--------------------------------
set forth on Schedule 1 hereto as the amount of such Bank's commitment to make
-------- -
Revolving Credit Loans to, and to participate in the issuance, extention and
renewal of Letters of Credit for the account of the Borrowers, as the same may
be reduced from time to time or terminated hereunder.
Revolving Credit Loan Maturity Date: November 11, 2002.
-----------------------------------
Revolving Credit Loans: Revolving credit loans made or to be made by the
----------------------
Banks to the Borrowers pursuant to (S)2 hereof.
Revolving Credit Note: See (S)2.2(d) hereof.
---------------------
Security Agreements: Collectively, (a) the Amended and Restated Security
-------------------
Agreement, dated or to be dated on or prior to the Closing Date, among the
Borrowers and the Agent and in form and substance satisfactory to the Agent; and
(b) the Amended and Restated Security Agreement, dated or to be dated on or
prior to the Closing Date, between Pacific Direct and the Agent, and in form and
substance satisfactory to the Agent, and as each Security Agreement may be
amended, restated, modified and/or supplemented from time to time.
Security Documents: Collectively, the Security Agreements, each Guaranty,
------------------
the Trademark Agreements and the Stock Pledge Agreement.
Seller: Each of the Shareholders (as such term is defined in the Merger
------
Agreement) set forth on the signature page to the Merger Agreement.
Seller Note: The unsecured promissory note from the Parent to Robert Lee
-----------
in the original principal amount of $4,249,845 issued pursuant to the
Acquisition, which promissory note shall be in form and substance satisfactory
to the Banks and the Agent.
Stock Pledge Agreement. The Amended and Restated Stock Pledge Agreement
----------------------
dated or to be dated on or prior to the Closing Date between SalesLink and the
Agent and in form and substance satisfactory to the Banks and the Agent.
Subsidiary: In respect of any Person, any business entity of which such
-----------
Person at any time owns or controls directly or indirectly more than fifty
percent (50%) of the outstanding shares of stock having voting power, regardless
of whether such right to vote depends upon the occurrence of a contingency.
-13-
Term Loan: The term loan made or to be made by the Banks to the Borrowers
---------
on the Closing Date in the aggregate principal amount of $15,500,000 pursuant to
(S)3 hereof.
Term Loan Commitment: With respect to each Bank, the amount set forth on
--------------------
Schedule 1 hereto as the amount of such Bank's commitment to make the Term Loan
- - - ----------
to the Borrowers on the Closing Date.
Term Loan Maturity Date: November 11, 2002.
-----------------------
Term Note: See (S)3.2 hereof.
---------
Total Commitment: The sum of the Commitments of the Banks, as in effect
----------------
from time to time.
Total Revolving Credit Commitment: The sum of the Revolving Credit
---------------------------------
Commitments of the Banks, as in effect from time to time. As of the Closing
Date the Total Revolving Credit Commitment is $8,000,000.
Total Funded Indebtedness: All Indebtedness of the Borrowers and their
-------------------------
Subsidiaries for borrowed money, purchase money Indebtedness and with respect to
Capitalized Leases, determined on a combined basis in accordance with GAAP.
Trademark Agreement. Collectively, (a) the Amended and Restated Trademark
-------------------
Collateral Security and Pledge Agreement, dated or to be dated on or prior to
the Closing Date, between SalesLink and the Agent and in form and substance
satisfactory to the agent, and as such Trademark Agreement may be amended,
restated, modified and/or supplemented from time to time and (b) the Trademark
Collateral Security and Pledge Agreement, dated or to be dated on or prior to
the Closing Date, between InSolutions and the Agent and in form and substance
satisfactory to the agent, and as such Trademark Agreement may be amended,
restated, modified and/or supplemented from time to time.
Uniform Customs: With respect to any Letter of Credit, the Uniform Customs
---------------
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500 or any successor version thereto adopted by the
Agent in the ordinary course of its business as a letter of credit issuer and in
effect at the time of issuance of such Letter of Credit.
Unpaid Reimbursement Obligation: Any Reimbursement Obligation for which
-------------------------------
any Borrower or the Parent, as the case may be, does not reimburse the Agent and
the Banks on the date specified in, and in accordance with, (S)3.2(a).
1.2. RULES OF INTERPRETATION. For purposes of this Agreement, the parties
hereto hereby acknowledge and agree that when a reference is made to any fiscal
year, fiscal quarter, fiscal month or any other such period, until such time as
InSolutions changes its fiscal year to be identical to that of SalesLink, such
term shall mean the fiscal year, fiscal quarter and fiscal month of
-14-
SalesLink, and shall include the relevant information of InSolutions for those
identical months, quarter or twelve month period, regardless of the actual
fiscal year of InSolutions. For example, a reference to the Combined Current
Assets of the Borrowers for the fiscal quarter ended July 31, 1998 shall mean
the current assets of SalesLink and it Subsidiaries for its period of April 1,
1998 through July 31, 1998, and the current assets of InSolutions and its
Subsidiaries for the three month period of April 1, 1998 through July 31, 1998.
2. REVOLVING CREDIT FACILITY.
-------------------------
2.1. COMMITMENT TO LEND. Upon the terms and subject to the conditions of
------------------
this Agreement, each of the Banks severally agrees to lend to the Borrowers such
sums that the Borrowers may request, from the Closing Date until but not
including the Revolving Credit Loan Maturity Date, up to a maximum aggregate
amount outstanding (after giving effect to all amounts requested) at any one
time equal to such Bank's Revolving Credit Loan Commitment minus such Bank's
-----
Commitment Percentage of the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations pertaining to Letters of Credit, provided that the sum
--------
of the outstanding amount of the Revolving Credit Loans (after giving effect to
all amounts requested) plus the Maximum Drawing Amount and all Unpaid
----
Reimbursement Obligations pertaining to all Letters of Credit shall not at any
time exceed the lesser of (a) Total Revolving Credit Commitment and (b) the
Borrowing Base. Revolving Credit Loans shall be in the minimum aggregate amount
of $100,000 or an integral multiple thereof.
2.2. REQUESTS FOR LOANS.
------------------
(a) SalesLink shall give to the Agent written notice in form and
substance satisfactory to the Agent (or telephonic notice confirmed in
writing in form and substance satisfactory to the Agent) of each Revolving
Credit Loan being requested hereunder (a "Loan Request") (i) no later than
10:00 a.m. (Boston time) on the proposed Drawdown Date of any Base Rate
Loan and (ii) no less than three (3) LIBOR Business Days prior to the
proposed Drawdown Date of any LIBOR Rate Loan. Each such notice shall
specify (A) the principal amount of the Revolving Credit Loan being
requested, (B) the proposed Drawdown Date of such Revolving Credit Loan,
(C) in the event the Revolving Credit Loan being requested is a LIBOR Rate
Loan, the Interest Period for such Revolving Credit Loan and (D) whether
such Revolving Credit Loan shall be a Base Rate Loan or a LIBOR Rate Loan.
Promptly upon receipt of any such notice, the Agent shall notify each of
the Banks thereof. Each Loan Request shall be irrevocable and binding upon
the Borrowers and shall obligate the Borrowers to accept the Revolving
Credit Loan requested from the Banks on the proposed Drawdown Date. Each
Loan Request shall be in a minimum aggregate amount of $100,000 or an
integral multiple thereof.
-15-
(b) Notwithstanding the notice requirements set forth in (S)2.2(a)
and the minimum Revolving Credit Loan amount provisions contained in (S)2.1
and 2.2(a), Revolving Credit Loans may be made from time to time in the
following manner: the Banks may make Revolving Credit Loans to the
Borrowers by entry of credits by the Agent to the Borrowers' controlled
disbursement account (the "Disbursement Account") with the Agent to cover
checks and other charges which the Borrowers have drawn or made against
such Disbursement Account. The Borrowers hereby request and authorize the
Banks to make from time to time such Revolving Credit Loans by means of
appropriate entries of such credits sufficient to cover checks and other
charges then presented. The Borrowers and the Banks may also agree to
effect such other controlled disbursement arrangements as may be mutually
satisfactory. The Borrowers acknowledge and agree that the making of such
Revolving Credit Loans in accordance with this (S)2.2(b) shall, in each
case, be subject in all respects to the provisions of this Agreement as if
they were Revolving Credit Loans covered by a Loan Request, including
without limitation, the limitations set forth in (S)2.1 and the requirement
that the applicable provisions of (S)8 be satisfied. All actions taken by
the Agent and the Banks pursuant to the provisions of this (S)2.2(b) shall
be conclusive and binding upon the Borrowers.
(c) Notwithstanding the notice requirement set forth in (S)2.2(a) and
the minimum Revolving Credit Loan provisions contained in (S)2.1 and
(S)2.2(a), each of the Banks agrees to make Revolving Credit Loans to the
Borrowers sufficient to pay to the Banks any Unpaid Reimbursement
Obligations on the date on which such Reimbursement Obligations become
Unpaid Reimbursement Obligations. The Borrowers hereby request and
authorize the Banks to make from time to time such Revolving Credit Loans
by means of paying Unpaid Reimbursement Obligations. The Borrowers
acknowledge and agree that the making of such Revolving Credit Loans shall,
in each case, be subject in all respects to the provisions of this
Agreement, including, without limitation, the limitations set forth in
(S)2.1(a) and the requirements of the applicable conditions in (S)8. All
actions taken by the Agent and the Banks pursuant to the provisions of this
(S)2.2(c) shall be conclusive and binding on the Borrowers.
(d) The joint and several obligations of the Borrowers to repay to
the Banks the principal of the Revolving Credit Loans and interest accrued
thereon shall be evidenced by separate joint and several promissory notes
(each a "Revolving Credit Note") dated as of the Closing Date and completed
with appropriate insertions. One Revolving Credit Note shall be payable to
the order of each Bank in a principal amount equal to such Bank's Revolving
Credit Loan Commitment or, if less, the outstanding amount of all Revolving
Credit Loans made by such Bank, plus interest accrued thereon, as set forth
in (S)2.4 below.
-16-
2.3. CONVERSION OPTIONS.
------------------
2.3.1. CONVERSION TO DIFFERENT LOAN TYPE. The Borrowers may elect
---------- -- --------- ---- ----
from time to time to convert any outstanding Revolving Credit Loan from a
Base Rate Loan to a LIBOR Rate Loan or from a LIBOR Rate Loan to a Base
Rate Loan, provided that (a) with respect to any such conversion of a LIBOR
--------
Rate Loan to a Base Rate Loan, the Borrowers shall give the Agent at least
three (3) Business Day's prior written notice of such election; (b) with
respect to any such conversion of a Base Rate Loan to a LIBOR Rate Loan,
the Borrowers shall give the Agent at least three (3) LIBOR Business Days
prior written notice of such election; (c) with respect to any such
conversion of a LIBOR Rate Loan into a Base Rate Loan, such conversion
shall only be made on the last day of the Interest Period with respect
thereto; and (d) no Revolving Credit Loan may be converted into a LIBOR
Rate Loan when any Default or Event of Default has occurred and is
continuing. On the date on which such conversion is being made each Bank
shall take such action as is necessary to transfer its Commitment
Percentage of such Revolving Credit Loans to its Domestic Lending Office or
its LIBOR Lending Office, as the case may be. All or any part of Revolving
Credit Loans may be converted as provided herein, provided that any partial
--------
conversion shall be in an aggregate principal amount of $100,000 or a whole
multiple thereof. Each Conversion Request relating to the conversion of a
Base Rate Loan to a LIBOR Rate Loan shall be irrevocable by the Borrowers.
2.3.2. CONTINUATION OF LOAN TYPE. Any Base Rate Loan or LIBOR Rate
------------ -- ---- ----
Loan may be continued as such upon the expiration of an Interest Period
with respect thereto by compliance by the Borrowers with the notice
provisions contained in (S)2.3.1; provided that no LIBOR Rate Loan may be
continued as such when any Default or Event of Default has occurred and is
continuing, but shall be automatically converted to a Base Rate Loan on the
last day of the first Interest Period relating thereto ending during the
continuance of any Default or Event of Default of which officers of the
Agent active upon the Borrowers' account have actual knowledge. In the
event that the Borrowers fail to provide any such notice with respect to
the continuation of any LIBOR Rate Loan as such, then such LIBOR Rate Loan
shall be automatically converted to a Base Rate Loan on the last day of the
first Interest Period relating thereto.
2.3.3. LIBOR RATE LOANS. Any conversion to or from LIBOR Rate Loans
----- ---- -----
shall be in such amounts and be made pursuant to such elections so that,
after giving effect thereto, the aggregate principal amount of all LIBOR
Rate Loans having the same Interest Period shall not be less than $100,000
or a whole multiple thereof, and there shall not be more than three (3)
outstanding Revolving Credit Loans which are LIBOR Rate Loans at any time.
-17-
2.4. INTEREST. So long as no Event of Default is continuing, and except as
--------
otherwise provided herein, (a) each Base Rate Loan shall bear interest for the
period commencing with the Drawdown Date thereof and ending of the last day of
the Interest Period with respect thereto at the rate per annum equal to the Base
Rate plus the Applicable Margin; (b) each LIBOR Rate Loan shall bear interest
----
for the period commencing with the Drawdown Date thereof and ending on the last
day of the Interest Period with respect thereto at the rate per annum equal to
the LIBOR Rate for such Interest Period plus the Applicable Margin; and (c) the
----
Borrowers jointly and severally promise to pay interest on each Revolving Credit
Loan in arrears on each Interest Payment Date with respect thereto. While an
Event of Default is continuing, amounts payable under any of the Loan Documents
shall bear interest (compounded monthly and payable on demand in respect of
overdue amounts) at a rate per annum which is equal to the sum of (a) the Base
Rate, and (b) four percent (4%) above the Margin until such amount is paid in
full or (as the case may be) such Event of Default has been cured or waived in
writing by the Majority Banks (after as well as before judgment).
2.5. REPAYMENTS AND PREPAYMENTS. The Borrowers hereby jointly and
--------------------------
severally agree to pay to the Agent for the benefit of the Banks on the
Revolving Credit Loan Maturity Date the entire unpaid principal of and interest
on all Revolving Credit Loans. If at any time the outstanding amount of the
Revolving Credit Loans plus the Maximum Drawing Amount and all Unpaid
----
Reimbursement Obligations exceeds the lesser of (a) the Total Revolving Credit
Commitment and (b) the Borrowing Base, then the Borrowers shall immediately pay
the amount of such excess to the Agent for the respective accounts of the Banks
for application, first to any Unpaid Reimbursement Obligation; second, to the
Revolving Credit Loans; and third, to provide to the Agent cash collateral for
Reimbursement Obligations as contemplated by (S)4. Each payment of any Unpaid
Reimbursement Obligation or prepayment of Revolving Credit Loans shall be
allocated among the Banks, in proportion, as nearly as practicable, to each
Reimbursement Obligation or (as the case may be) the respective unpaid principal
amount of each Bank's Revolving Credit Note, with adjustments to be extent
practicable to equalize any prior payments or repayments not exactly in
proportion. The Borrowers may elect to prepay the outstanding principal of all
or any part of any Revolving Credit Loan, without premium or penalty, in a
minimum amount of $100,000 or an integral multiple thereof, upon written notice
to the Agent given by 10:00 a.m. Boston time on the date of such prepayment, of
the amount to be prepaid. Each partial prepayment shall be allocated among the
Banks, in proportion, as nearly as practicable, to the respective unpaid
principal amount of each Bank's Revolving Credit Note, with adjustments to the
extent practicable to equalize any prior repayments not exactly in proportion.
The Borrowers shall be entitled to reborrow before the Revolving Credit Loan
Maturity Date such amounts, upon the terms and subject to the conditions of this
Agreement. Each repayment or prepayment of principal of any Revolving Credit
Loan shall be accompanied by payment of the unpaid interest accrued to such date
on the principal being repaid or prepaid.. The Borrowers may elect to reduce or
terminate the Revolving Credit Loan
-18-
Commitment by a minimum principal amount of $100,000 or an integral multiple
thereof, upon written notice to the Agent given by 10:00 a.m. Boston time at
least two (2) Business Days prior to the date of such reduction or termination.
The Borrowers shall not be entitled to reinstate the Revolving Credit Loan
Commitment following such reduction or termination.
2.6. FUNDS FOR REVOLVING CREDIT LOAN.
-------------------------------
2.6.1. FUNDING PROCEDURES. Not later than 11:00 a.m. (Boston time)
------------------
on the proposed Drawdown Date of any Revolving Credit Loans, each of the
Banks will make available to the Agent, at the Agent's Head Office, in
immediately available funds, the amount of such Bank's Commitment
Percentage of the amount of the requested Revolving Credit Loans. Upon
receipt from each Bank of such amount, and upon receipt of the documents
required by (S)8 and the satisfaction of the other conditions set forth
therein, to the extent applicable, the Agent will make available to the
Borrowers the aggregate amount of such Revolving Credit Loans made
available to the Agent by the Banks. The failure or refusal of any Bank to
make available to the Agent at the aforesaid time and place on any Drawdown
Date the amount of its Commitment Percentage of the requested Revolving
Credit Loans shall not relieve any other Bank from its several obligation
hereunder to make available to the Agent the amount of such other Bank's
Commitment Percentage of any requested Revolving Credit Loans.
2.6.2 ADVANCES BY AGENT. The Agent may, unless notified to the
-----------------
contrary by any Bank prior to a Drawdown Date, assume that such Bank has
made available to the Agent on such Drawdown Date the amount of such Bank's
Commitment Percentage of the Revolving Credit Loans to be made on such
Drawdown Date, and the Agent may (but it shall not be required to), in
reliance upon such assumption, make available to the Borrowers a
corresponding amount. If any Bank makes available to the Agent such amount
on a date after such Drawdown Date, such Bank shall pay to the Agent on
demand an amount equal to the product of (a) the average computed for the
period referred to in clause (c) below, of the weighted average interest
rate paid by the Agent for federal funds acquired by the Agent during each
day included in such period, times (b) the amount of such Bank's Commitment
-----
Percentage of such Revolving Credit Loans, times (c) a fraction, the
-----
numerator of which is the number of days that elapse from and including
such Drawdown Date to the date on which the amount of such Bank's
Commitment Percentage of such Revolving Credit Loans shall become
immediately available to the Agent, and the denominator of which is 365. A
statement of the Agent submitted to such Bank with respect to any amounts
owing under this paragraph shall be prima facie evidence of the amount due
----- -----
and owing to the Agent by such Bank. If the amount of such Bank's
Commitment Percentage of such Revolving Credit Loans is not made available
to the Agent by such Bank within three (3) Business Days following such
Drawdown Date, the
-19-
Agent shall be entitled to recover such amount from the Borrowers on
demand, with interest thereon at the rate per annum applicable to the
Revolving Credit Loans made on such Drawdown Date.
3. THE TERM LOAN.
-------------
3.1. COMMITMENT TO LEND. Upon the terms and subject to the conditions of
------------------
this Agreement, each Bank agrees to lend to the Borrowers on the Closing Date
the amount of its Commitment Percentage of the principal amount of $15,500,000.
3.2. THE TERM NOTES. The Term Loan shall be evidenced by separate joint
--------------
and several promissory notes of the Borrowers in form and substance satisfactory
to the Agent (each a "Term Note"), dated the Closing Date and completed with
appropriate insertions. One Term Note shall be payable to the order of each Bank
in a principal amount equal to such Bank's Commitment Percentage of the Term
Loan and representing the joint and several obligation of the Borrowers to pay
to such Bank such principal amount or, if less, the outstanding amount of such
Bank's Commitment Percentage of the Term Loan, plus interest accrued thereon, as
set forth below. The Borrowers irrevocably authorize each Bank to make or cause
to be made a notation on each grid attached to such Bank's Term Note (the
"Record") reflecting the original principal amount of the Term Loan and, at or
about the time of such Bank's receipt of any principal payment on such Term
Note, an appropriate notation on such Record reflecting such payment. The
aggregate unpaid amount set forth on the Record shall be prima facie evidence of
the principal amount thereof owing and unpaid to such Bank, but the failure to
record, or any error in so recording, any such amount on the Record shall not
affect the joint and several obligations of the Borrowers hereunder or under the
Term Note to make payments of principal of and interest on the Term Note when
due.
3.3. SCHEDULE OF INSTALLMENT PAYMENTS OF PRINCIPAL OF TERM LOAN. The
----------------------------------------------------------
Borrowers jointly and severally promise to pay to the Agent for the account of
the Banks the principal amount of the Term Loan in sixteen (16) consecutive
quarterly payments, payable on the last Business Day of each fiscal quarter
ending within any period set forth below in the amount set forth opposite such
period, commencing on January 31, 1999 with a final payment on the Term Loan
Maturity Date in an amount equal to the unpaid balance of the Term Loan.
QUARTER ENDING: AMOUNT OF EACH PAYMENT
-------------- ----------------------
January 31, 1999 - October 31, 1999 $ 387,500
January 31, 2000 - October 31, 2000 $ 775,000
January 31, 2001 - October 31, 2001 $1,162,500
January 31, 2002 - October 31, 2002 $1,550,000
-20-
Term Loan Maturity Date Remaining unpaid balance of Term
Loan
3.4. OPTIONAL PREPAYMENT OF TERM LOAN. The Borrowers shall have the right
--------------------------------
at any time to prepay the Term Notes on or before the Term Loan Maturity Date,
as a whole, or in part, upon not less than five (5) Business Days prior written
notice to the Agent, without premium or penalty, provided, that (a) each partial
--------
prepayment shall be in the principal amount of $100,000 or an integral multiple
thereof; (b) no portion of the Term Loan bearing interest at the LIBOR Rate may
be prepaid pursuant to this (S)3.4 except on the last day of the Interest Period
relating thereto; and (c) each partial prepayment shall be allocated among the
Banks, in proportion, as nearly as practicable, to the respective outstanding
amount of each Bank's Term Note, with adjustments to the extent practicable to
equalize any prior prepayments not exactly in proportion. Any prepayment of
principal of the Term Loan shall include all interest accrued to the date of
prepayment and shall be applied against the scheduled installments of principal
due on the Term Loan in the inverse order of maturity No amount repaid with
respect to the Term Loan may be reborrowed.
3.5. INTEREST ON TERM LOAN.
---------------------
3.5.1. INTEREST RATES. So long as no Event of Default is continuing,
-------- -----
and except as otherwise provided herein, the Term Loan shall bear interest
during each Interest Period relating to all or any portion of the Term Loan
at the following rates: (a) to the extent that all or any portion of the
Term Loan bears interest during such Interest Period at the Base Rate, the
Term Loan or such portion shall bear interest during such Interest Period
at the rate per annum equal to the Base Rate plus the Applicable Margin;
----
(b) to the extent that all or any portion of the Term Loan bears interest
during such Interest Period at the LIBOR Rate, the Term Loan or such
portion shall bear interest during such Interest Period at the rate per
annum equal to the LIBOR Rate for such Interest Period plus the Applicable
----
Margin. The Borrowers jointly and severally promise to pay interest on the
Term Loan or any portion thereof outstanding during each Interest Period in
arrears on each Interest Payment Date applicable to such Interest Period.
While an Event of Default is continuing, amounts payable under any of the
Loan Documents shall bear interest (compounded monthly and payable on
demand in respect of overdue amounts) at a rate per annum which is equal to
the sum of (a) the Base Rate, and (b) three percent (3%) above the Margin
until such amount is paid in full or (as the case may be) such Event of
Default has been cured or waived in writing by the Majority Banks (after as
well as before judgment).
3.5.2. NOTIFICATION BY BORROWERS. The Borrowers shall notify the
------------ -- ---------
Agent, such notice to be irrevocable, at least three (3) LIBOR Business
Days prior to the Drawdown Date of the Term Loan if all or any portion of
the Term Loan is to bear interest at the LIBOR Rate. After the
-21-
Term Loan has been made, the provisions of (S)2.3 shall apply mutatis
-------
mutandis with respect to all or any portion of the Term Loan so that the
--------
Borrower may have the same interest rate options with respect to all or any
portion of the Term Loan as it would be entitled to with respect to the
Revolving Credit Loans.
3.5.3. AMOUNTS, ETC. Any portion of the Term Loan bearing interest
------- ---
at the LIBOR Rate relating to any Interest Period shall be in the amount of
$100,000 or an integral multiple thereof. No Interest Period relating to
the Term Loan or any portion thereof bearing interest at the LIBOR Rate
shall extend beyond the date on which a regularly scheduled installment
payment of the principal of the Term Loan is to be made unless a portion of
the Term Loan at least equal to such installment payment has an Interest
Period ending on such date or is then bearing interest at the Base Rate.
4. LETTER OF CREDIT FACILITY.
-------------------------
4.1. LETTER OF CREDIT COMMITMENT.
---------------------------
(a) Subject to the terms and conditions hereof and the execution
and delivery by the Borrowers of a letter of credit application on the
Agent's customary form (a "Letter of Credit Application"), the Agent on
behalf of the Banks, in reliance upon the agreement of the Banks set forth
in (S)4.1(d) and upon the representations and warranties of the Borrowers
contained herein, agrees, in its individual capacity, to issue, extend and
renew, for the account of the Borrowers, or, at the Borrowers' request, for
the account of the Parent, one or more standby letters of credit
(individually, a "Letter of Credit"), in such form as may be requested from
time to time by the Borrowers or, as the case may be, the Parent and agreed
to by the Agent; provided, however, that, after giving effect to such
-------- -------
request, (i) the sum of the aggregate Maximum Drawing Amount and all Unpaid
Reimbursement Obligations for all Letters of Credit shall not exceed
$2,000,000 at any one time; and (ii) the sum of (1) the Maximum Drawing
Amount on all Letters of Credit; plus (2) all Unpaid Reimbursement
----
Obligations, plus (3) the amount of all Revolving Credit Loans outstanding
----
shall not exceed the lesser of (a) the Total Commitment and (b) the
Borrowing Base;
(b) Each Letter of Credit Application shall be completed to the
satisfaction of the Agent. In the event that any provision of any Letter
of Credit Application shall be inconsistent with any provision of this
Agreement, then the provisions of this Agreement shall, to the extent of
any such inconsistency, govern;
(c) Each Letter of Credit issued, extended or renewed hereunder
shall, among other things, (i) provide for the payment of sight drafts for
honor thereunder when presented in accordance with the terms thereof
-22-
and when accompanied by the documents described therein and (ii) shall have
an expiry date no later than the date which is fourteen (14) days (or, if
the Letter of Credit is confirmed by a confirmer or otherwise provides for
one or more nominated persons, forty-five (45) days) prior to the Revolving
Credit Loan Maturity Date. The Letter of Credit so issued, extended or
renewed shall be subject to the Uniform Customs;
(d) Each Bank severally agrees that it shall be absolutely liable,
without regard to the occurrence of any Default or Event of Default or any
other condition precedent whatsoever, to the extent of such Bank's
Commitment Percentage, to reimburse the Agent on demand for the amount of
each draft paid by the Agent under each Letter of Credit to the extent that
such amount is not reimbursed by the Borrowers pursuant to (S)4.2 (such
agreement for a Bank being called herein the "Letter of Credit
Participation" of such Bank); and
(e) Each such payment made by a Bank shall be treated as the purchase
by such Bank of a participating interest in the Borrowers' Reimbursement
Obligation under (S)4.2 in an amount equal to such payment. Each Bank
shall share in accordance with its participating interest in any interest
which accrues pursuant to (S)4.2.
4.2. REIMBURSEMENT OBLIGATION OF THE BORROWER. In order to induce the
----------------------------------------
Agent to issue, extend and renew any Letter of Credit and the Banks to
participate therein, each of the Borrowers hereby jointly and severally
agrees to reimburse or pay to the Agent, for the account of the Agent or,
as the case may be, the Banks, with respect to any Letter of Credit issued,
extended or renewed by the Agent hereunder,
(a) except as otherwise expressly provided in (S)4.2(b) and (c), on
each date that any draft presented under such Letter of Credit is honored
by the Agent, or the Agent otherwise makes a payment with respect thereto,
(i) the amount paid by the Agent under or with respect to the Letter of
Credit, and (ii) the amount of any taxes, fees, charges or other costs and
expenses whatsoever incurred by the Agent or any Bank in connection with
any payment made by the Agent or any Bank under, or with respect to, such
Letter of Credit;
(b) upon the reduction (but not termination) of the Total Commitment
to an amount less than the Maximum Drawing Amount, an amount equal to such
difference, which amount shall be held by the Agent for the benefit of the
Banks and the Agent as cash collateral for all Reimbursement Obligations;
and
(c) upon the termination of the Total Commitment, or the acceleration
of the Reimbursement Obligations with respect to all Letters of Credit in
accordance with (S)10 an amount equal to the Maximum Drawing Amount on all
Letters of Credit, which amount shall be held by
-23-
the Agent for the benefit of the Agent and the Banks as cash collateral for
all Reimbursement Obligations.
Unless funded by a Revolving Credit Loan pursuant to (S)2.2(c)(i), each
such payment shall be made to the Agent at the Agent's Head Office in
immediately available funds. Interest on any and all amounts remaining unpaid
by the Borrowers under this (S)4.2 and not required to be funded by a Revolving
Credit Loan pursuant to (S)2.2(c)(i) at any time from the date such amounts
become due and payable (whether as stated in this (S)4.2, by acceleration or
otherwise) until payment in full (whether before or after judgment) shall be
payable to the Bank on demand at the rate specified in (S)2.2 following an Event
of Default.
4.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other
-------------------------
demand for payment shall be made under any Letter of Credit, the Agent shall
notify the Borrowers of the date and amount of the draft presented or demand for
payment and of the date and time when it expects to pay such draft or honor such
demand for payment. If the Borrowers fail to reimburse the Agent as provided in
(S)4.2 on or before the date that such draft is paid or other payment is made by
the Agent, the Agent may at any time thereafter notify the Banks of the amount
of any such Unpaid Reimbursement Obligation. No later than 3:00 p.m. (Boston
time) on the Business Day next following the receipt of such notice, each Bank
shall make available to the Agent, at the Agent's Head Office, in immediately
available funds, such Bank's Commitment Percentage of such Unpaid Reimbursement
Obligation, together with an amount equal to the product of (a) the average,
computed for the period referred to in clause (c) below, of the weighted average
interest rate paid by the Agent for federal funds acquired by the Agent during
each day included in such period, times (b) the amount equal to such Bank's
-----
Commitment Percentage of such Unpaid Reimbursement Obligation, times (c) a
-----
fraction, the numerator of which is the number of days that elapse from and
including the date the Agent paid the draft presented for honor or otherwise
made payment to the date on which such Bank's Commitment Percentage of such
Unpaid Reimbursement obligation shall become immediately available to the Agent,
and the denominator of which is 360. The responsibility of the Bank to the
Borrowers, the Parent and the Banks, as the case may be, shall be only to
determine that the documents (including each draft) delivered under such Letter
of Credit in connection with such presentment shall be in conformity in all
material respects with such Letter of Credit.
4.4. OBLIGATIONS ABSOLUTE. Each of the Borrowers' joint and several
--------------------
obligations under this (S)4 shall be absolute and unconditional under any and
all circumstances and irrespective of the occurrence of any Default or Event of
Default or any condition precedent whatsoever or any setoff, counterclaim or
defense to payment which the Borrowers may have or have had against the Agent,
any Bank or the beneficiary of any Letter of Credit. Each of the Borrowers
further agrees with the Agent and the Banks that the Agent and the Banks shall
not be responsible for, and the Reimbursement Obligations shall not
-24-
be affected by, among other things, the validity or genuineness of documents or
of any endorsements thereon, even if such documents should in fact prove to be
in any or all respects invalid, fraudulent or forged, or any dispute between or
among the Borrowers, the beneficiary of any Letter of Credit or any financing
institution or other party to which such Letter of Credit may be transferred or
any claims or defenses whatsoever of either the Parent or the Borrowers against
the beneficiary of any Letter of Credit or any such transferee. The Agent and
the Banks shall not be liable for any error, omission, interruption or delay in
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit. Each of the Parent and the
Borrowers agrees that any action taken or omitted by the Agent or any Bank under
or in connection with any Letter of Credit and the related drafts and documents,
if done in good faith, shall be binding upon the Borrowers and the Parent and
shall not result in any liability on the part of the Agent or any Bank to the
Borrowers or the Parent.
4.5. RELIANCE BY ISSUER. To the extent not inconsistent with (S)4.4, the
------------------
Agent shall be entitled to rely, and shall be fully protected in relying upon,
any Letter of Credit, draft, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document believed by it to be genuine and correct and
to have been signed, sent or made by the proper person or entity and upon advice
and statements of legal counsel, independent accountants and other experts
selected by the Agent. The Agent shall be fully justified in failing or refusing
to take any action under this Agreement unless it shall first have received such
advice or concurrence of the Majority Banks as it reasonably deems appropriate
or it shall first be indemnified to its reasonable satisfaction by the Banks
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Agent shall in all case be
fully protected in acting, or in refraining from acting, under this Agreement in
accordance with a request of the Majority Banks, and such request and any action
taken or failure to act pursuant thereto shall be binding upon the Banks and all
future holders of a Letter of Credit Participation.
4.6. LETTER OF CREDIT FEES. The Borrowers shall, on the date of issuance
---------------------
or of any extension or renewal of any Letter of Credit and at such other time or
times as such charges are customarily made by the Agent, pay a fee (in each case
a "Letter of Credit Fee") to the Agent in a per annum amount equal to the
Applicable Margin otherwise applicable to LIBOR Rate Loans times the face amount
of such Letter of Credit (of which 1/8% of such 1% shall be retained for the
account of the Agent as issuer of such Letter of Credit (the "Issuing Bank
Fee")), plus the Agent's customary issuance, amendment and other administrative
----
processing fees, such Letter of Credit Fee (other than the Issuing Bank Fee and
not such issuance, amendment or administrative fee) to be for the accounts of
the Banks in accordance with their respective Commitment Percentages.
-25-
5. CHANGES IN CIRCUMSTANCES, ETC.
-----------------------------
5.1. INABILITY TO DETERMINE LIBOR RATE. In the event, prior to the
--------- -- --------- ----- ----
commencement of any Interest Period relating to any LIBOR Rate Loan, the Agent
shall determine or be notified by the Majority Banks that adequate and
reasonable methods do not exist for ascertaining the LIBOR Rate that would
otherwise determine the rate of interest to be applicable to any LIBOR Rate Loan
during any Interest Period, the Agent shall forthwith give notice of such
determination (which shall be conclusive and binding on the Borrowers and the
Banks) to the Borrowers and the Banks. In such event (a) any Loan Request or
Conversion Request with respect to LIBOR Rate Loans shall be automatically
withdrawn and shall be deemed a request for a Base Rate Loan, (b) each LIBOR
Rate Loan will automatically, on the last day of the then current Interest
Period relating thereto, become a Base Rate Loan, and (c) the obligations of the
Banks to make LIBOR Rate Loans shall be suspended until the Agent or the
Majority Banks determines that the circumstances giving rise to such suspension
no longer exist, whereupon the Agent or, as the case may be, the Agent upon the
instruction of the Majority Banks shall so notify the Borrowers and the Banks.
5.2. ILLEGALITY. Notwithstanding any other provisions herein, if any
----------
present or future law, regulation, treaty or directive or in the interpretation
or application thereof shall make it unlawful for any Bank to make or maintain
LIBOR Rate Loans, such Bank shall forthwith give notice of such circumstances to
the Borrowers and the other Banks and thereupon (a) the commitment of such Bank
to make LIBOR Rate Loans or convert Base Rate Loans to LIBOR Rate Loans shall
forthwith be suspended and (b) such Bank's Loans then outstanding as LIBOR Rate
Loans, if any, shall be converted automatically to Base Rate Loans on the last
day of each Interest Period applicable to such LIBOR Rate Loans or within such
earlier period as may be required by law. Each of the Borrowers hereby jointly
and severally agrees promptly to pay the Agent for the account of such Bank,
upon demand by such Bank, any additional amounts necessary to compensate such
Bank for any costs incurred by such Bank in making any conversion in accordance
with this (S)5.2, including the discounted present value of any interest or fees
payable by such Bank to lenders of funds obtained by it in order to make or
maintain its LIBOR Loans hereunder.
5.3. CHANGES IN CIRCUMSTANCES. If, on or after the date hereof any Bank or
------- -- -------------
the Agent determines that (a) the adoption of, or any change in, any applicable
law, rule, regulation or guideline or the interpretation or administration
thereof (whether or not having the force of law), or (b) compliance by such Bank
or the Agent or its parent holding company with any guideline, request or
directive (whether or not having the force of law), (i) has the effect of
reducing the return on the Bank's, the Agent's or such holding company's capital
as a consequence of the Commitment, the Loans or the Letters of Credit to a
level below that which such Bank, the Agent or such holding company could have
achieved but for such adoption, change or compliance by any amount deemed by
such Bank or the Agent to be material, or (ii) shall subject such Bank to any
tax, duty or other charge with respect to any LIBOR
-26-
Rate Loan or any Note, or shall change the basis of taxation of payments to such
Bank of the principal of or interest on, LIBOR Rate Loans or in respect of any
other amount due under this Agreement in respect of LIBOR Rate Loans (other than
with respect to taxes based upon such Bank's net income); or (iii) shall impose,
modify or deem applicable any reserve, special deposit or similar requirement
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System, but excluding with respect to the LIBOR Rate Loan any
such requirement included in the applicable Eurocurrency Reserve Rate) against
assets of, deposits with or for the account of, or credit extended by, any Bank
or the Agent, or shall impose on any Bank, the Agent or the London interbank
market any other condition affecting LIBOR Rate Loans or the Notes, and the
result of any of the foregoing is to increase the cost to any Bank of making or
maintaining any LIBOR Rate Loan, or to reduce the amount of any sum received or
receivable by such Bank under this Agreement or under any Note with respect to
any Loan or the Letter of Credit, by an amount reasonably deemed by such Bank or
the Agent to be material, then such Bank or the Agent may notify the Borrowers
thereof. Each of the Borrowers jointly and severally agrees to pay to the Agent
for the account of such Bank or the Agent, as the case may be, (A) the amount of
the Borrowers' allocable share of the amount of such reduction in the return on
capital as and when such reduction is determined, upon presentation by such Bank
of a statement in the amount and setting forth such Bank's calculation thereof,
which statement shall be deemed true and correct absent manifest error and (B)
such additional amount or amounts as will compensate such Bank for such other
increased costs or reduction. Each Bank agrees to allocate shares of such
reduction among the Borrowers and such Bank's other customers similarly situated
on a fair and non-discriminatory basis.
5.4. CERTIFICATE. A certificate setting forth any additional amounts
-----------
payable pursuant to (S)5.3 and a brief explanation of such amounts which are
due, submitted by any Bank or the Agent to the Borrowers, shall be conclusive,
absent manifest error, that such amounts are due and owing.
5.5. INDEMNITY. The Borrowers jointly and severally agree to indemnify
---------
each Bank and to hold each Bank harmless from and against any loss, cost or
expense that such Bank may sustain or incur as a consequence of (a) default by
the Borrowers in payment of the principal amount of or any interest on any LIBOR
Rate Loans as and when due and payable, including any such loss or expense
arising from interest or fees payable by such Bank to lenders of funds obtained
by it in order to maintain its LIBOR Rate Loans, (b) default by the Borrowers in
making a borrowing or conversion after the Borrowers have given (or are deemed
to have given) a Loan Request or a Conversion Request relating thereto in
accordance with (S)2.2, (S)2.3 or (S)3.5 or (c) the making of any payment of a
LIBOR Rate Loan or the making of any conversion of any such Loan to a Base Rate
Loan on a day that is not the last day of the applicable Interest Period with
respect thereto, including interest or fees payable by any Bank to lenders of
funds obtained by it in order to maintain any such LIBOR Rate Loans.
-27-
6. FEES AND PAYMENTS.
-----------------
Contemporaneously with execution and delivery of this Agreement, the
Borrowers shall jointly and severally pay to the Agent a closing fee in the
amount of $50,000. The Borrowers shall jointly and severally pay to the Agent
for the Agent's own account an agent's fee at the times and in the amounts
determined by the Agent and the Borrowers. The Borrowers shall jointly and
severally pay to the Agent for the pro rata accounts of the Banks, on the first
--------
day of each calendar quarter hereafter, and upon the Revolving Credit Loan
Maturity Date or the date upon which the Revolving Credit Loan Commitment is no
longer in effect, a commitment fee calculated at a rate per annum which is equal
to one half of one percent (1/2%) of the average daily difference by which the
Total Revolving Credit Commitment amount exceeds the aggregate sum of the
outstanding Revolving Credit Loans during the preceding calendar quarter or
portion thereof. All payments to be made by the Borrowers hereunder or under
any of the other Loan Documents shall be made in U.S. dollars in immediately
available funds at the Agent's Head Office, without set-off or counterclaim and
without any withholding or deduction whatsoever. Each Bank and the Agent shall
be entitled to charge any account of the Borrowers with such Bank for any sum
due and payable by the Borrowers to such Bank hereunder or under any of the
other Loan Documents. If any payment hereunder is required to be made on a day
which is not a Business Day, it shall be paid on the immediately succeeding
Business Day, with interest and any applicable fees adjusted accordingly. All
computations of interest or of the commitment fee or any Letter of Credit Fees
payable hereunder shall be made by the Bank on the basis of actual days elapsed
and on a 360-day year.
7. REPRESENTATIONS AND WARRANTIES.
------------------------------
Each of the Borrowers and the Guarantors represents and warrants to the
Banks and the Agent on the date hereof, on the date of any Loan Request, on the
date of the request for a Letter of Credit, on each Drawdown Date and on the
date on which the Letter of Credit is issued, extended or renewed that:
(a) each of the Borrowers and each of their Subsidiaries is duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified and in good standing in
every other jurisdiction where it is doing business, and the execution,
delivery and performance by the Borrowers and the Guarantors of the Loan
Documents to which it is a party (i) are within its corporate authority,
(ii) have been duly authorized, (iii) do not conflict with or contravene
its Charter Documents;
(b) upon execution and delivery thereof, each Loan Document shall
constitute the legal, valid and binding obligation of the Borrowers and
their Subsidiaries party thereto, enforceable in accordance with its terms;
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(c) each of the Borrowers and their Subsidiaries has good and
marketable title to all its material properties, subject only to Liens
permitted hereunder, and possesses all assets, including intellectual
properties, franchises and Consents, adequate for the conduct of its
business as now conducted, without known conflict with any rights of
others. Each of the Borrowers and their Subsidiaries maintains insurance
with financially responsible insurers, copies of the policies for which
have been previously delivered to the Agent, covering such risks and in
such amounts and with such deductibles as are customary in the each of the
Borrowers' and their Subsidiaries' business and are adequate;
(d) SalesLink has provided to the Agent its audited Financials as at
July 31, 1997, and for the fiscal period then ended, and such Financials
are complete and correct and fairly present the position of SalesLink and
its Subsidiaries on a consolidated basis as at such date and for such
period in accordance with GAAP consistently applied. InSolutions has
provided to the Agent the audited Financials of InSolutions Incorporated,
and such Financials are complete and correct and fairly present the
position of InSolutions and its Subsidiaries on a consolidated basis as at
such date and for such period in accordance with GAAP consistently applied.
Each of the Borrowers has also provided to the Agent its projections of the
consolidated and combined operations of the Borrowers and their
Subsidiaries for the period from 1998 through 2003, and such forecast has
been prepared in good faith based upon reasonable assumptions;
(e) since July 31, 1997, there has been no materially adverse change
of any kind in SalesLink or any of its other Subsidiaries which would have
a Materially Adverse Effect, and since March 31, 1998 there has been no
materially adverse change of any kind in the business or assets to be
acquired in the Acquisition which would have, either individually or in the
aggregate, a Materially Adverse Effect;
(f) there are no legal or other proceedings or investigations pending
or threatened against the Borrowers or any of their Subsidiaries before any
court, tribunal or regulatory authority which would, if adversely
determined, alone or together, have a Materially Adverse Effect;
(g) the execution, delivery, performance of its obligations, and
exercise of its rights under the Loan Documents by each of the Guarantors
and the Borrowers, including borrowing under this Agreement and the
obtaining of Letters of Credit (i) do not require any Consents; and (ii)
are not and will not be in conflict with or prohibited or prevented by (A)
any Requirement of Law, or (B) any Charter Document, corporate minute or
resolution, instrument, agreement or provision thereof, in each case
binding on it or affecting its property;
-29-
(h) neither of the Guarantors nor either Borrower is in violation of
(i) any Charter Document, corporate minute or resolution, (ii) any
instrument or agreement, in each case binding on it or affecting its
property, or (iii) any Requirement of Law, in a manner which could have a
Materially Adverse Effect, including, without limitation, all applicable
federal and state tax laws, ERISA and Environmental Laws;
(i) each Borrower is a wholly-owned Subsidiary of the Parent,
SalesLink has no Subsidiaries other than Pacific Direct, InSolutions has no
Subsidiaries and neither of the Guarantors nor the Borrowers are a party to
any partnership or joint venture;
(j) the Acquisition Documents have not been amended in any material
respect. Each of the representations and warranties made by the Borrowers
in any of the Loan Documents or by the Parent and InSolutions Incorporated
in any of the Acquisition Documents was true and correct in all material
respects when made and continues to be true and correct in all material
respects on the Closing Date, except to the extent that any of such
representations and warranties relate, by the express terms thereof, solely
to a date falling prior to the Closing Date, and except to the extent that
any of such representations and warranties may have been affected by the
consummation of the transactions contemplated and permitted or required by
the Loan Documents or the Acquisition;
(k) no representation or warranty made by either of the Guarantors or
the Borrowers in this Agreement or in any agreement, instrument, document,
certificate, statement or letter furnished to the Agent or any Bank by or
on behalf of such Guarantor and such Borrower in connection with any of the
transactions contemplated by any of the Loan Documents and the Acquisition
Documents contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein not misleading in light of the circumstances in which they are
made;
(l) to the best of the Borrowers' knowledge, each of the
representations and warranties of the Sellers and InSolutions Incorporated
contained in the Meger Agreement are true and correct in all material
respects as of the Closing Date and the Acquisition Closing Date;
(m) the proceeds of (i) the Term Loan shall be used to refinance
existing Indebtedness of SalesLink and InSolutions and to make a loan to
the Parent to finance a portion of the purchase price of the Acquisition;
and (ii) the Revolving Credit Loans shall be used for working capital and
general corporate purposes of the Borrowers and their Subsidiaries. The
Borrowers will obtain other Letters of Credit solely for working capital
and general corporate purpposes. No portion of any Loan is to be used,
-30-
and no portion of the Letter of Credit is to be obtained, for the purpose
of purchasing or carrying any "margin security" or "margin stock" as such
terms are used in Regulations U and X of the Board of Governors of the
Federal Reserve System, 12 C.F.R. Parts 221 and 224; and
(n) all filings, assignments, pledges and deposits of documents or
instruments have been made and all other actions have been taken that are
necessary or advisable, under applicable law, to establish and perfect the
Agent's security interest in the Collateral. The Collateral and the
Agent's rights with respect to the Collateral are not subject to any
setoff, claims, withholdings or other defenses. The Borrowers and the
Guarantors (with respect to the Collateral under the Guarantor's Security
Agreement) is the owner of the Collateral free from any lien, security
interest, encumbrance and any other claim or demand, except Liens permitted
under (S)9.2(b) (the "Permitted Liens").
8. CONDITIONS PRECEDENT.
--------------------
In addition to the making of the foregoing representations and warranties
and the delivery of the Loan Documents, the Acquisition Documents and such other
documents and the taking of such actions as the Agent and each Bank may require
at or prior to the time of executing this Agreement, the obligation of any Bank
to make any Loan or of the Agent to issue, renew or extend any Letter of Credit
to the Borrowers, is subject to the satisfaction of the following further
conditions precedent:
(a) each of the representations and warranties of each of the
Guarantors and the Borrowers to the Agent and the Banks herein, in any of
the other Loan Documents or any documents, certificate or other paper or
notice in connection herewith shall be true and correct in all material
respects as of the time made or claimed to have been made;
(b) no Default or Event of Default shall have occurred and be
continuing;
(c) all proceedings in connection with the transactions contemplated
hereby shall be in form and substance satisfactory to the Agent and the
Banks, and the Agent and the Banks shall have received all information and
documents as it may have reasonably requested;
(d) no change shall have occurred in any law or regulation or in the
interpretation thereof that in the reasonable opinion of the Agent or any
Bank would make it unlawful for such Bank to make such Loan or for the
Agent to issue, extend or renew any Letter of Credit;
(e) each of the Guarantors and the Borrowers shall have delivered to
the Agent and the Banks (i) certified copies of its Charter Documents; (ii)
evidence that all corporate action necessary for the valid execution,
-31-
delivery and performance by each of the Guarantors and the Borrowers of the
Loan Documents to which it is a party has been duly and effectively taken;
(iii) an incumbency certificate signed by a duly authorized officer of each
of the Guarantors and the Borrowers, and giving the name and bearing a
specimen signature of each individual who shall be authorized to sign, in
the name and on behalf of each of the Guarantors and the Borrowers, each of
the Loan Documents to which each is a party and to give notices and to take
action on each of the Guarantor's and the Borrowers' behalf under the Loan
Documents; (iv) a solvency certificate of each of the Guarantors and the
Borrowers in form and substance satisfactory to the Agent; and (v) a
favorable legal opinion addressed to the Agent and the Banks in form and
substance satisfactory to the Agent and the Banks from counsel to each of
the Guarantors and the Borrowers;
(f) the Borrowers shall have paid to the Agent the closing fee and
the agent's fee as set forth in (S)6 hereof;
(g) the Agent and the Banks shall have received an opinion of counsel
to the Borrowers and the Guarantors satisfactory to the Agent and the
Banks;
(h) the Borrowers shall have caused the Agent to receive evidence
that all of the closing conditions in the Merger Agreement have been
satisfied without recourse to any provision permitting the waiver by any
party thereto of any condition, obligation, covenant or other requirement
and that the Acquisition shall have been completed pursuant to Merger
Agreement and otherwise on terms and conditions that are satisfactory to
the Agent in all respects. In addition the purchase price of the capital
stock acquired pursuant to the Acquisition and all expenditures and
transaction costs associated therewith shall not exceed $15,000,000 in the
aggregate, and the Acquisition shall have been completed on terms and
conditions that are satisfactory to the Agent in all respects;
(i) the Agent shall have received evidence satisfactory to the Agent
that the Indebtedness under the Original Credit Agreement has been
refinanced hereunder, the promissory note issued to Michael Tuite has been
repaid in full, and the Letter of Credit issued in favor of Michael Tuite
has been cancelled and returned to the Agent (or, in the alternative,
appropriate arrangements satisfactory to the Agent have been made for its
return and cancellation); and
(j) the Agent and the Banks shall be satisfied that all information
provided to the Agent and the Banks prior to the Closing Date accurately
sets forth the cash flow for such period attributable to the assets and
business to be acquired in the Acquisition and the Agent and the Banks
shall be satisfied with the results of its due diligence.
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9. COVENANTS.
---------
9.1. AFFIRMATIVE COVENANTS. Each of the Guarantors and the Borrowers
---------------------
agrees that so long as there are any Loans or Letters of Credit outstanding and
until the termination of the Commitment and the payment and satisfaction in full
of all the Obligations, each of the Guarantors and the Borrowers will, and where
applicable the Borrowers will cause each of their Subsidiaries to comply with,
its obligations as set forth throughout this Agreement and to:
(a) furnish the Agent and the Banks: (i) as soon as available but in
any event within ninety (90) days after the close of each fiscal year, each
of the Borrowers' audited consolidated and consolidating Financials for
such year, certified by its accountants, as well as the Borrowers' combined
Financials for such year, certified by its accountants; (ii) as soon as
available but in any event within forty-five (45) days after the end of
each fiscal quarter, the Borrowers' unaudited combined and combining
Financials for such quarter, certified by their respective chief financial
officers; (iii) as soon as available but in any event within thirty (30)
days after the end of each month in each fiscal year of the Borrowers,
unaudited monthly combined Financials for such month, certified by their
respective chief financial officers; (iv) together with the quarterly and
annual audited Financials, a certificate of the Borrowers (the "Compliance
Certificate") setting forth computations demonstrating compliance with the
Borrowers' financial covenants set forth herein, and certifying that no
Default or Event of Default has occurred, or if it has, the actions taken
by the Borrowers with respect thereto; (v) within twenty (20) days after
the end of each calendar month or at such earlier time as the Agent may
reasonably request, a Borrowing Base Report setting forth the Borrowing
Base as at the end of such calendar month or other date so requested by the
Agent; (vi) within twenty (20) days after the end of each calendar month,
an Accounts Receivable aging report; (vii) contemporaneously with the
delivery thereof, copies of all accountants' management letters delivered
to the Borrowers or any of their Subsidiaries; and (viii) from time to time
such other financial data and information as the Agent or any Bank may
request;
(b) keep true and accurate books of account in accordance with GAAP,
maintain its current fiscal year and permit the Agent or any Bank or its
designated representatives to inspect the Guarantors' and the Borrowers'
premises during normal business hours, to examine and be advised as to such
or other business records upon the request of the Agent or any Bank, and to
permit the Agent's or any Bank's commercial finance examiners to conduct
periodic commercial finance examinations which prior to an Event of Default
shall be no more often than one (1) per year;
(c) (i) maintain its corporate existence, business and assets, (ii)
keep its business and assets adequately insured, (iii) maintain
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SalesLink's chief executive office in Boston, Massachusetts or at such
other place in the United States of America as SalesLink shall designate
upon written notice to the Agent and maintain InSolution's chief executive
office in Santa Clara, California or at such other place in the United
States of America as InSolutions shall designate upon written notice to the
Agent, (iv) continue to engage in substantially similar lines of business,
and (v) comply with all Requirements of Law, including ERISA and
Environmental Laws;
(d) notify the Agent and the Banks promptly in writing of (i) the
occurrence of any Default or Event of Default, (ii) any noncompliance with
ERISA or any Environmental Law or proceeding in respect thereof which could
have a Materially Adverse Effect, (iii) any change of address, (iv) any
threatened or pending litigation or similar proceeding affecting the
Guarantors or the Borrowers or their other Subsidiaries or any material
change in any such litigation or proceeding previously reported and (v)
claims against any assets or properties of the Guarantors, the Borrower or
any such Subsidiaries encumbered in favor of the Agent or any Bank;
(e) use the proceeds of the Loans and Letters of Credit solely for
the purposes set forth in (S)7(m), and not for the carrying of "margin
security" or "margin stock" within the meaning of Regulations U and X of
the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221
and 224;
(f) cooperate with the Agent and the Banks, take such action, execute
such documents, and provide such information as the Agent and the Banks may
from time to time reasonably request in order further to effect the
transactions contemplated by and the purposes of the Loan Documents;
(g) by not later than ninety (90) days of the Closing Date, purchase
an interest rate cap or swap or effect other interest rate protection
arrangements for a minimum period of five (5) years applicable to not less
than fifty percent (50%) of the Term Loan, on terms and conditions
satisfactory to the Agent; and
(h) simultaneously with the formation or acquisition of any new
Subsidiary, cause such Subsidiary to execute and deliver to the Agent a
Guaranty, Security Agreement and such other documents, instruments or
agreements which the Agent may reasonably request in order to perfect its
security interest in all assets of such Subsidiary.
9.2. NEGATIVE COVENANTS. Each of the Guarantor and the Borrowers agrees
------------------
that so long as there are any Loans or any Letter of Credit is outstanding and
until the termination of the Commitment and the payment and satisfaction in full
of all the Obligations, neither of the Guarantors nor the Borrowers will and
where applicable the Borrowers will not permit their Subsidiaries to:
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(a) create, incur or assume any Indebtedness other than (i)
Indebtedness to the Agent and the Banks, (ii) current liabilities of the
Borrowers or any Subsidiaries of the Borrowers not incurred through the
borrowing of money or the obtaining of credit except credit on an open
account customarily extended, (iii) Indebtedness in respect of taxes or
other governmental charges contested in good faith and by appropriate
proceedings and for which adequate reserves have been taken; (iv)
Indebtedness of the Borrowers in respect of interest rate protection
arrangements required to be maintained by (S)9.1(g) or in respect of
currency swap arrangements so long as such arrangements are in the ordinary
course of business and not for speculative purposes; (v) unsecured
Indebtedness of the Borrowers and their Subsidiaries not otherwise provided
for in this (S)9.2(a) which, when taken together with all such Indebtedness
of the Borrower and its Subsidiaries set forth on Schedule 9.2(a) does not
---------------
exceed, in the aggregate, $500,000; (vi) Indebtedness not included above
and listed on Schedule 9.2(a) hereto; and (vii) Indebtedness in respect of
-------- ------
capitalized leases in the aggregate amount outstanding at any time not to
exceed the amount permitted pursuant to (S)9.3(a) hereof;
(b) create or incur any Liens on any of the property or assets of the
Borrowers or any of their Subsidiaries except (i) Liens securing the
Obligations; (ii) Liens securing taxes or other governmental charges not
yet due; (iii) deposits or pledges made in connection with social security
obligations; (iv) Liens of carriers, warehousemen, mechanics and
materialmen, less than 120 days old as to obligations not yet due; (v)
easements, rights-of-way, zoning restrictions and similar minor Liens which
individually and in the aggregate do not have a Materially Adverse Effect;
(vi) purchase money security interests in or purchase money mortgages on
real or personal property securing purchase money Indebtedness permitted by
(S)9.2(a)(ii), covering only the property so acquired; and (vii) other
Liens existing on the date hereof and listed on Schedule 9.2(b) hereto;
-------- ------
(c) make any investments other than investments in (i) marketable
obligations of the United States maturing within one (1) year, (ii)
certificates of deposit, bankers' acceptances and time and demand deposits
of United States banks having total assets in excess of $1,000,000,000,
(iii) Subsidiaries which are parties to the Loan Documents, (iv) Twin
Solutions LLC for the construction of the CD-ROM processing facility
provided the aggregate amount of such investment does not exceed
$2,500,000; (v) the loan in the principal amount not to exceed $4,249,845
in the aggregate to the Parent or (vi) such other investments as the Agent
and the Majority Banks may from time to time approve in writing;
(d) make any Restricted Payment, provided, however, any Subsidiary
shall be permitted to make a Distribution to any Borrower;
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(e) become party to a merger or sale-leaseback transaction, or to
effect any disposition of assets other than in the ordinary course, or to
purchase, lease or otherwise acquire assets other than in the ordinary
course; provided, however, SalesLink shall be permitted to acquire 100 % of
-------- -------
the capital stock of InSolutions from the Parent so long as the criteria
set forth in (i) through (vii) are satisfied and the Borrowers shall be
permitted to acquire the assets and/or stock of another entity so long as
(i) such entity is in the same or a similar line of business as the
Borrowers; (ii) the applicable Borrower has provided the Agent with five
(5) Business Days prior written notice of such acquisition, which notice
shall include a reasonably detailed description of the acquisition; (iii)
the business and/or entity to be acquired would not subject the Agent or
any Bank to regulatory or third party approvals in connection with the
exercise of its rights and remedies under this Agreement or the other Loan
Documents; (iv) the Borrowers have demonstrated to the satisfaction of the
Agent and the Banks, based on a pro forma Compliance Certificate,
--- -----
compliance with (S)9.3 on a pro forma basis immediately prior to and after
--- -----
giving effect to any such acquisition; (v) the business and assets so
acquired in each such acquisition shall be acquired by the applicable
Borrower free and clear of all liens and Indebtedness; (vi) the aggregate
purchase price for each acquisition, or a series of related acquisitions,
does not exceed $5,000,000 and the aggregate purchase price of all
acquisitions permitted hereunder does not exceed $10,000,000 during the
term of this Agreement; and (vii) the applicable Borrower shall at all
times maintain a majority voting interest in such entity to be acquired;
and
(f) make any change in or amendment to either of the Borrowers' or
the Guarantors' Charter Documents unless such change or amendment that
would not have any adverse effect on the Agent's or any Bank's interest
under the Loan Documents or the Guarantors' or Borrowers' obligations under
the Loan Documents.
9.3. FINANCIAL COVENANTS. Each of the Borrowers agrees that so long as
-------------------
there are any Loans or Letters of Credit outstanding and until the termination
of the Commitment and the payment and satisfaction in full of all the
Obligations, the Borrowers will not and will not permit their Subsidiaries to:
(a) make capital expenditures or incur Indebtedness in respect of
capitalized leases which in the aggregate and on a combined basis exceed
(a) $5,000,000 from the Closing Date through July 31, 1999; (b) $4,000,000
for the fiscal year ending July 31, 2000 and (c) $2,000,000 in any fiscal
year thereafter; provided, however, that, if during any fiscal year the
-------- -------
amount of capital expenditures permitted for that fiscal year is not so
utilized, such unutilized amount may be utilized in the next succeeding
fiscal year but not in any subsequent fiscal year;
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(b) permit the Leverage Ratio for any fiscal quarter ending during
any period described in the table below to be greater than the ratio set
forth opposite such period in such table:
PERIOD RATIO
------ -----
July 31, 1998 2.50:1.00
October 31, 1998 2.40:1.00
January 31, 1999 2.25:1.00
April 30, 1999 and thereafter 2.00:1.00
(c) permit the ratio of the Borrowers' Combined Operating Cash Flow
to Combined Total Debt Service for any Reference Period to be less than
1.25:1.00.
(d) permit the ratio of the Borrowers' Combined Current Assets to
Combined Current Liabilities at any time to be less than 1.25:1.00; or
(e) permit the Borrower's Combined Net Income for any fiscal quarter
to be less than $1.00.
10. EVENTS OF DEFAULT; ACCELERATION.
-------------------------------
If any of the following events ("Events of Default") shall occur:
(a) the Borrowers shall fail to pay when due and payable any
principal of the Loans when the same becomes due;
(b) the Borrowers shall fail to pay interest on the Loans, or the
Borrowers shall fail to pay any Reimbursement Obligations not funded by a
Revolving Credit Loan pursuant to (S)2.2(c), or any other sum due under any
of the Loan Documents within two (2) Business Days after the date on which
the same shall have first become due and payable;
(c) either of the Guarantors or the Borrowers shall fail to perform
any term, covenant or agreement contained in (S)(S)9.1(a), 9.1(d) through
(g), 9.2 and 9.3;
(d) the Borrowers or any of their Subsidiaries shall fail to perform
any other term, covenant or agreement contained in the Loan Documents
within fifteen (15) days after the Agent has given written notice of such
failure to the Borrowers;
(e) any representation or warranty of the Borrowers or any of their
other Subsidiaries in the Loan Documents or in any certificate or notice
given in connection therewith shall have been false or misleading in any
material respect at the time made or deemed to have been made;
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(f) the Borrowers or any of their Subsidiaries shall be in default
(after any applicable period of grace or cure period) under any agreement
or agreements evidencing Indebtedness owing to any Bank or any affiliates
of any Bank, to the Seller, or to any other Person in excess of $500,000 in
aggregate principal amount, or shall fail to pay such Indebtedness when
due, or within any applicable period of grace;
(g) any of the Loan Documents shall cease to be in full force and
effect or if any of the Loan Documents shall be canceled, terminated,
revoked or rescinded or the Agent's security interests, mortgages or liens
in a substantial portion of the Collateral shall cease to be perfected, or
shall cease to have the priority contemplated by the Security Documents, in
each case otherwise than in accordance with the terms thereof or with the
express prior written agreement, consent or approval of the Banks, or any
action at law, suit in equity or other legal proceeding to cancel, revoke
or rescind any of the Loan Documents shall be commenced by or on behalf of
the Borrowers or any of their Subsidiaries party thereto or any of their
respective stockholders, or any court or any other governmental or
regulatory authority or agency of competent jurisdiction shall make a
determination that, or issue a judgment, order, decree or ruling to the
effect that, any one or more of the Loan Documents is illegal, invalid or
unenforceable in accordance with the terms thereof;
(h) the Parent, the Borrowers or any of their Subsidiaries (i) shall
make an assignment for the benefit of creditors, (ii) shall be adjudicated
bankrupt or insolvent, (iii) shall seek the appointment of, or be the
subject of an order appointing, a trustee, liquidator or receiver as to all
or part of its assets, (iv) shall commence, approve or consent to, any case
or proceeding under any bankruptcy, reorganization or similar law and, in
the case of an involuntary case or proceeding, such case or proceeding is
not dismissed within forty-five (45) days following the commencement
thereof, or (v) shall be the subject of an order for relief in an
involuntary case under federal bankruptcy law;
(i) the Borrowers or any of their Subsidiaries shall be unable to pay
its debts as they mature;
(j) there shall remain undischarged for more than thirty (30) days
any final judgment or execution action against the Borrowers or any of
their Subsidiaries that, together with other outstanding claims and
execution actions against the Borrowers and their Subsidiaries exceeds
$500,000 in the aggregate;
(k) the Parent ceases to own legally or beneficially 80% or more of
the voting stock of the Borrowers (or, in the event the Parent contributes
100% of the capital stock of InSolutions to SalesLink, 80% or more of the
voting stock of SalesLink) or more than 51% of the voting stock of any
Subsidiary of the Borrowers, and either of the Borrowers ceases to own
legally or beneficially
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100% or more of the voting stock of any Guarantor (or, in the event the
Parent contributes 100% of the capital stock of InSolution to SalesLink,
SalesLink ceases to own 100% of the capital stock of InSolution);
then, and in any such event, so long as the same may be continuing, the Agent
may, and upon the request of the Majority Banks shall, by notice in writing to
the Borrowers declare all amounts owing with respect to this Credit Agreement,
the Notes and the other Loan Documents and all Reimbursement Obligations to be,
and they shall thereupon forthwith become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrowers; provided that in the event of any
--------
Event of Default specified in (S)(S)10.1(h) or 10.1(i), all such amounts shall
become immediately due and payable automatically and without any requirement of
notice from the Agent or any Bank.
If any one or more of the Events of Default specified in (S)10.1(h) or
(S)10.1(i) shall occur, any unused portion of the credit hereunder shall
forthwith terminate and each of the Banks shall be relieved of all further
obligations to make Loans to the Borrowers and the Agent shall be relieved of
all further obligations to issue, extend or renew any Letter of Credit. If any
other Event of Default shall have occurred and be continuing, the Agent may and,
upon the request of the Majority Banks, shall, by notice to the Borrowers,
terminate the unused portion of the credit hereunder, and upon such notice being
given such unused portion of the credit hereunder shall terminate immediately
and each of the Banks shall be relieved of all further obligations to make Loans
and the Agent shall be relieved of all further obligations to issue, extend or
renew any Letter of Credit. No termination of the credit hereunder shall
relieve the Borrowers, the Guarantors or any other Subsidiaries of the Borrowers
of any of the Obligations.
In case any one or more of the Events of Default shall have occurred and be
continuing, and whether or not the Banks shall have accelerated the maturity of
the Loans pursuant to (S)10.1, each Bank, if owed any amount with respect to the
Loans or the Reimbursement Obligations, may, with the consent of the Majority
Banks but not otherwise, proceed to protect and enforce its rights by suit in
equity, action at law or other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Agreement and the
other Loan Documents or any instrument pursuant to which the Obligations to such
Bank are evidenced, including as permitted by applicable law the obtaining of
the ex parte appointment of a receiver, and, if such amount shall have become
-- -----
due, by declaration or otherwise, proceed to enforce the payment thereof or any
other legal or equitable right of such Bank. No remedy herein conferred upon
any Bank or the Agent or the holder of any Note or purchaser of a Letter of
Credit Participation is intended to be exclusive of any other remedy and each
and every remedy shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by
statute or any other provision of law.
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In the event that, following the occurrence or during the continuance of
any Default or Event of Default, the Agent or any Bank, as the case may be,
receives any monies in connection with the enforcement of any of the Security
Documents, or otherwise with respect to the realization upon any of the
Collateral, such monies shall be distributed for application as follows: (a)
first, the payment of, or, as the case may be, the reimbursement of the Agent
for or in respect of all reasonable costs, expenses, disbursements and losses
which shall have been incurred or sustained by the Agent in connection with the
collection of such monies by the Agent, for the exercise, protection or
enforcement by the Agent of all or any of the rights, remedies, powers and
privileges of the Agent under this Credit Agreement or any of the other Loan
Documents or in respect of the Collateral and supports the provision of adequate
indemnity to the Agent against all taxes or liens which by law shall have, or
may have, priority over the rights of the Agent to such monies; (b) second, to
all other Obligations in such order or preference as the Majority Banks may
determine; provided, however that distributions in respect of such Obligations
-------- -------
shall be made (i) pari passu among Obligations with respect to the Agent's fee
payable under (S)6 and all other Obligations and (ii) Obligations owing to the
Banks with respect to each type of Obligations such as interest, principal, fees
and expenses, shall be made among the Banks pro rata; and provided, further,
that the Agent may in its discretion make proper allowance to take into account
any Obligations not then due and payable; (c) third, upon payment and
satisfaction in full or other provisions for payment in full satisfactory to the
Banks and the Agent of all of the Obligations, to the payment of any obligations
required to be paid pursuant to (S)9-504(1)(c) of the Uniform Commercial Code of
the Commonwealth of Massachusetts; and (d) fourth, the excess, if any, shall be
returned to the Borrowers or to such other Persons as are entitled thereto.
11. SETOFF.
------
Regardless of the adequacy of any collateral for the Obligations, any
deposits or other sums credited by or due from any of the Banks to the Borrowers
or the Guarantors may be applied to or set off following an Event of Default
against any principal, interest and any other amounts due from the Borrowers or
any Guarantor to the Banks at any time without notice to the Borrowers or the
Guarantors, or compliance with any other procedure imposed by statute or
otherwise, all of which are hereby expressly waived by the Borrowers and the
Guarantors. Each of the Banks agrees with each other Bank that (a) if an amount
to be set off is to be applied to Indebtedness of the Borrowers to such Bank,
other than Indebtedness evidenced by the Notes held by such Bank or constituting
Reimbursement Obligations owed to such Bank, such amount shall be applied
ratably to such other Indebtedness and to the Indebtedness evidenced by all such
Notes held by such Bank or constituting Reimbursement Obligations owed to such
Bank, and (b) if such Bank shall receive from any Borrower, whether by voluntary
payment, exercise of the right of setoff, counterclaim, cross action,
enforcement of the claim evidenced by the Notes held by, or constituting
Reimbursement Obligations owed to, such Bank by proceedings against the
Borrowers at law or in equity or by proof thereof in
-40-
bankruptcy, reorganization, liquidation, receivership or similar proceedings, or
otherwise, and shall retain and apply to the payment of the Note or Notes held
by, or Reimbursement Obligations owed to, such Bank any amount in excess of its
ratable portion of the payments received by all of the Banks with respect to the
Notes held by, and Reimbursement Obligations owed to, all of the Banks, such
Bank will make such disposition and arrangements with the other Banks with
respect to such excess, either by way of distribution, pro tanto assignment of
--- -----
claims, subrogation or otherwise as shall result in each Bank receiving in
respect of the Notes held by it or Reimbursement obligations owed it, its
proportionate payment as contemplated by this Agreement; provided that if all or
--------
any part of such excess payment is thereafter recovered from such Bank, such
disposition and arrangements shall be rescinded and the amount restored to the
extent of such recovery, but without interest.
12. THE AGENT.
---------
12.1. AUTHORIZATION.
-------------
(a) The Agent is authorized to take such action on behalf of each of
the Banks and to exercise all such powers as are hereunder and under any of
the other Loan Documents and any related documents delegated to the Agent,
together with such powers as are reasonably incident thereto, provided that
--------
no duties or responsibilities not expressly assumed herein or therein shall
be implied to have been assumed by the Agent.
(b) The relationship between the Agent and each of the Banks is that
of an independent contractor. The use of the term "Agent" is for
convenience only and is used to describe, as a form of convention, the
independent contractual relationship between the Agent and each of the
Banks. Nothing contained in this Agreement nor the other Loan Documents
shall be construed to create an agency, trust or other fiduciary
relationship between the Agent and any of the Banks.
(c) As an independent contractor empowered by the Banks to exercise
certain rights and perform certain duties and responsibilities hereunder
and under the other Loan Documents, the Agent is nevertheless a
"representative" of the Banks, as that term is defined in Article 1 of the
Uniform Commercial Code, for purposes of actions for the benefit of the
Banks and the Agent with respect to all collateral security and guaranties
contemplated by the Loan Documents. Such actions include the designation
of the Agent as "secured party", "mortgagee" or the like on all financing
statements and other documents and instruments, whether recorded or
otherwise, relating to the attachment, perfection, priority or enforcement
of any security interests, mortgages or deeds of trust in collateral
security intended to secure the payment or performance of any of the
Obligations, all for the benefit of the Banks and the Agent.
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12.2. EMPLOYEES AND AGENTS. The Agent may exercise its powers and execute
--------------------
its duties by or through employees or agents and shall be entitled to take, and
to rely on, advice of counsel concerning all matters pertaining to its rights
and duties under this Agreement and the other Loan Documents. The Agent may
utilize the services of such Persons as the Agent in its sole discretion may
reasonably determine, and all reasonable fees and expenses of any such Persons
shall be paid by the Borrowers and the Guarantors.
12.3. NO LIABILITY. Neither the Agent nor any of its shareholders,
------------
directors, officers or employees nor any other Person assisting them in their
duties nor any agent or employee thereof, shall be liable for any waiver,
consent or approval given or any action taken, or omitted to be taken, in good
faith by it or them hereunder or under any of the other Loan Documents, or in
connection herewith or therewith, or be responsible for the consequences of any
oversight or error of judgment whatsoever, except that the Agent or such other
Person, as the case may be, may be liable for losses due to its willful
misconduct or gross negligence.
12.4. NO REPRESENTATIONS. The Agent shall not be responsible for the
------------------
execution or validity or enforceability of this Agreement, the Notes, the
Letters of Credit, any of the other Loan Documents or any instrument at any time
constituting, or intended to constitute, collateral security for the Notes, or
for the value of any such collateral security or for the validity,
enforceability or collectability of any such amounts owing with respect to the
Notes, or for any recitals or statements, warranties or representations made
herein or in any of the other Loan Documents or in any certificate or instrument
hereafter furnished to it by or on behalf of the Guarantors, the Borrowers or
any of their Subsidiaries, or be bound to ascertain or inquire as to the
performance or observance of any of the terms, conditions, covenants or
agreements herein or in any instrument at any time constituting, or intended to
constitute, collateral security for the Notes or to inspect any of the
properties, books or records of the Guarantors, the Borrowers or any of their
Subsidiaries. The Agent shall not be bound to ascertain whether any notice,
consent, waiver or request delivered to it by the Guarantors, the Borrowers or
any holder of any of the Notes shall have been duly authorized or is true,
accurate and complete. The Agent has not made nor does it now make any
representations or warranties, express or implied, nor does it assume any
liability to the Banks, with respect to the credit worthiness or financial
conditions of the Borrowers or any of their Subsidiaries. Each Bank acknowledges
that it has, independently and without reliance upon the Agent or any other
Bank, and based upon such information and documents as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement.
12.5. PAYMENTS.
--------
12.5.1. PAYMENTS TO AGENT. A payment by the Borrowers or any of the
-----------------
Guarantors to the Agent hereunder or any of the other Loan Documents for
the account of any Bank shall constitute a payment to
-42-
such Bank. The Agent agrees promptly to distribute to each Bank such Bank's
pro rata share of payments received by the Agent for the account of the
--- ----
Banks except as otherwise expressly provided herein or in any of the other
Loan Documents.
12.5.2. DISTRIBUTION BY AGENT. If in the opinion of the Agent the
---------------------
distribution of any amount received by it in such capacity hereunder, under
the Notes or under any of the other Loan Documents might involve it in
liability, it may refrain from making distribution until its right to make
distribution shall have been adjudicated by a court of competent
jurisdiction. If a court of competent jurisdiction shall adjudge that any
amount received and distributed by the Agent is to be repaid, each Person
to whom any such distribution shall have been made shall either repay to
the Agent its proportionate share of the amount so adjudged to be repaid or
shall pay over the same in such manner and to such Persons as shall be
determined by such court.
12.5.3. DELINQUENT BANKS. Notwithstanding anything to the contrary
----------------
contained in this Agreement or any of the other Loan Documents, any Bank
that fails (a) to make available to the Agent its pro rata share of any
--- ----
Loan or to purchase any Letter of Credit Participation or (ii) to comply
with the provisions of (S)11 with respect to making dispositions and
arrangements with the other Banks, where such Bank's share of any payment
received, whether by setoff or otherwise, is in excess of its pro rata
--- ----
share of such payments due and payable to all of the Banks, in each case
as, when and to the full extent required by the provisions of this
Agreement, shall be deemed delinquent (a "Delinquent Bank") and shall be
deemed a Delinquent Bank until such time as such delinquency is satisfied.
A Delinquent Bank shall be deemed to have assigned any and all payments due
to it from the Borrowers and the Guarantors, whether on account of
outstanding Loans, Unpaid Reimbursement Obligations, interest, fees or
otherwise, to the remaining nondelinquent Banks for application to, and
reduction of, their respective pro rata shares of all outstanding Loans and
--- ----
Unpaid Reimbursement Obligations. The Delinquent Bank hereby authorizes the
Agent to distribute such payments to the nondelinquent Banks in proportion
to their respective pro rata shares of all outstanding Loans and Unpaid
Reimbursement Obligations. A Delinquent Bank shall be deemed to have
satisfied in full a delinquency when and if, as a result of application of
the assigned payments to all outstanding Loans and Unpaid Reimbursement
Obligations of the nondelinquent Banks, the Banks' respective pro rata
--- ----
shares of all outstanding Loans and Unpaid Reimbursement Obligations have
returned to those in effect immediately prior to such delinquency and
without giving effect to the nonpayment causing such delinquency.
12.6. HOLDERS OF NOTES. The Agent may deem and treat the payee of any
----------------
Note or the purchaser of any Letter of Credit Participation as the absolute
owner or purchaser thereof for all purposes hereof until it shall have been
-43-
furnished in writing with a different name by such payee or by a subsequent
holder, assignee or transferee.
12.7. INDEMNITY. The Banks ratably agree hereby to indemnify and hold
---------
harmless the Agent from and against any and all claims, actions and suits
(whether groundless or otherwise), losses, damages, costs, expenses (including
any expenses for which the Agent has not been reimbursed by the Borrowers as
required by (S)14), and liabilities of every nature and character arising out of
or related to this Agreement, the Notes, or any of the other Loan Documents or
the transactions contemplated or evidenced hereby or thereby, or the Agent's
actions taken hereunder or thereunder, except to the extent that any of the same
shall be directly caused by the Agent's willful misconduct or gross negligence.
12.8. AGENT AS BANK. In its individual capacity, BKB shall have the same
-------------
obligations and the same rights, powers and privileges in respect to its
Commitment and the Loans made by it, and as the holder of any of the Notes and
as the purchaser of any Letter of Credit Participations, as it would have were
it not also the Agent.
12.9. RESIGNATION. The Agent may resign at any time by giving sixty (60)
-----------
days prior written notice thereof to the Banks and the Borrowers. Upon any such
resignation, the Majority Banks shall have the right to appoint a successor
Agent. Unless a Default or Event of Default shall have occurred and be
continuing, such successor Agent shall be reasonably acceptable to the
Borrowers. If no successor Agent shall have been so appointed by the Majority
Banks and shall have accepted such appointment within thirty (30) days after the
retiring Agent's giving of notice of resignation, then the retiring Agent may,
on behalf of the Banks, appoint a successor Agent, which shall be a financial
institution having a rating of not less than A or its equivalent by Standard &
Poor's Corporation. Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation, the provisions of this
Agreement and the other Loan Documents shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as Agent.
12.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Bank hereby
----------------------------------------------
agrees that, upon learning of the existence of a Default or an Event of Default,
it shall promptly notify the Agent thereof. The Agent hereby agrees that upon
receipt of any notice under this (S)12.10 it shall promptly notify the other
Banks of the existence of such Default or Event of Default.
13. ASSIGNMENT AND PARTICIPATION.
----------------------------
13.1. CONDITIONS TO ASSIGNMENT BY BANKS. Except as provided herein, each
---------------------------------
Bank may assign to one or more Eligible Assignees all or a portion
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of its interests, rights and obligations under this Credit Agreement (including
all or a portion of its Commitment Percentage and Commitment and the same
portion of the Loans at the time owing to it, the Notes held by it and its
participating interest in the risk relating to any Letters of Credit); provided
--------
that (a) each of the Agent and, unless a Default or Event of Default shall have
occurred and be continuing, the Borrowers shall have given its prior written
consent to such assignment, which consent, in the case of the Borrowers, will
not be unreasonably withheld, (b) each such assignment shall be of a constant,
and not a varying, percentage of all the assigning Bank's rights and obligations
under this Agreement, (c) each assignment shall be in an amount that is a whole
multiple of $1,000,000 and (d) the parties to such assignment shall execute and
deliver to the Agent, for recording in the Register (as hereinafter defined), an
Assignment and Acceptance, in form and substance satisfactory to the Agent (an
"Assignment and Acceptance"), together with any Notes subject to such
assignment. Upon such execution, delivery, acceptance and recording, from and
after the effective date specified in each Assignment and Acceptance, which
effective date shall be at least five (5) Business Days after the execution
thereof, (i) the assignee thereunder shall be a party hereto and, to the extent
provided in such Assignment and Acceptance, have the rights and obligations of a
Bank hereunder, and (ii) the assigning Bank shall, to the extent provided in
such assignment and upon payment to the Agent of the registration fee referred
to in (S)13.3, be released from its obligations under this Agreement.
13.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. By
--------------------------------------------------------------
executing and delivering an Assignment and Acceptance, the parties to the
assignment thereunder confirm to and agree with each other and the other parties
hereto as follows:
(a) other than the representation and warranty that it is the legal
and beneficial owner of the interest being assigned thereby free and clear
of any adverse claim, the assigning Bank makes no representation or
warranty, express or implied, and assumes no responsibility with respect to
any statements, warranties or representations made in or in connection with
this Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, the other Loan
Documents or any other instrument or document furnished pursuant hereto,
(b) the assigning Bank makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Borrowers and their Subsidiaries or any other Person primarily or
secondarily liable in respect of any of the Obligations, or the performance
or observance by the Guarantors, the Borrowers and their Subsidiaries or
any other Person primarily or secondarily liable in respect of any of the
Obligations of any of their obligations under this Agreement or any of the
other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto;
-45-
(c) such assignee confirms that it has received a copy of this
Credit Agreement, together with copies of the most recent financial
statements referred to in (S)9.1 and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision
to enter into such Assignment and Acceptance;
(d) such assignee will, independently and without reliance upon the
assigning Bank, the Agent or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement;
(e) such assignee represents and warrants that it is an Eligible
Assignee;
(f) such assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this
Agreement and the other Loan Documents as are delegated to the Agent by the
terms hereof or thereof, together with such powers as are reasonably
incidental thereto;
(g) such assignee agrees that it will perform in accordance with
their terms all of the obligations that by the terms of this Agreement are
required to be performed by it as a Bank;
(h) such assignee represents and warrants that it is legally
authorized to enter into such Assignment and Acceptance; and
(i) such assignee acknowledges that it has made arrangements with
the assigning Bank satisfactory to such assignee with respect to its pro
---
rata share of the Letter of Credit Fees in respect of any outstanding
----
Letter of Credit.
13.3. REGISTER. The Agent shall maintain a copy of each Assignment and
--------
Acceptance delivered to it and a register or similar list (the "Register") for
the recordation of the names and addresses of the Banks and the Commitment
Percentage of, and principal amount of the Revolving Credit Loans owing to and
Letter of Credit Participations purchased by, the Banks from time to time. The
entries in the Register shall be conclusive, in the absence of manifest error,
and the Borrowers, the Agent and the Banks may treat each Person whose name is
recorded in the Register as a Bank hereunder for all purposes of this Credit
Agreement. The Register shall be available for inspection by the Borrowers and
the Banks at any reasonable time and from time to time upon reasonable prior
notice. Upon each such recordation, the assigning Bank agrees to pay to the
Agent a registration fee in the sum of $2,500.
13.4. NEW NOTES. Upon its receipt of an Assignment and Acceptance
---------
executed by the parties to such assignment, together with each Note subject to
-46-
such assignment, the Agent shall (a) record the information contained therein in
the Register, and (b) give prompt notice thereof to the Borrowers and the Banks
(other than the assigning Bank). Within five (5) Business Days after receipt of
such notice, the Borrowers, at their own expense, shall execute and deliver to
the Agent, in exchange for each surrendered Note, a new Note to the order of
such Eligible Assignee in an amount equal to the amount assumed by such Eligible
Assignee pursuant to such Assignment and Acceptance and, if the assigning Bank
has retained some portion of its obligations hereunder, a new Note to the order
of the assigning Bank in an amount equal to the amount retained by it hereunder.
Such new Notes shall provide that they are replacements for the surrendered
Notes, shall be in an aggregate principal amount equal to the aggregate
principal amount of the surrendered Notes, shall be dated the effective date of
such in Assignment and Acceptance and shall otherwise be substantially the form
of the assigned Notes. Within five (5) days of issuance of any new Notes
pursuant to this (S)13.4, the Borrowers shall deliver an opinion of counsel,
addressed to the Banks and the Agent, relating to the due authorization,
execution and delivery of such new Notes and the legality, validity and binding
effect thereof, in form and substance satisfactory to the Banks. The surrendered
Notes shall be cancelled and returned to the Borrowers.
13.5. PARTICIPATIONS. Each Bank may sell participations to one or more
--------------
banks or other entities in all or a portion of such Bank's rights and
obligations under this Agreement and the other Loan Documents; provided that (a)
--------
any such sale or participation shall not affect the rights and duties of the
selling Bank hereunder to the Borrowers, and (b) the only rights granted to the
participant pursuant to such participation arrangements with respect to waivers,
amendments or modifications of the Loan Documents shall be the rights to approve
waivers, amendments or modifications that would reduce the principal of or the
interest rate on any Loans, extend the term or increase the amount of the
Commitment of such Bank as it relates to such participant, reduce the amount of
any commitment fees or Letter of Credit Fees to which such participant is
entitled or extend any regularly scheduled payment date for principal or
interest.
13.6. DISCLOSURE. Each of the Borrowers and the Guarantors agrees that
----------
in addition to disclosures made in accordance with standard and customary
banking practices any Bank may disclose information obtained by such Bank
pursuant to this Agreement to assignees or participants and potential assignees
or participants hereunder; provided that such assignees or participants or
--------
potential assignees or participants shall agree (a) to treat in confidence such
information unless such information otherwise becomes public knowledge, (b) not
to disclose such information to a third party, except as required by law or
legal process and (c) not to make use of such information for purposes of
transactions unrelated to such contemplated assignment or participation.
13.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWERS. If any
-----------------------------------------------------
assignee Bank is an Affiliate of either the Guarantors or the Borrowers, then
-47-
any such assignee Bank shall have no right to vote as a Bank hereunder or under
any of the other Loan Documents for purposes of granting consents or waivers or
for purposes of agreeing to amendments or other modifications to any of the Loan
Documents or for purposes of making requests to the Agent pursuant to (S)10.1 or
(S)10.2, and the determination of the Majority Banks shall for all purposes of
this Agreement and the other Loan Documents be made without regard to such
assignee Bank's interest in any of the Loans. If any Bank sells a participating
interest in any of the Loans or Reimbursement Obligations to a participant, and
such participant is either a Guarantor or a Borrower or an Affiliate of either
the Guarantors or the Borrowers, then such transferor Bank shall promptly notify
the Agent of the sale of such participation. A transferor Bank shall have no
right to vote as a Bank hereunder or under any of the other Loan Documents for
purposes of granting consents or waivers or for purposes of agreeing to
amendments or modifications to any of the Loan Documents or for purposes of
making requests to the Agent pursuant to (S)13.1 or (S)13.2 to the extent that
such participation is beneficially owned by either the Guarantors or the
Borrowers or any Affiliate of either the Guarantors or the Borrowers, and the
determination of the Majority Banks shall for all purposes of this Agreement and
the other Loan Documents be made without regard to the interest of such
transferor Bank in the Loans to the extent of such participation.
13.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Bank shall
-----------------------------------
retain its rights to be indemnified pursuant to (S)14 with respect to any claims
or actions arising prior to the date of such assignment. If any assignee Bank is
not incorporated under the laws of the United States of America or any state
thereof, it shall, prior to the date on which any interest or fees are payable
hereunder or under any of the other Loan Documents for its account, deliver to
the Borrowers and the Agent certification as to its exemption from deduction or
withholding of any United States federal income taxes. Anything contained in
this (S)13 to the contrary notwithstanding, any Bank may at any time pledge all
or any portion of its interest and rights under this Agreement (including all or
any portion of its Notes) to any of the twelve Federal Reserve Banks organized
under (S)4 of the Federal Reserve Act, 12 U.S.C. (S)341. No such pledge or the
enforcement thereof shall release the pledgor Bank from its obligations
hereunder or under any of the other Loan Documents.
13.9. ASSIGNMENT BY BORROWERS. Neither of the Guarantors nor Borrowers
-----------------------
shall assign or transfer any of its rights or obligations under any of the Loan
Documents without the prior written consent of each of the Banks.
14. MISCELLANEOUS.
-------------
Each of the Guarantors and the Borrowers jointly and severally agrees to
indemnify and hold harmless the Agent and the Banks and their officers,
employees, affiliates, agents, and controlling persons from and against all
claims, damages, liabilities and losses of every kind arising out of the Loan
Documents, including without limitation, against those in respect of the
application of Environmental Laws to the Guarantors, the Borrowers and their
-48-
other Subsidiaries absent the gross negligence or willful misconduct of the
Agent and the Banks. The Borrowers shall pay to the Agent and the Banks
promptly on demand all costs and expenses (including any taxes and reasonable
legal and other professional fees and fees of its commercial finance examiner)
incurred by the Agent and the Banks in connection with the preparation,
negotiation, execution, amendment, administration or enforcement of any of the
Loan Documents. Any communication to be made hereunder shall (a) be made in
writing, but unless otherwise stated, may be made by telex, facsimile
transmission, overnight delivery or letter, and (b) be made or delivered to the
address of the party receiving notice which is identified with its signature
below (unless such party has by five (5) days written notice specified another
address), and shall be deemed made or delivered, when dispatched, left at that
address, one (1) day after given to an overnight delivery service, or five (5)
days after being mailed, postage prepaid, to such address. This Agreement shall
be binding upon and inure to the benefit of each party hereto and its successors
and assigns, but neither of the Guarantors nor the Borrowers may assign their
rights or obligations hereunder. This Agreement may not be amended or waived
except by a written instrument signed by the Borrowers, the Agent and the
Majority Banks, and any such amendment or waiver shall be effective only for the
specific purpose given; provided, however, notwithstanding the foregoing, the
-------- -------
rate of interest on the Notes, the term of the Notes, the Commitment amounts and
the amount of the fees hereunder, the definition of Majority Banks and this
sentence of (S)14 shall not be changed without the written consent of all the
Banks, and the amount of the agent's fee and (S)12 may not be amended without
the consent of the Agent. No failure or delay by the Bank to exercise any right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege preclude any other right, power or
privilege. The provisions of this Agreement are severable and if any one
provision hereof shall be held invalid or unenforceable in whole or in part in
any jurisdiction, such invalidity or unenforceability shall affect only such
provision in such jurisdiction. This Agreement, together with all Schedules
hereto, expresses the entire understanding of the parties with respect to the
transactions contemplated hereby. This Agreement and any amendment hereby may
be executed in several counterparts, each of which shall be an original, and all
of which shall constitute one agreement. In proving this Agreement, it shall
not be necessary to produce more than one such counterpart executed by the party
to be charged. THIS AGREEMENT AND THE NOTES ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL BE CONSTRUED IN ACCORDANCE THEREWITH AND
GOVERNED THEREBY. EACH OF THE GUARANTORS AND THE BORROWERS AGREES THAT ANY SUIT
FOR THE ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF
THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN. Each of
the Guarantors and the Borrowers, as an inducement to the Bank to enter into
this Agreement, hereby waives its right to a jury trial with respect to any
action arising in connection with any Loan Document.
-49-
15. SECURITY; GUARANTIES.
--------------------
15.1. GUARANTIES AND SECURITY OF BORROWERS. The Obligations shall also be
------------------------------------
guaranteed pursuant to the terms of the Guaranty. The obligations of the
Guarantors under the Guaranty shall in turn be secured by a perfected first
priority security interest (subject only to Permitted Liens entitled to priority
under applicable law) in all of the assets of each such Guarantor, whether now
owned or hereafter acquired, pursuant to the terms of the Security Documents to
which each such Guarantor is a party.
15.2. GUARANTIES AND SECURITY OF GUARANTORS. The Obligations shall also
-------------------------------------
be guaranteed pursuant to the terms of the Guaranty. The obligations of the
Guarantors under the Guaranty shall in turn be secured by a perfected first
priority security interest (subject only to Permitted Liens entitled to priority
under applicable law) in all of the assets of the Guarantors, whether now owned
or hereafter acquired, pursuant to the terms of the Security Documents to which
each such Guarantor is a party.
15.3. JOINT AND SEVERAL LIABILITY OF THE BORROWERS.
--------------------------------------------
15.3.1. JOINT and Several Liability. Each of the Borrowers is and
----- --- ------- ---------
shall be jointly and severally liable for each and every Obligation of any
of the Borrowers arising or incurred under or in respect of this Agreement
or any of the other Loan Documents or in respect of any of the Loans made
or Reimbursement Obligations incurred on any of the Notes, any Letter of
Credit Application, any Letter of Credit or other instruments at any time
evidencing any thereof. Each of the Borrowers agrees that it shall be
jointly and severally liable for all fees, as well as each of the other
Obligations of any of the Borrowers arising or incurred under or in respect
of this Credit Agreement or any of the other Loan Documents.
15.3.2. CONSIDERATION. Each of the Borrowers is accepting joint and
-------------
several liability hereunder in consideration of the financial
accommodations to be provided by the Agents and the Banks under this
Agreement, for the mutual benefit, directly or indirectly, of each of the
Borrowers and in consideration of the undertakings of each of the Borrowers
to accept joint and several liability for the obligations of each of them.
15.3.3. CO-DEBTORS. Each of the Borrowers jointly and severally
----------
hereby irrevocably and unconditionally accepts, not merely as a surety but
as a co-debtor, joint and several liability with the other Borrowers with
respect to the payment and performance of all of the Obligations arising
under this Agreement and the other Loan Documents, it being the intention
of the parties hereto that all the Obligations shall be the joint
-50-
and several obligations of each of the Borrowers without preferences or
distinction among them.
15.3.4. PAYMENT. If and to the extent that any of the Borrowers
-------
shall fail to make any payment with respect to any of the Obligations
hereunder as and when due or to perform any of such Obligations in
accordance with the terms thereof, then in each such event, the other
Borrowers will make such payment with respect to, or perform, such
Obligation.
15.3.5. RECOURSE. The obligations of each Borrower under the
--------
provisions of this (S)15.3.5 constitute full recourse obligations of such
Borrower, enforceable against it to the full extent of its properties and
assets, irrespective of the validity, regularity or enforceability of this
Agreement or the other Loan Documents against any Obligor or any other
circumstances whatsoever.
15.3.6. WAIVERS. Except as otherwise expressly provided herein,
-------
each Borrower hereby waives promptness, diligences, presentment, demand,
protest, notice of acceptance of its joint and several liability, notice of
any and all advances of the Loans made under this Agreement and the Notes,
notice of occurrence of any Default or Event of Default (except to the
extent notice is expressly required to be given pursuant to the terms of
this Agreement or any of the other Loan Documents), or of any demand for
any payment under this Agreement, notice of any action at any time taken or
omitted by the Agents or the Lenders under or in respect of any of the
Obligations hereunder, any requirement of diligence and, generally, all
demands, notices and other formalities of every kind in connection with
this Credit Agreement and the other Loan Documents. Each Borrower hereby
waives all defenses which may be available by virtue of any valuation,
stay, moratorium law or other similar law now or hereafter in effect, any
right to require the marshaling of assets of the Borrowers and any other
entity or Person primarily or secondarily liable with respect to any of the
Obligations, and all suretyship defenses generally. Each Borrower hereby
assents to, and waives notice of, any extension or postponement of the time
for the payment, or place or manner for payment, compromise, refinancing,
consolidation or renewals of any of the Obligations hereunder, the
acceptance of any partial payment thereon, any waiver, consent or other
action or acquiescence by the Agent and the Banks at any time or times in
respect of any default by any Borrower in the performance or satisfaction
of any term, covenant, condition or provision of this Agreement and the
other Loan Documents, any and all other indulgences whatsoever by the Agent
and the Banks in respect of any of the Obligations hereunder, and the
taking, addition, substitution or release, in whole or in part, at any time
or times, of any security for any of such Obligations or the addition,
substitution or release, in whole or in part, of any Borrower or any other
entity or Person primarily or secondarily liable for any Obligation. Such
Borrower further
-51-
agrees that its Obligations shall not be released or discharged, in whole
or in part, or otherwise affected by the adequacy of any rights which the
Agent or any Bank may have against any collateral security or other means
of obtaining repayment of any of the Obligations, the impairment of any
collateral security securing the Obligations, including, without
limitation, the failure to protect or preserve any rights which the Agent
or any Bank may have in such collateral security or the substitution,
exchange, surrender, release, loss or destruction of any such collateral
security, any other act or omission which might in any manner or to the
extent vary the risk of the Borrower, or otherwise operate as a release or
discharge of such Borrower, all of which may be done without notice to such
Borrower; provided, however, that the foregoing shall in no way be deemed
-------- -------
to create commercially unreasonable standards as to the Agent's duties as
secured party under the Loan Documents (as such rights and duties are set
forth therein). If for any reason any of the other Borrowers has no legal
existence or is under no legal obligation to discharge any of the
Obligations, or if any of the Obligations have become irrecoverable from
any of the other Borrowers by reason of such other Borrower's insolvency,
bankruptcy or reorganization or by other operation of law or for any
reason, this Agreement and the other Loan Documents to which it is a party
shall nevertheless be binding on such Borrower to the same extent as if
such Borrower at all times had been the sole obligor on such Obligations.
Without limiting the generality of the foregoing, each Borrower assents to
any other action or delay in acting or failure to act on the part of the
Agent and the Banks, including, without limitation, any failure strictly or
diligently to assert any right or to pursue any remedy or to comply fully
with applicable laws or regulations thereunder which might, but for the
provisions of this (S)15.3.6, afford grounds for terminating, discharging
or relieving such Borrower, in whole or in part, from any of its
obligations under this (S)15.3.6 shall not be discharged except by
performance and then only to the extent of such performance. The
Obligations of each Borrower under this (S)15.3.6 shall not be diminished
or rendered unenforceable by any winding up, reorganization, arrangement,
liquidation, reconstruction or similar proceeding with respect to any
reconstruction or similar proceeding with respect to any Borrower, or any
of the Banks. The joint and several liability of the Borrowers hereunder
shall continue in full force and effect notwithstanding any absorption,
merger, amalgamation or any other change whatsoever in the name,
membership, constitution or place of formation of any Borrower or the
Banks.
15.3.7. ENFORCEMENT. The provisions of this (S)15.3.7 are made for
-----------
the benefit of each of the Agent and the Banks and its successors and
assigns, and may be enforced by it from time to time against any of the
Borrowers as often as occasion therefor may arise and without requirement
on the part of the Agent and the Banks first to marshall any of their
claims or to exercise any of their rights against the other Borrowers or to
exhaust any remedies available to it against the other
-52-
Borrowers or to resort to any other source or means of obtaining payment of
any of the Obligations hereunder or to elect any other remedy. The
provisions of this (S)15.3.7 shall remain in effect until all the
Obligations hereunder shall have been paid in full or otherwise fully
satisfied. If at any time, any payment, or any part thereof, made in
respect of any of the Obligations, is rescinded or must otherwise be
restored or returned by the Agent or the Banks upon the insolvency,
bankruptcy or reorganization of the Borrowers, or otherwise, the provisions
of this (S)15.3.7 will forthwith be reinstated in effect as though such
payment had not been made.
15.3.8. CONTRIBUTION. To the extent any Borrower makes a payment
------------
hereunder in excess of the aggregate amount of the benefit received by such
Borrower in respect of the extensions of credit under the Agreement (the
"Benefit Amount"), then such Borrower, after the payment in full in cash of
all of the Obligations, shall be entitled to recover from each other
Borrower such excess payment, pro rata in accordance with the ratio of the
--- ----
Benefit Amount received by each such other Borrower to the total Benefit
Amounts received by all Borrowers, and the right to such recovery shall be
deemed to be in asset and property of such Borrower so funding; provided
--------
that all such rights to recovery shall be subordinate and junior in right
of payment to the final and indefeasible repayment in full in cash of all
of the Obligations.
16. TRANSITIONAL ARRANGEMENTS.
16.1. ORIGINAL CREDIT AGREEMENT SUPERSEDED. This Agreement shall on the
------------------------------------
Closing Date supersede the Original Credit Agreement in its entirety, except as
provided in this (S)16. On the Closing Date, the rights and obligations of the
parties evidenced by the Original Credit Agreement shall be evidenced by this
Agreement and the other Loan Documents, the "Revolving Credit Loans" and "Term
Loans" as defined in the Original Credit Agreement shall be converted into
Revolving Credit Loans and Term Loans as defined herein and all outstanding
letters of credit issued by the Agent for the account of SalesLink or the Parent
prior to the Closing Date shall, for purposes of this Credit Agreement, be
Letters of Credit hereunder.
16.2. RETURN AND CANCELLATION OF NOTES. As soon as reasonably practicable
---------------------------------
after its receipt of its Notes hereunder on the Closing Date, the Banks will
promptly return to SalesLink, marked "Substituted" or "Cancelled", as the case
may be, any promissory notes of SalesLink held by the Banks pursuant to the
Original Credit Agreement.
-53-
16.3. INTEREST AND FEES UNDER SUPERSEDED AGREEMENT. All interest and fees
--------------------------------------------
and expenses, if any, owing or accruing under or in respect of the Original
Credit Agreement though the Closing Date shall be calculated as of the Closing
Date (prorated in the case of any fractional periods) and shall be paid on the
Closing Date. Commencing on the Closing Date, the commitment fees shall be
payable by the Borrowers to the Agent for the accounts of the Banks in
accordance with (S)2 hereof.
-54-
IN WITNESS WHEREOF, the undersigned have duly executed this Amended and
Restated Revolving Credit and Term Loan Agreement as a sealed instrument as of
the date first above written.
SALESLINK CORPORATION
By:__________________________________
Name:
Title:
Address:
25 Drydock Avenue
Boston, Massachusetts 02210
Tel: (617)
Fax: (617)
INSOLUTIONS INCORPORATED
By:__________________________________
Name:
Title:
Address:
Tel:
Fax:
PACIFIC DIRECT MARKETING CORP.
By:__________________________________
Name:
Title:
Address:
8852 Thornton Avenue
Newark, California
Tel:
Fax:
-55-
BANKBOSTON, N.A., individually and as Agent
By:__________________________________
Name:
Title:
Address:
100 Federal Street
High Technology Division
Boston, Massachusetts 02110
Tel:
Fax: (617)434-0819
IMPERIAL BANK
By:__________________________________
Name:
Title:
Address:
Tel:
Fax:
EXHIBIT 10.58
AMENDED AND RESTATED TERM NOTE
------------------------------
$5,606,383.01 as of June 11, 1998
FOR VALUE RECEIVED, the undersigned SALESLINK CORPORATION, a Delaware
corporation ("SalesLink") and INSOLUTIONS INCORPORATED, a Delaware corporation
("InSolutions", and, collectively with SalesLink, the "Borrowers"), hereby
jointly and severally promise to pay to the order of IMPERIAL BANK, a national
banking association (the "Bank") at the Agent's Head Office (as defined in the
Credit Agreement referred to below):
(a) prior to or on the Term Loan Maturity Date the principal amount
of FIVE MILLION SIX HUNDRED SIX THOUSAND THREE HUNDRED EIGHTY THREE DOLLARS
AND ONE CENT ($5,606,383.01) evidencing the Term Loan made by the Bank to
the BorrowerS pursuant to the Amended and Restated Revolving Credit and
Term Loan Agreement dated as of June 11, 1998 (as amended and in effect
from time to time, the "Credit Agreement"), by and among the Borrower, the
Bank and other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest from the date hereof on the principal amount from time
to time outstanding to and including the maturity hereof at the rates and
terms and in all cases in accordance with the terms of the Credit
Agreement.
This Note constitutes the amendment and restatement in its entirety of the
Term Note issued by SalesLink to the Bank in the original principal amount of
$1,774,193.55, dated as of March 14, 1997 (the "Original Note") and is issued in
substitution therefor and an amendment and replacement thereof. Nothing herein
or in any other document shall be construed to constitute payment of the
Original Note or to release or terminate any guaranty, lien, mortgage, pledge or
other security interest in favor of the Bank.
This Note evidences borrowings under and has been issued by the Borrowers
in accordance with the terms of the Credit Agreement. The Bank and any holder
hereof is entitled to the benefits of the Credit Agreement, the Security
Documents and the other Loan Documents, and may enforce the agreements of the
Borrowers contained therein, and any holder hereof may exercise the respective
remedies provided for thereby or otherwise available in respect thereof, all in
accordance with the respective terms thereof. All
-2-
capitalized terms used in this Note and not otherwise defined herein shall have
the same meanings herein as in the Credit Agreement.
Each Borrower irrevocably authorizes the Bank to make or cause to be made,
at the time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid, or
any other similar record, including computer records, reflecting the receipt of
such payment. The outstanding amount of the Term Loan set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to the
Term Loan shall be prima facie evidence of the principal amount of the Term Loan
----- -----
owing and unpaid to the Bank, but the failure to record, or any error in so
recording, any such amount on any such grid, continuation or other record shall
not limit or otherwise affect the joint and several obligations of the Borrowers
hereunder or under the Credit Agreement to make payments of principal of and
interest on this Note when due.
Each Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any future occasion.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE JOINT AND SEVERAL OBLIGATIONS OF THE BORROWERS HEREUNDER
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR
ANY FEDERAL COURT
-3-
SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT
AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWERS BY
MAIL AT THE ADDRESS SPECIFIED BENEATH THE BORROWERS' SIGNATURE ON THE SIGNATURE
PAGE OF THE CREDIT AGREEMENT. EACH BORROWER HEREBY WAIVES ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR
THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
-4-
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
SALESLINK CORPORATION
By:_________________________________
Title:
INSOLUTIONS INCORPORATED
By:_________________________________
Title:
EXHIBIT 10.59
AMENDED AND RESTATED TERM NOTE
------------------------------
$9,893,616.99 as of June 11, 1998
FOR VALUE RECEIVED, the undersigned SALESLINK CORPORATION, a Delaware
corporation ("SalesLink") and INSOLUTIONS INCORPORATED, a Delaware corporation
("InSolutions", and, collectively with SalesLink, the "Borrowers"), hereby
jointly and severally promise to pay to the order of BANKBOSTON, N.A., a
national banking association (the "Bank") at the Agent's Head Office (as defined
in the Credit Agreement referred to below):
(a) prior to or on the Term Loan Maturity Date the principal amount
of NINE MILLION EIGHT HUNDRED NINETY THREE THOUSAND SIX HUNDRED SIXTEEN
DOLLARS AND NINETY NINE CENTS ($9,893,616.99) evidencing the Term Loan made
by the Bank to the BorrowerS pursuant to the Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 11, 1998 (as amended and in
effect from time to time, the "Credit Agreement"), by and among the
Borrower, the Bank and other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest from the date hereof on the principal amount from time
to time outstanding to and including the maturity hereof at the rates and
terms and in all cases in accordance with the terms of the Credit
Agreement.
This Note constitutes the amendment and restatement in its entirety of the
Term Note issued by SalesLink to the Bank in the original principal amount of
$3,725,806.45, dated as of March 14, 1997 (the "Original Note") and is issued in
substitution therefor and an amendment and replacement thereof. Nothing herein
or in any other document shall be construed to constitute payment of the
Original Note or to release or terminate any guaranty, lien, mortgage, pledge or
other security interest in favor of the Bank.
This Note evidences borrowings under and has been issued by the Borrowers
in accordance with the terms of the Credit Agreement. The Bank and any holder
hereof is entitled to the benefits of the Credit Agreement, the Security
Documents and the other Loan Documents, and may enforce the agreements of the
Borrowers contained therein, and any holder hereof may exercise the respective
remedies provided for thereby or otherwise available in respect thereof, all in
accordance with the respective terms thereof. All
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capitalized terms used in this Note and not otherwise defined herein shall have
the same meanings herein as in the Credit Agreement.
Each Borrower irrevocably authorizes the Bank to make or cause to be made,
at the time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid, or
any other similar record, including computer records, reflecting the receipt of
such payment. The outstanding amount of the Term Loan set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to the
Term Loan shall be prima facie evidence of the principal amount of the Term Loan
----- -----
owing and unpaid to the Bank, but the failure to record, or any error in so
recording, any such amount on any such grid, continuation or other record shall
not limit or otherwise affect the joint and several obligations of the Borrowers
hereunder or under the Credit Agreement to make payments of principal of and
interest on this Note when due.
Each Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any future occasion.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE JOINT AND SEVERAL OBLIGATIONS OF THE BORROWERS HEREUNDER
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR
ANY FEDERAL COURT
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SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT
AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWERS BY
MAIL AT THE ADDRESS SPECIFIED BENEATH THE BORROWERS' SIGNATURE ON THE SIGNATURE
PAGE OF THE CREDIT AGREEMENT. EACH BORROWER HEREBY WAIVES ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR
THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
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IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in
its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
SALESLINK CORPORATION
By:_________________________
Title:
INSOLUTIONS INCORPORATED
By:_________________________
Title:
EXHIBIT 10.60
FOURTH AMENDED AND RESTATED
REVOLVING CREDIT NOTE
---------------------
$3,255,319.17 as of June 11, 1998
FOR VALUE RECEIVED, the undersigned SALESLINK CORPORATION a Delaware
corporation ("SalesLink") and INSOLUTIONS INCORPORATED ("InSolutions" and,
collectively with SalesLink, the "Borrowers"), hereby jointly and severally
promise to pay to the order of IMPERIAL BANK, a national banking association
(the "Bank") at the Agent's Head Office (as such term is defined in the Credit
Agreement referred to below):
(a) prior to or on the Revolving Credit Loan Maturity Date the
principal amount of THREE MILLION TWO HUNDRED FIFTY-FIVE THOUSAND THREE
HUNDRED NINETEEN DOLLARS AND SEVENTEEN CENTS ($3,255,319.17) or, if less,
the aggregate unpaid principal amount of Revolving Credit Loans advanced by
the Bank to the Borrowesr pursuant to the Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 11, 1998 (as amended and in
effect from time to time, the "Credit Agreement"), among the Borrowers, the
Bank and other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest on the principal balance hereof from time to time
outstanding from the Closing Date under the Credit Agreement through and
including the maturity date hereof at the times and at the rate provided in
the Credit Agreement.
This Note constitutes the second amendment and restatement in its entirety
of the Third Amended and Restated Revolving Credit Note issued by SalesLink to
the Bank in the original principal amount of $1,774,193.55, dated as of March
31, 1997 (the "Original Note") and is issued in substitution therefor and an
amendment and replacement thereof. Nothing herein or in any other document
shall be construed to constitute payment of the Original Note or to release or
terminate any guaranty, lien, mortgage, pledge or other security interest in
favor of the Bank.
This Note evidences borrowings under and has been issued by the Borrowers
on a joint and several basis and in accordance with the terms of the Credit
Agreement. The Bank and any holder hereof is entitled to the benefits of the
Credit Agreement, the Security Documents and the other Loan Documents, and may
enforce the agreements of the Borrowers contained therein, and any holder hereof
may exercise the respective remedies provided for thereby or otherwise available
in respect thereof, all in accordance with the respective
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terms thereof. All capitalized terms used in this Note and not otherwise defined
herein shall have the same meanings herein as in the Credit Agreement.
Each Borrower irrevocably authorizes the Bank to make or cause to be made,
at or about the time of the Drawdown Date of any Revolving Credit Loan or at the
time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid, or
any other similar record, including computer records, reflecting the making of
such Revolving Credit Loan or (as the case may be) the receipt of such payment.
The outstanding amount of the Revolving Credit Loans set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to any
Revolving Credit Loans shall be prima facie evidence of the principal amount
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thereof owing and unpaid to the Bank, but the failure to record, or any error in
so recording, any such amount on any such grid, continuation or other record
shall not limit or otherwise affect the joint and several obligations of the
Borrowers hereunder or under the Credit Agreement to make payments of principal
of and interest on this Note when due.
Each Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any further occasion.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE JOINT AND SEVERAL OBLIGATIONS OF THE BORROWERS HEREUNDER
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
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THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR
ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE
JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING
MADE UPON THE BORROWERS BY MAIL AT THE ADDRESS SPECIFIED BENEATH THE BORROWERS'
SIGNATURE ON THE SIGNATURE PAGE OF THE CREDIT AGREEMENT. EACH BORROWER HEREBY
WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
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IN WITNESS WHEREOF, the undersigned has caused this Revolving Credit Note
to be signed in its corporate name and its corporate seal to be impressed
thereon by its duly authorized officer as of the day and year first above
written.
[Corporate Seal]
SALESLINK CORPORATION
By:____________________________
Title:
INSOLUTIONS INCORPORATED
By:____________________________
Title:
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Amount of Balance of
Amount Principal Paid Principal Notation
Date of Loan or Prepaid Unpaid Made By:
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EXHIBIT 10.61
FOURTH AMENDED AND RESTATED
REVOLVING CREDIT NOTE
---------------------
$5,744,680.83 as of June 11, 1998
FOR VALUE RECEIVED, the undersigned SALESLINK CORPORATION a Delaware
corporation ("SalesLink") and INSOLUTIONS INCORPORATED ("InSolutions" and,
collectively with SalesLink, the "Borrowers"), hereby jointly and severally
promise to pay to the order of BANKBOSTON, N.A. a national banking association
(the "Bank") at the Agent's Head Office (as such term is defined in the Credit
Agreement referred to below):
(a) prior to or on the Revolving Credit Loan Maturity Date the
principal amount of FIVE MILLION SEVEN HUNDRED FORTY-FOUR THOUSAND SIX
HUNDRED EIGHTY DOLLARS AND EIGHTY-THREE CENTS ($5,744,680.83) or, if less,
the aggregate unpaid principal amount of Revolving Credit Loans advanced by
the Bank to the Borrowesr pursuant to the Amended and Restated Revolving
Credit and Term Loan Agreement dated as of June 11, 1998 (as amended and in
effect from time to time, the "Credit Agreement"), among the Borrowers, the
Bank and other parties thereto;
(b) the principal outstanding hereunder from time to time at the
times provided in the Credit Agreement; and
(c) interest on the principal balance hereof from time to time
outstanding from the Closing Date under the Credit Agreement through and
including the maturity date hereof at the times and at the rate provided in
the Credit Agreement.
This Note constitutes the second amendment and restatement in its entirety
of the Third Amended and Restated Revolving Credit Note issued by SalesLink to
the Bank in the original principal amount of $1,774,193.55, dated as of March
31, 1997 (the "Original Note") and is issued in substitution therefor and an
amendment and replacement thereof. Nothing herein or in any other document
shall be construed to constitute payment of the Original Note or to release or
terminate any guaranty, lien, mortgage, pledge or other security interest in
favor of the Bank.
This Note evidences borrowings under and has been issued by the Borrowers
on a joint and several basis and in accordance with the terms of the Credit
Agreement. The Bank and any holder hereof is entitled to the benefits of the
Credit Agreement, the Security Documents and the other Loan Documents, and may
enforce the agreements of the Borrowers contained therein, and any holder hereof
may exercise the respective remedies provided for thereby or otherwise available
in respect thereof, all in accordance with the respective
-2-
terms thereof. All capitalized terms used in this Note and not otherwise defined
herein shall have the same meanings herein as in the Credit Agreement.
Each Borrower irrevocably authorizes the Bank to make or cause to be made,
at or about the time of the Drawdown Date of any Revolving Credit Loan or at the
time of receipt of any payment of principal of this Note, an appropriate
notation on the grid attached to this Note, or the continuation of such grid, or
any other similar record, including computer records, reflecting the making of
such Revolving Credit Loan or (as the case may be) the receipt of such payment.
The outstanding amount of the Revolving Credit Loans set forth on the grid
attached to this Note, or the continuation of such grid, or any other similar
record, including computer records, maintained by the Bank with respect to any
Revolving Credit Loans shall be prima facie evidence of the principal amount
----- -----
thereof owing and unpaid to the Bank, but the failure to record, or any error in
so recording, any such amount on any such grid, continuation or other record
shall not limit or otherwise affect the joint and several obligations of the
Borrowers hereunder or under the Credit Agreement to make payments of principal
of and interest on this Note when due.
Each Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.
If any one or more of the Events of Default shall occur, the entire unpaid
principal amount of this Note and all of the unpaid interest accrued thereon may
become or be declared due and payable in the manner and with the effect provided
in the Credit Agreement.
No delay or omission on the part of the Bank or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one occasion be deemed a bar or waiver of the same or any other right on
any further occasion.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
THIS NOTE AND THE JOINT AND SEVERAL OBLIGATIONS OF THE BORROWERS HEREUNDER
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
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THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR
ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE
JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING
MADE UPON THE BORROWERS BY MAIL AT THE ADDRESS SPECIFIED BENEATH THE BORROWERS'
SIGNATURE ON THE SIGNATURE PAGE OF THE CREDIT AGREEMENT. EACH BORROWER HEREBY
WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
This Note shall be deemed to take effect as a sealed instrument under the
laws of the Commonwealth of Massachusetts.
-4-
IN WITNESS WHEREOF, the undersigned has caused this Revolving Credit Note
to be signed in its corporate name and its corporate seal to be impressed
thereon by its duly authorized officer as of the day and year first above
written.
[Corporate Seal]
SALESLINK CORPORATION
By: __________________________________
Title:
INSOLUTIONS INCORPORATED
By: __________________________________
Title:
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Amount of Balance of
Amount Principal Paid Principal Notation
Date of Loan or Prepaid Unpaid Made By:
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EXHIBIT 10.62
AMENDED AND RESTATED STOCK PLEDGE AGREEMENT
-------------------------------------------
This AMENDED AND RESTATED STOCK PLEDGE AGREEMENT is made as of June 11,
1998, by and between SalesLink Corporation, a Delaware corporation (the
"Company"), and BankBoston, N.A. (f/k/a The First National Bank of Boston), a
national banking association, as agent (hereinafter, in such capacity, the
"Agent") for itself and the other banking institutions (hereinafter,
collectively, the "Banks") which are or may become parties to an Amended and
Restated Revolving Credit and Term Loan Agreement dated as of June 11, 1998 (as
amended and in effect from time to time, the "Credit Agreement"), among the
Company, InSolutions Incorporated ("InSolutions" and, collectively with the
Company, the "Borrowers"), Pacific Direct Marketing Corp., the Banks and the
Agent.
WHEREAS, SalesLink as well as certain other parties entered into a
Revolving Credit and Term Loan Agrement dated as of October 24, 1996 (such
agreement as heretofore amended and in effect from time to time, the "Original
Loan Agreement"); and
WHEREAS, in connection with the Original Loan Agreement, SalesLink entered
into a Stock Pledge Agreement dated as of July 17, 1997 (such agreement as
heretofore amended and in effect form time to time, the "Original Stock Pledge
Agreement") in favor of BankBoston, N.A. as agent for the lending institutions
party to the Original Loan Agreement; and
WHEREAS, each of the Borrower is expected to receive substantial direct and
indirect benefits from the extensions of credit by the Banks to the Borrowers
pursuant to the Credit Agreement; and
WHEREAS, the Original Loan Agreement will be superseded by the Credit
Agreement on the Closing Date (as defined in the Credit Agreement); and
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement that the Company execute and deliver to the Agent, for the benefit of
the Banks and the Agent, a stock pledge agreement in substantially the form
hereof; and
WHEREAS, the Company desires to amend and restate all of its rights and
obligations under the Original Stock Pledge Agreement and grant security
interests in favor of and as provided herein;
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NOW, THEREFORE, in consideration of the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. PLEDGE OF STOCK, ETC.
---------------------
1.1 PLEDGE OF STOCK. The Company hereby pledges, assigns, grants a
---------------
security interest in, and delivers to the Agent, for the benefit of the
Banks and the Agent, all of the shares of capital stock of the Subsidiaries
of every class, as more fully described on Annex A hereto, to be held by
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the Agent, for the benefit of the Banks and the Agent, subject to the terms
and conditions hereinafter set forth. The certificates for such shares,
accompanied by stock powers or other appropriate instruments of assignment
thereof duly executed in blank by the Company, have been delivered to the
Agent.
1.2 ADDITIONAL STOCK. In case the Company shall acquire any
----------------
additional shares of the capital stock of any Subsidiary or corporation
which is the successor of any Subsidiary, or any securities exchangeable
for or convertible into shares of such capital stock of any class of any
Subsidiary, by purchase, stock dividend, stock split or otherwise, then the
Company shall forthwith deliver to and pledge such shares or other
securities to the Agent, for the benefit of the Banks and the Agent, under
this Agreement and shall deliver to the Agent forthwith any certificates
therefor, accompanied by stock powers or other appropriate instruments of
assignment duly executed by the Company in blank. The Company agrees that
the Agent may from time to time attach as Annex A hereto an updated list of
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the shares of capital stock or securities at the time pledged with the
Agent hereunder.
1.3 PLEDGE OF CASH COLLATERAL ACCOUNT. The Company also hereby
---------------------------------
pledges, assigns, grants a security interest in, and delivers to the Agent,
for the benefit of the Banks and the Agent, the Cash Collateral Account and
all of the Cash Collateral as such terms are hereinafter defined.
2. DEFINITIONS. The term "Obligations" and all other capitalized terms
-----------
used herein without definition shall have the respective meanings provided
therefor in the Credit Agreement. Terms used herein and not defined in the
Credit Agreement or otherwise defined herein that are defined in the Uniform
Commercial Code of the Commonwealth of Massachusetts have such defined meanings
herein, unless the context otherwise indicated or requires, and the following
terms shall have the following meanings:
Cash Collateral. See (S)4.
---------------
Cash Collateral Account. See (S)4.
-----------------------
Stock. Includes the shares of stock described in Annex A attached hereto
----- ----- -
and any additional shares of stock at the time pledged with the Agent hereunder.
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Stock Collateral. The property at any time pledged to the Agent hereunder
----------------
(whether described herein or not) and all income therefrom, increases therein
and proceeds thereof, including without limitation that included in Cash
Collateral, but excluding from the definition of "Stock Collateral" any income,
increases or proceeds received by the Company to the extent expressly permitted
by (S)6.
Time Deposits. See (S)4.
-------------
3. SECURITY FOR OBLIGATIONS. This Agreement and the security interest in
------------------------
and pledge of the Stock Collateral hereunder are made with and granted to the
Agent, for the benefit of the Banks and the Agent, as security for the payment
and performance in full of all the Obligations.
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4. LIQUIDATION, RECAPITALIZATION, ETC.
-----------------------------------
4.1 DISTRIBUTIONS PAID TO AGENT. Any sums or other property paid
---------------------------
or distributed upon or with respect to any of the Stock, whether by
dividend or redemption or upon the liquidation or dissolution of the issuer
thereof or otherwise, shall, except to the limited extent provided in (S)6,
be paid over and delivered to the Agent to be held by the Agent, for the
benefit of the Banks and the Agent, as security for the payment and
performance in full of all of the Obligations. In case, pursuant to the
recapitalization or reclassification of the capital of the issuer thereof
or pursuant to the reorganization thereof, any distribution of capital
shall be made on or in respect of any of the Stock or any property shall be
distributed upon or with respect to any of the Stock, the property so
distributed shall be delivered to the Agent, for the benefit of the Banks
and the Agent, to be held by it as security for the Obligations. Except to
the limited extent provided in (S)6, all sums of money and property paid or
distributed in respect of the Stock, whether as a dividend or upon such a
liquidation, dissolution, recapitalization or reclassification or
otherwise, that are received by the Company shall, until paid or delivered
to the Agent, be held in trust for the Agent, for the benefit of the Banks
and the Agent, as security for the payment and performance in full of all
of the Obligations.
4.2 CASH COLLATERAL ACCOUNT. All sums of money that are delivered
-----------------------
to the Agent pursuant to this (S)4 shall be deposited into an interest
bearing account with the Agent (the "Cash Collateral Account"). Some or all
of the funds from time to time in the Cash Collateral Account may be
invested in time deposits, including, without limitation, certificates of
deposit issued by the Agent (such certificates of deposit or other time
deposits being hereinafter referred to, collectively, as "Time Deposits"),
that are satisfactory to the Agent after consultation with the Company,
provided, that, in each such case, arrangements satisfactory to the Agent
--------
are made and are in place to perfect and to insure the first priority of
the Agent's security interest therein. Interest earned on the Cash
Collateral Account and on the Time Deposits, and the principal of the Time
Deposits at maturity that is not invested in new Time Deposits, shall be
deposited in the Cash Collateral Account. The Cash Collateral Account, all
sums from time to time standing to the credit of the Cash Collateral
Account, any and all Time Deposits, any and all instruments or other
writings evidencing Time Deposits and any and all proceeds or any thereof
are hereinafter referred to as the "Cash Collateral."
4.3 COMPANY'S RIGHTS TO CASH COLLATERAL, ETC. Except as otherwise
----------------------------------------
expressly provided in (S)15, the Company shall have no right to withdraw
sums from the Cash Collateral Account, to receive any of the Cash
Collateral or to require the Agent to part with the Agent's possession of
any instruments or other writings evidencing any Time Deposits.
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5. WARRANTY OF TITLE; AUTHORITY. The Company hereby represents and
----------------------------
warrants that: (a) the Company has good and marketable title to, and is the sole
record and beneficial owner of, the Stock described in (S)1, subject to no
pledges, liens, security interests, charges, options, restrictions or other
encumbrances except the pledge and security interest created by this Agreement,
(b) all of the Stock described in (S)1 is validly issued, fully paid and non-
assessable, (c) the Company has full power, authority and legal right to
execute, deliver and perform its obligations under this Agreement and to pledge
and grant a security interest in all of the Stock Collateral pursuant to this
Agreement, and the execution, delivery and performance hereof and the pledge of
and granting of a security interest in the Stock Collateral hereunder have been
duly authorized by all necessary corporate or other action and do not contravene
any law, rule or regulation or any provision of the Company's charter documents
or by-laws or of any judgment, decree or order of any tribunal or of any
agreement or instrument to which the Company is a party or by which it or any of
its property is bound or affected or constitute a default thereunder, and (d)
the information set forth in Annex A hereto relating to the Stock is true,
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correct and complete in all respects. The Company covenants that it will defend
the rights of the Banks and the Agent and security interest of the Agent, for
the benefit of the Banks and the Agent, in such Stock against the claims and
demands of all other persons whomsoever. The Company further covenants that it
will have the like title to and right to pledge and grant a security interest in
the Stock Collateral hereafter pledged or in which a security interest is
granted to the Agent hereunder and will likewise defend the rights, pledge and
security interest thereof and therein of the Banks and the Agent.
6. DIVIDENDS, VOTING, ETC., PRIOR TO MATURITY. So long as no Event of
------------------------------------------
Default shall have occurred and be continuing, the Company shall be entitled to
receive all cash dividends paid in respect of the Stock, to vote the Stock and
to give consents, waivers and ratifications in respect of the Stock; provided,
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however, that no vote shall be cast or consent, waiver or ratification given by
- - - -------
the Company if the effect thereof would in the reasonable judgment of the
Majority Banks impair any of the Stock Collateral or be inconsistent with or
result in any violation of any of the provisions of the Credit Agreement, the
Notes or any of the other Loan Documents. All such rights of the Company to
receive cash dividends shall cease in case an Event of Default shall have
occurred and be continuing. All such rights of the Company to vote and give
consents, waivers and ratifications with respect to the Stock shall, at the
Agent's option, as evidenced by the Agent's notifying the Company of such
election, cease in case an Event of Default shall have occurred and be
continuing.
7. REMEDIES.
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7.1 IN GENERAL. If an Event of Default shall have occurred and be
----------
continuing, the Agent shall thereafter have the following rights and
remedies (to the extent permitted by applicable law) in addition to the
rights and remedies of a secured party under the Uniform Commercial Code of
the Commonwealth of Massachusetts, all such rights and remedies being
-6-
cumulative, not exclusive, and enforceable alternatively, successively or
concurrently, at such time or times as the Agent deems expedient:
(a) if the Agent so elects and gives notice of such election to
the Company, the Agent may vote any or all shares of the Stock
(whether or not the same shall have been transferred into its name or
the name of its nominee or nominees) for any lawful purpose,
including, without limitation, if the Agent so elects, for the
liquidation of the assets of the issuer thereof, and give all
consents, waivers and ratifications in respect of the Stock and
otherwise act with respect thereto as though it were the outright
owner thereof (the Company hereby irrevocably constituting and
appointing the Agent the proxy and attorney-in-fact of the Company,
with full power of substitution, to do so);
(b) the Agent may demand, sue for, collect or make any
compromise or settlement the Agent deems suitable in respect of any
Stock Collateral;
(c) the Agent may sell, resell, assign and deliver, or otherwise
dispose of any or all of the Stock Collateral, for cash or credit or
both and upon such terms at such place or places, at such time or
times and to such entities or other persons as the Agent thinks
expedient, all without demand for performance by the Company or any
notice or advertisement whatsoever except as expressly provided herein
or as may otherwise be required by law;
(d) the Agent may cause all or any part of the Stock held by it
to be transferred into its name or the name of its nominee or
nominees; and
(e) the Agent may set off against the Obligations any and all
sums deposited with it or held by it, including without limitation,
any sums standing to the credit of the Cash Collateral Account and any
Time Deposits issued by the Agent.
7.2 SALE OF STOCK COLLATERAL. In the event of any disposition of the
------------------------
Stock Collateral as provided in clause (c) of (S)7.1, the Agent shall give
to the Company at least ten (10) Business Days prior written notice of the
time and place of any public sale of the Stock Collateral or of the time
after which any private sale or any other intended disposition is to be
made. The Company hereby acknowledges that ten (10) Business Days prior
written notice of such sale or sales shall be reasonable notice. The Agent
may enforce its rights hereunder without any other notice and without
compliance with any other condition precedent now or hereunder imposed by
statute, rule of law or otherwise (all of which are hereby expressly waived
by the Company, to the fullest extent permitted by law). The Agent may buy
any part or all of the Stock Collateral at any public sale and if any part
or all of the Stock
-7-
Collateral is of a type customarily sold in a recognized market or is of
the type which is the subject of widely-distributed standard price
quotations, the Agent may buy at private sale and may make payments thereof
by any means. The Agent may apply the cash proceeds actually received from
any sale or other disposition to the reasonable expenses of retaking,
holding, preparing for sale, selling and the like, to reasonable attorneys'
fees, travel and all other expenses which may be incurred by the Agent in
attempting to collect the Obligations or to enforce this Agreement or in
the prosecution or defense of any action or proceeding related to the
subject matter of this Agreement, and then to the Obligations pursuant to
the Credit Agreement or in the order set forth in such order or preference
--
as the Agent may determine after proper allowance for Obligations not then
due. Only after such applications, and after payment by the Agent of any
amount required by (S)9-504(1)(c) of the Uniform Commercial Code of the
Commonwealth of Massachusetts, need the Agent account to the Company for
any surplus. To the extent that any of the Obligations are to be paid or
performed by a person other than the Company, the Company waives and agrees
not to assert any rights or privileges which it may have under (S)9-112 of
the Uniform Commercial Code of the Commonwealth of Massachusetts.
7.3 PRIVATE SALES. The Company recognizes that the Agent may be
-------------
unable to effect a public sale of the Stock by reason of certain
prohibitions contained in the Securities Act, federal banking laws, and
other applicable laws, but may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers. The Company
agrees that any such private sales may be at prices and other terms less
favorable to the seller than if sold at public sales and that such private
sales shall not by reason thereof be deemed not to have been made in a
commercially reasonable manner. The Agent shall be under no obligation to
delay a sale of any of the Stock for the period of time necessary to permit
the issuer of such securities to register such securities for public sale
under the Securities Act, or such other federal banking or other applicable
laws, even if the issuer would agree to do so. Subject to the foregoing,
the Agent agrees that any sale of the Stock shall be made in a commercially
reasonable manner, and the Company agrees to use its best efforts to cause
the issuer or issuers of the Stock contemplated to be sold, to execute and
deliver, and cause the directors and officers of such issuer to execute and
deliver, all at the Company's expense, all such instruments and documents,
and to do or cause to be done all such other acts and things as may be
necessary or, in the reasonable opinion of the Agent, advisable to exempt
such Stock from registration under the provisions of the Securities Act,
and to make all amendments to such instruments and documents which, in the
opinion of the Agent, are necessary or advisable, all in conformity with
the requirements of the Securities Act and the rules and regulations of the
Securities and Exchange Commission applicable thereto. The Company further
agrees to use its best efforts to cause such issuer or issuers to comply
with the provisions of the securities or "Blue Sky" laws of any
jurisdiction which the Agent shall
-8-
designate and, if required, to cause such issuer or issuers to make
available to its security holders, as soon as practicable, an earnings
statement (which need not be audited) which will satisfy the provisions of
Section 11(a) of the Securities Act.
7.4 COMPANY'S AGREEMENTS, ETC. The Company further agrees to do or
-------------------------
cause to be done all such other acts and things as may be reasonably
necessary to make any sales of any portion or all of the Stock pursuant to
this (S)7 valid and binding and in compliance with any and all applicable
laws, regulations, orders, writs, injunctions, decrees or awards of any and
all courts, arbitrators or governmental instrumentalities, domestic or
foreign, having jurisdiction over any such sale or sales, all at the
Company's expense. The Company further agrees that a breach of any of the
covenants contained in this (S)7 will cause irreparable injury to the Agent
and the Banks, that the Agent and the Banks have no adequate remedy at law
in respect of such breach and, as a consequence, agrees that each and every
covenant contained in this (S)7 shall be specifically enforceable against
the Company by the Agent and the Company hereby waives and agrees not to
assert any defenses against an action for specific performance of such
covenants.
8. MARSHALLING. Neither the Agent nor any Bank shall be required to
-----------
marshal any present or future collateral security for (including but not limited
to this Agreement and the Stock Collateral), or other assurances of payment of,
the Obligations or any of them, or to resort to such collateral security or
other assurances of payment in any particular order. All of the Agent's rights
hereunder and of the Banks and the Agent in respect of such collateral security
and other assurances of payment shall be cumulative and in addition to all other
rights, however existing or arising. To the extent that it lawfully may, the
Company hereby agrees that it will not invoke any law relating to the
marshalling of collateral that might cause delay in or impede the enforcement of
the Agent's rights under this Agreement or under any other instrument evidencing
any of the Obligations or under which any of the Obligations is outstanding or
by which any of the Obligations is secured or payment thereof is otherwise
assured, and to the extent that it lawfully may the Company hereby irrevocably
waives the benefits of all such laws.
9. COMPANY'S OBLIGATIONS NOT AFFECTED. The obligations of the Company
----------------------------------
hereunder shall remain in full force and effect without regard to, and shall not
be impaired by (a) any exercise or nonexercise, or any waiver, by the Agent or
any Bank of any right, remedy, power or privilege under or in respect of any of
the Obligations or any security thereof (including this Agreement); (b) any
amendment to or modification of the Credit Agreement, the Note, the other Loan
Documents or any of the Obligations; (c) any amendment to or modification of any
instrument (other than this Agreement) securing any of the Obligations,
including, without limitation, any of the Security Documents; or (d) the taking
of additional security for, or any other assurances of payment of, any of the
Obligations or the release or discharge or termination of any security or other
assurances of payment or
-9-
performance for any of the Obligations; whether or not the Company shall have
notice or knowledge of any of the foregoing.
10. TRANSFER, ETC., BY COMPANY. Without the prior written consent of the
--------------------------
Agent, the Company will not sell, assign, transfer or otherwise dispose of,
grant any option with respect to, or pledge or grant any security interest in or
otherwise encumber or restrict any of the Stock Collateral or any interest
therein, except for the pledge thereof and security interest therein provided
for in this Agreement.
11. FURTHER ASSURANCES. The Company will do all such acts, and will
------------------
furnish to the Agent all such financing statements, certificates, legal opinions
and other documents and will obtain all such governmental consents and corporate
approvals and will do or cause to be done all such other things as the Agent may
reasonably request from time to time in order to give full effect to this
Agreement and to secure the rights of the Banks and the Agent hereunder, all
without any cost or expense to the Agent or any Bank. If the Agent so elects, a
photocopy of this Agreement may at any time and from time to time be filed by
the Agent as a financing statement in any recording office in any jurisdiction.
12. AGENT'S EXONERATION. Under no circumstances shall the Agent be deemed
-------------------
to assume any responsibility for or obligation or duty with respect to any part
or all of the Stock Collateral of any nature or kind or any matter or
proceedings arising out of or relating thereto, other than (i) to exercise
reasonable care in the physical custody of the Stock Collateral and (ii) after
an Event of Default shall have occurred and be continuing to act in a
commercially reasonable manner. Neither the Agent nor any Bank shall be required
to take any action of any kind to collect, preserve or protect its or the
Company's rights in the Stock Collateral or against other parties thereto. The
Agent's prior recourse to any part or all of the Stock Collateral shall not
constitute a condition of any demand, suit or proceeding for payment or
collection of any of the Obligations.
13. NO WAIVER, ETC. Neither this Agreement nor any term hereof may be
--------------
changed, waived, discharged or terminated except by a written instrument
expressly referring to this Agreement and to the provisions so modified or
limited, and executed by the Agent, with the consent of the Majority Banks, and
the Company. No act, failure or delay by the Agent shall constitute a waiver of
its rights and remedies hereunder or otherwise. No single or partial waiver by
the Agent of any default or right or remedy that it may have shall operate as a
waiver of any other default, right or remedy or of the same default, right or
remedy on a future occasion. The Company hereby waives presentment, notice of
dishonor and protest of all instruments, included in or evidencing any of the
Obligations or the Stock Collateral, and any and all other notices and demands
whatsoever (except as expressly provided herein or in the Credit Agreement).
14. NOTICE, ETC. All notices, requests and other communications hereunder
-----------
shall be made in the manner set forth in (S)14 of the Credit Agreement.
-10-
15. TERMINATION. Upon final payment and performance in full of the
-----------
Obligations, this Agreement shall terminate and the Agent shall, at the
Company's request and expense, return such Stock Collateral in the possession or
control of the Agent as has not theretofore been disposed of pursuant to the
provisions hereof, together with any moneys and other property at the time held
by the Agent hereunder.
16. OVERDUE AMOUNTS. Until paid, all amounts due and payable by the
---------------
Company hereunder shall be a debt secured by the Stock Collateral and shall
bear, whether before or after judgment, interest at the rate of interest for
overdue principal set forth in the Credit Agreement.
17. GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT IS INTENDED TO
--------------------------------------
TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. The Company
agrees that any suit for the enforcement of this Agreement may be brought in the
courts of the Commonwealth of Massachusetts or any federal court sitting therein
and consents to the non-exclusive jurisdiction of such court and to service of
process in any such suit being made upon the Company by mail at the address
specified in signature page of the Credit Agreement. The Company hereby waives
any objection that it may now or hereafter have to the venue of any such suit or
any such court or that such suit is brought in an inconvenient court.
18. WAIVER OF JURY TRIAL. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL
--------------------
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF
ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives
any right which it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages. The Company (a)
certifies that neither the Agent or any Bank nor any representative, agent or
attorney of the Agent or any Bank has represented, expressly or otherwise, that
the Agent or any Bank would not, in the event of litigation, seek to enforce the
foregoing waivers and (b) acknowledges that, in entering into the Credit
Agreement and the other Loan Documents to which the Agent is a party, the Agent
and the Banks are relying upon, among other things, the waivers and
certifications contained in this (S)18.
19. MISCELLANEOUS. The headings of each section of this Agreement are for
-------------
convenience only and shall not define or limit the provisions thereof. This
Agreement and all rights and obligations hereunder shall be binding upon the
Company and its respective successors and assigns, and shall inure to the
benefit of the Agent and the Banks and their respective successors and assigns.
If any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall be in no way
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had
-11-
not been included herein. The Company acknowledges receipt of a copy of this
Agreement.
IN WITNESS WHEREOF, intending to be legally bound, the Company and the
Agent have caused this Agreement to be executed as of the date first above
written.
SALESLINK CORPORATION
By: _______________________________
Title:
BANKBOSTON, N.A. (f/k/a The First
National Bank of Boston), as Agent
By: _______________________________
Title:
The undersigned Subsidiaries hereby join in the above Agreement for the
sole purpose of consenting to and being bound by the provisions of (S)(S)4.1, 6
and 7 thereof, the undersigned hereby agreeing to cooperate fully and in good
faith with the Agent and the Company in carrying out such provisions.
PACIFIC DIRECT MARKETING CORP.
By: _______________________________
Title:
ANNEX A TO PLEDGE AGREEMENT
---------------------------
None of the issuers has any authorized, issued or outstanding shares of its
capital stock of any class or any commitments to issue any shares of its capital
stock of any class or any securities convertible into or exchangeable for any
shares of its capital stock of any class except as otherwise stated in this
Annex A.
- - - ----- -
Number of Number of Number of Par or
Record Class of Authorized Issued Outstanding Liquidation
Issuer Owner Shares Shares Shares Shares Value
- - - ----------- ------------ ------------ ------------ ------------ ------------ ------------
Pacific SalesLink
Direct Corporation
Marketing
Corp.
EXHIBIT 10.63
AMENDED AND RESTATED GUARANTY
-----------------------------
AMENDED AND RESTATED GUARANTY, dated as of June 11, 1998, by PACIFIC DIRECT
MARKETING CORP., a California corporation, (the "Guarantor") in favor of (a)
BANKBOSTON, N.A., a national banking association, as agent (hereinafter, in such
capacity, the "Agent") for itself and the other lending institutions
(hereinafter, collectively, the "Banks") which are or may become parties to an
Amended and Restated Revolving Credit and Term Loan Agreement dated as of June
11, 1998 (as amended and in effect from time to time, the "Credit Agreement")
among SalesLink Corporation, a Delaware corporation ("SalesLink"), InSolutions
Incorporated, a Delaware corporation ("InSolutions" and, collectively with
SalesLink, the "Borrowers"), the Guarantor, the Banks and the Agent and (b) each
of the Banks.
WHEREAS, SalesLink as well as certain other parties entered into a
Revolving Credit and Term Loan Agreement dated as of October 24, 1996 (such
agreement as heretofore amended and in effect from time to time, the "Original
Loan Agreement"); and
WHEREAS, in connection with the Original Loan Agreement, the Guarantor
entered into a Guaranty dated as of October 24, 1996 (such agreement as
heretofore amended and in effect form time to time, the "Original Guaranty") in
favor of BankBoston, N.A. as agent for the lending institutions party to the
Original Loan Agreement and the Banks party thereto; and
WHEREAS, the Borrowers and the Guarantor have entered into the Credit
Agreement with the Agent and the Banks pursuant to which the Banks and the
Agent, subject to the terms and conditions contained therein, is to make loans
or otherwise to extend to the Borrowers;
WHEREAS, the Borrowers and the Guarantor are members of a group of related
corporations, the success of either one of which is dependent in part on the
success of the other members of such group;
WHEREAS, the Guarantor expects to receive substantial direct and indirect
benefits from the extensions of credit to the Borrowers by the Agent and the
Banks pursuant to the Credit Agreement (which benefits are hereby acknowledged);
WHEREAS, the Original Loan Agreement will be superseded by the Credit
Agreement on the Closing Date (as defined in the Credit Agreement); and
WHEREAS, it is a condition precedent to the Bank's making any loans or
otherwise extending credit to the Borrowers under the Credit Agreement that
-2-
the Guarantor execute and deliver to the Agent and the Banks a guaranty
substantially in the form hereof; and
WHEREAS, the Company desires to amend and restate all of its rights and
obligations under the Original Guaranty;
NOW, THEREFORE, the Guarantor hereby agrees with the Agent and the Banks as
follows:
1. DEFINITIONS. The term "Obligations" and all other capitalized terms
-----------
used herein without definition shall have the respective meanings provided
therefor in the Credit Agreement.
2. GUARANTY OF PAYMENT AND PERFORMANCE. The Guarantor hereby guarantees
-----------------------------------
to the Banks and the Agent the full and punctual payment when due (whether at
stated maturity, by required pre-payment, by acceleration or otherwise), as well
as the performance, of all of the Obligations including all such which would
become due but for the operation of the automatic stay pursuant to (S)362(a) of
the Federal Bankruptcy Code and the operation of (S)(S)502(b) and 506(b) of the
Federal Bankruptcy Code. This Guaranty is an absolute, unconditional and
continuing guaranty of the full and punctual payment and performance of all of
the Obligations and not of their collectibility only and is in no way
conditioned upon any requirement that the Agent or any Bank first attempt to
collect any of the Obligations from the Borrower or the Parent or resort to any
collateral security or other means of obtaining payment. Should the Borrower or
the Parent default in the payment or performance of any of the Obligations, the
obligations of the Guarantor hereunder with respect to such Obligations in
default shall become immediately due and payable to the Agent and the Banks,
without demand or notice of any nature, all of which are expressly waived by the
Guarantor. Payments by the Guarantor hereunder may be required by the Agent or
any Bank on any number of occasions.
3. GUARANTOR'S AGREEMENT TO PAY ENFORCEMENT COSTS, ETC. The Guarantor
----------------------------------------------------
further agrees, as the principal obligor and not as a guarantor only, to pay to
the Agent, on demand, all costs and expenses (including court costs and legal
expenses) incurred or expended by the Agent or any Bank in connection with the
Obligations, this Guaranty and the enforcement thereof, together with interest
on amounts recoverable under this (S)3 from the time when such amounts become
due until payment, whether before or after judgment, at the rate of interest for
overdue principal set forth in the Credit Agreement, provided that if such
--------
interest exceeds the maximum amount permitted to be paid under applicable law,
then such interest shall be reduced to such maximum permitted amount.
4. WAIVERS BY GUARANTOR; BANK'S FREEDOM TO ACT. The Guarantor agrees that
-------------------------------------------
the Obligations will be paid and performed strictly in accordance with their
respective terms, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of
-3-
the Agent or any Bank with respect thereto. The Guarantor waives promptness,
diligences, presentment, demand, protest, notice of acceptance, notice of any
Obligations incurred and all other notices of any kind, all defenses which may
be available by virtue of any valuation, stay, moratorium law or other similar
law now or hereafter in effect, any right to require the marshalling of assets
of either the Borrower or the Parent or any other entity or other person
primarily or secondarily liable with respect to any of the Obligations, and all
suretyship defenses generally. Without limiting the generality of the foregoing,
the Guarantor agrees to the provisions of any instrument evidencing, securing or
otherwise executed in connection with any Obligation and agrees that the
obligations of the Guarantor hereunder shall not be released or discharged, in
whole or in part, or otherwise affected by (a) the failure of the Agent or any
Bank to assert any claim or demand or to enforce any right or remedy against the
Borrower, the Parent or any other entity or other person primarily or
secondarily liable with respect to any of the Obligations; (b) any extensions,
compromise, refinancing, consolidation or renewals of any Obligation; (c) any
change in the time, place or manner of payment of any of the Obligations or any
rescissions, waivers, compromise, refinancing, consolidation, amendments or
modifications of any of the terms or provisions of the Credit Agreement, the
Notes, the other Loan Documents or any other agreement evidencing, securing or
otherwise executed in connection with any of the Obligations; (d) the addition,
substitution or release of any entity or other person primarily or secondarily
liable for any Obligation, (e) the adequacy of any rights which the Bank may
have against any collateral security or other means of obtaining repayment of
any of the Obligations; (f) the impairment of any collateral securing any of the
Obligations, including without limitation the failure to perfect or preserve any
rights which the Agent or any Bank might have in such collateral security or the
substitution, exchange, surrender, release, loss or destruction of any such
collateral security; or (g) any other act or omission which might in any manner
or to any extent vary the risk of the Guarantor or otherwise operate as a
release or discharge of the Guarantor, all of which may be done without notice
to the Guarantor. To the fullest extent permitted by law, the Guarantor hereby
expressly waives any and all rights or defenses arising by reason of (i) any
"one action" or "anti-deficiency" law which would otherwise prevent the Agent or
any Bank from bringing any action, including any claim for a deficiency, or
exercising any other right or remedy (including any right of set-off), against
the Guarantor before or after the Agent's or any Bank's commencement or
completion of any foreclosure action, whether judicially, by exercise of power
of sale or otherwise, or (ii) any other law which in any other way would
otherwise require any election of remedies by the Agent or any Bank.
5. UNENFORCEABILITY OF OBLIGATIONS AGAINST BORROWER OR PARENT. If for any
----------------------------------------------------------
reason either the Borrower or the Parent has no legal existence or is under no
legal obligation to discharge any of the Obligations, or if any of the
Obligations have become irrecoverable from either the Borrower or the Parent by
reason of the Borrower's or the Parent's insolvency, bankruptcy or
reorganization or by other operation of law or for any other reason, this
Guaranty shall nevertheless be binding on the Guarantor to the same extent as
-4-
if the Guarantor at all times had been the principal obligor on all such
Obligations. In the event that acceleration of the time for payment of any of
the Obligations is stayed upon the insolvency, bankruptcy or reorganization of
the Company, or for any other reason, all such amounts otherwise subject to
acceleration under the terms of the Credit Agreement, the Notes, the other Loan
Documents or any other agreement evidencing, securing or otherwise executed in
connection with any Obligation shall be immediately due and payable by the
Guarantor.
6. SUBROGATION; SUBORDINATION.
--------------------------
6.1 WAIVER OF RIGHTS AGAINST BORROWER OR PARENT. Until the final
-------------------------------------------
payment and performance in full of all of the Obligations and any and all
other obligations of the Borrower, the Parent or the Guarantor to the Agent
or any Bank or any affiliate of the Agent or any Bank, the Guarantor shall
not exercise any rights against either the Borrower or the Parent arising
as a result of payment by the Guarantor hereunder, by way of subrogation,
reimbursement, restitution, contribution or otherwise, and will not prove
any claim in competition with the Agent or any Bank or such affiliate in
respect of any payment hereunder in any bankruptcy, insolvency or
reorganization case or proceedings of any nature; the Guarantor will not
claim any setoff, recoupment or counterclaim against either the Borrower or
the Parent in respect of any liability of the Guarantor to the Borrower or
the Parent; and the Guarantor waives any benefit of and any right to
participate in any collateral security which may be held by the Agent or
any Bank or any such affiliate.
6.2 SUBORDINATION. The payment of any amounts due with respect to
-------------
any indebtedness of the Borrower or the Parent now or hereafter owed to the
Guarantor is hereby subordinated to the prior payment in full of all of the
Obligations and any and all other obligations of the Borrower, the Parent
or the Guarantor to the Agent or any Bank or any affiliate of the Agent or
any Bank. The Guarantor agrees that, after the occurrence of any default in
the payment or performance of any of the Obligations, the Guarantor will
not demand, sue for or otherwise attempt to collect any such indebtedness
of the Borrower or the Parent to the Guarantor until all of the Obligations
shall have been paid in full. If, notwithstanding the foregoing sentence,
the Guarantor shall collect, enforce or receive any amounts in respect of
such indebtedness, such amounts shall be collected, enforced and received
by the Guarantor as trustee for the Agent for the benefito of the Agent and
the Banks and be paid over to the Agent for the benefit of the Agent and
the Banks on account of the Obligations without affecting in any manner the
liability of the Guarantor under the other provisions of this Guaranty.
6.3 PROVISIONS SUPPLEMENTAL. The provisions of this (S)6 shall be
-----------------------
supplemental to and not in derogation of any rights and remedies of
-5-
the Agent or any Bank or any affiliate of the Agent or any Bank under any
separate subordination agreement which the Agent or such Bank or such
affiliate may at any time and from time to time enter into with the
Guarantor.
7. SECURITY; SETOFF. The Guarantor grants to the Agent for the benefit of
----------------
the Agent and the Banks, as security for the full and punctual payment and
performance of all of the Guarantor's obligations hereunder, a continuing lien
on and security interest in all securities or other property belonging to the
Guarantor now or hereafter held by the Agent or any Bank and in all deposits
(general or special, time or demand, provisional or final) and other sums
credited by or due from the Agent or any Bank to the Guarantor or subject to
withdrawal by the Guarantor. Regardless of the adequacy of any collateral
security or other means of obtaining payment of any of the Obligations, the
Agent and any Bank is hereby authorized at any time and from time to time,
without notice to the Guarantor (any such notice being expressly waived by the
Guarantor) and to the fullest extent permitted by law, to set off and apply such
deposits and other sums against the obligations of the Guarantor under this
Guaranty, whether or not the Agent or such Bank shall have made any demand under
this Guaranty and although such obligations may be contingent or unmatured.
8. FURTHER ASSURANCES. The Guarantor agree that it will from time to
------------------
time, at the request of the Agent, provide to the Agent the Guarantor's most
recent audited and unaudited balance sheets and related statements of income and
changes in financial condition (prepared on a consolidated basis with the
Guarantor's subsidiaries, if any) and such other information relating to the
business and affairs of the Guarantor as the Agent or any Bank may reasonably
request. The Guarantor also agrees to do all such things and execute all such
documents as the Agent may consider necessary or desirable to give full effect
to this Guaranty and to perfect and preserve the rights and powers of the Agent
hereunder. The Guarantor acknowledges and confirms that the Guarantor itself has
established its own adequate means of obtaining from the Borrower and the Parent
on a continuing basis all information desired by the Guarantor concerning the
financial condition of the Borrower and the Parent and that the Guarantor will
look to the Borrower and the Parent and not to the Bank in order for the
Guarantor to keep adequately informed of changes in the Company's financial
condition.
9. TERMINATION; REINSTATEMENT. This Guaranty shall remain in full force
--------------------------
and effect until the Agent is given written notice of the Guarantor's intention
to discontinue this Guaranty, notwithstanding any intermediate or temporary
payment or settlement of the whole or any part of the Obligations. No such
notice shall be effective unless received and acknowledged by an officer of the
Agent at the address of the Agent for notices set forth on the signature page of
the Credit Agreement. No such notice shall affect any rights of the Agent or any
Bank or of any affiliate of the Agent or any Bank hereunder, including without
limitation the rights set forth in (S)(S)4 and 6, with respect to any
Obligations incurred or accrued prior to the receipt of such notice or any
-6-
Obligations incurred or accrued pursuant to any contract or commitment in
existence prior to such receipt, and all checks, drafts, notes, instruments
(negotiable or otherwise) and writings made by or for the account of the
Borrower or the Parent and drawn on the Agent or any Bank or any of its agents
purporting to be dated on or before the date of receipt of such notice, although
presented to and paid or accepted by the Agent or any Bank after that date,
shall form part of the Obligations. This Guaranty shall continue to be effective
or be reinstated, notwithstanding any such notice, if at any time any payment
made or value received with respect to any Obligation is rescinded or must
otherwise be returned by the Agent or any Bank upon the insolvency, bankruptcy
or reorganization of the Borrower, the Parent, or otherwise, all as though such
payment had not been made or value received.
10. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon the
----------------------
Guarantor, its successors and assigns, and shall inure to the benefit of and be
enforceable by the Agent, each Bank and its successors, transferees and assigns.
Without limiting the generality of the foregoing sentence, the Agent or any Bank
may assign or otherwise transfer the Credit Agreement, the Notes, the other Loan
Documents or any other agreement or note held by it evidencing, securing or
otherwise executed in connection with the Obligations, or sell participations in
any interest therein, to any other entity or other person, and such other entity
or other person shall thereupon become vested, to the extent set forth in the
agreement evidencing such assignment, transfer or participation, with all the
rights in respect thereof granted to the Agent or such Bank herein.
11. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
----------------------
this Guaranty nor consent to any departure by the Guarantor therefrom shall be
effective unless the same shall be in writing and signed by the Agent and each
Bank. No failure on the part of the Agent or any Bank to exercise, and no delay
in exercising, any right hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any right hereunder preclude any other or
further exercise thereof or the exercise of any other right.
12. NOTICES. All notices and other communications called for hereunder
-------
shall be made in writing and, unless otherwise specifically provided herein,
shall be deemed to have been duly made or given when delivered by hand or mailed
first class, postage prepaid, or, in the case of telegraphic or telexed notice,
when transmitted, answer back received, addressed as follows: if to the
Guarantor, at the address set forth beneath its signature hereto, and if to the
Agent or any Bank, at the address for notices to the Agent and such Bank set
forth on the signature page of the Credit Agreement, or at such address as
either party may designate in writing to the other.
13. GOVERNING LAW; CONSENT TO JURISDICTION. THIS GUARANTY IS INTENDED TO
--------------------------------------
TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. The Guarantor
agrees that any suit for the enforcement of this Guaranty may be
-7-
brought in the courts of the Commonwealth of Massachusetts or any federal court
sitting therein and consents to the nonexclusive jurisdiction of such court and
to service of process in any such suit being made upon the Guarantor by mail at
the address specified by reference in (S)12. The Guarantor hereby waives any
objection that it may now or hereafter have to the venue of any such suit or any
such court or that such suit was brought in an inconvenient court.
14. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY WAIVES ITS RIGHT TO A JURY
--------------------
TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN
CONNECTION WITH THIS GUARANTY, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE
PERFORMANCE OF ANY OF SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law,
the Guarantor hereby waives any right which it may have to claim or recover in
any litigation referred to in the preceding sentence any special, exemplary,
punitive or consequential damages or any damages other than, or in addition to,
actual damages. The Guarantor (a) certifies that neither the Agent, any Bank nor
any representative, agent or attorney of the Agent or any Bank has represented,
expressly or otherwise, that the Agent or such Bank would not, in the event of
litigation, seek to enforce the foregoing waivers and (b) acknowledges that, in
entering into the Credit Agreement and the other Loan Documents to which the
Agent or such Bank is a party, the Agent and each Bank is relying upon, among
other things, the waivers and certifications contained in this (S)14.
15. MISCELLANEOUS. This Guaranty constitutes the entire agreement of the
-------------
Guarantor with respect to the matters set forth herein. The rights and remedies
herein provided are cumulative and not exclusive of any remedies provided by law
or any other agreement, and this Guaranty shall be in addition to any other
guaranty of or collateral security for any of the Obligations. The invalidity or
unenforceability of any one or more sections of this Guaranty shall not affect
the validity or enforceability of its remaining provisions. Captions are for the
ease of reference only and shall not affect the meaning of the relevant
provisions. The meanings of all defined terms used in this Guaranty shall be
equally applicable to the singular and plural forms of the terms defined.
-8-
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed
and delivered as of the date first above written.
PACIFIC DIRECT MARKETING CORP.
By: _________________________________
Title:
Address:
Telex: ______________________________
EXHIBIT 10.64
AMENDED AND RESTATED SECURITY AGREEMENT
---------------------------------------
AMENDED AND RESTATED SECURITY AGREEMENT, dated as of June 11, 1998, among
SalesLink Corporation, a Delaware corporation ("SalesLink"), InSolutions
Incorporated, a Delaware corporation ("InSolutions" and, collectively with
SalesLink, the "Companies" and each individually, a "Company") and BankBoston,
N.A. (f/k/a The First National Bank of Boston), a national banking association,
as agent (hereinafter, in such capacity, the "Agent") for itself and other
banking institutions (hereinafter, collectively, the "Banks") which are or may
become parties to an Amended and Restated Revolving Credit and Term Loan
Agreement dated as of June 11, 1998 (as amended and in effect from time to time,
the "Credit Agreement"), among the Companies, Pacific Direct Marketing Corp.,
the Banks and the Agent.
WHEREAS, SalesLink as well as certain other parties entered into a
Revolving Credit and Term Loan Agreement dated as of October 24, 1996 (such
agreement as heretofore amended and in effect from time to time, the "Original
Loan Agreement"); and
WHEREAS, in connection with the Original Loan Agreement, SalesLink entered
into a Security Agreement dated as of July 17, 1997 (such agreement as
heretofore amended and in effect form time to time, the "Original Security
Agreement") in favor of BankBoston, N.A. as agent for the lending institutions
party to the Original Loan Agreement; and
WHEREAS, each of the Companies is expected to receive substantial direct
and indirect benefits from the extensions of credit by the Banks to the
Companies pursuant to the Credit Agreement; and
WHEREAS, the Original Loan Agreement will be superseded by the Credit
Agreement on the Closing Date (as defined in the Credit Agreement); and
WHEREAS, pursuant to the transactions contemplated by the Credit Agreement,
InSolutions will be a borrower under the terms of the Credit Agreement; and
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement that the Companies execute and deliver to the Agent, for the benefit
of the Banks and the Agent, a security agreement in substantially the form
hereof; and
-2-
WHEREAS, certain of the parties hereto desire to amend and restate all of
their rights and obligations under the Security Agreement and grant security
interests in favor of and as provided herein;
NOW, THEREFORE, in consideration of the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein without definitions
-----------
shall have the respective meanings provided therefor in the Credit Agreement.
All terms defined in the Uniform Commercial Code of the Commonwealth of
Massachusetts and used herein shall have the same definitions herein as
specified therein.
2. GRANT OF SECURITY INTEREST.
--------------------------
2.1. COLLATERAL GRANTED. (a)SalesLink ratifies and affirms the grant
------------------
of security interests made pursuant to the Original Security Agreement, and
(b) to the extent not covered under clause (a), SalesLink further grants to
the Agent, and InSolutions hereby grants to the Agent, for the benefit of
the Banks and the Agent, to secure the payment and performance in full of
all of the Obligations, a security interest in and so pledges and assigns
to the Agent, for the benefit of the Banks and the Agent, the following
properties, assets and rights of each of the Companies, wherever located,
whether now owned or hereafter acquired or arising, and all proceeds and
products thereof (all of the same being hereinafter called the
"Collateral"):
All personal and fixture property of every kind and nature
including without limitation all furniture, fixtures, equipment, raw
materials, inventory, other goods, accounts, contract rights, rights
to the payment of money, insurance refund claims and all other
insurance claims and proceeds, tort claims, chattel paper, documents,
instruments, securities and other investment property, deposit
accounts and all general intangibles including, without limitation,
all tax refund claims, license fees, patents, patent applications,
trademarks, trademark applications, trade names, copyrights, copyright
applications, rights to sue and recover for past infringement of
patents, trademarks and copyrights, computer programs, computer
software, engineering drawings, service marks, customer lists,
goodwill, and all licenses, permits, agreements of any kind or nature
pursuant to which each such Company possesses, uses or has authority
to possess or use property (whether tangible or intangible) of others
or others possess, use or have authority to possess or use property
(whether tangible or intangible) of such Company, and all recorded
data of any kind or nature, regardless of the medium of recording
including, without limitation, all software, writings, plans,
specifications and schematics.
-3-
2.2. DELIVERY OF INSTRUMENTS, ETC.
----------------------------
(a) Pursuant to the terms hereof, each Company has endorsed,
assigned and delivered to the Agent all negotiable or non-negotiable
instruments (including certificated securities) and chattel paper
pledged by it hereunder, together with instruments of transfer or
assignment duly executed in blank as the Agent may have specified. In
the event that such Company shall, after the date of this Agreement,
acquire any other negotiable or non-negotiable instruments (including
certificated securities) or chattel paper to be pledged by it
hereunder, such Company shall forthwith endorse, assign and deliver
the same to the Agent, accompanied by such instruments of transfer or
assignment duly executed in blank as the Agent may from time to time
specify.
(b) To the extent that any securities now or hereafter acquired
by either of the Companies are uncertificated and are issued to such
Company or its nominee directly by the issuer thereof, such Company
shall cause the issuer to note on its books the security interest of
the Agent in such securities and shall cause the issuer, pursuant to
an agreement in form and substance satisfactory to the Agent, to agree
to comply with instructions from the Agent as to such securities,
without further consent of such Company or such nominee. To the
extent that any securities, whether certificated or uncertificated, or
other financial assets now or hereafter acquired by any Company are
held by such Company or its nominee through a securities intermediary,
such Company shall (i) cause such securities intermediary to note on
its books the security interest of the Agent in such securities or
other financial assets and to confirm such notation promptly to the
Agent and (ii), at the request of the Agent, cause such securities
intermediary, pursuant to an agreement in form and substance
satisfactory to the Agent, to agree to comply with entitlement orders
or other instructions from the Agent as to such securities or other
financial assets, without further consent of such Company or such
nominee. The Agent agrees with each Company that the Agent shall not
give any such entitlement orders or instructions to any such issuer or
securities intermediary unless an Event of Default has occurred and is
continuing and the Agent has elected to exercise its rights and
remedies as contemplated by (S)13.
2.3. EXCLUDED COLLATERAL. Notwithstanding the foregoing provisions of
-------------------
this (S)2, such grant of security interest shall not extend to, and the term
"Collateral" shall not include, any chattel paper and general intangibles which
are now or hereafter held by any Company as licensee, lessee or otherwise, to
the extent that (a) such chattel paper and general intangibles are not
assignable or capable of being encumbered as a matter of law or
-4-
under the terms of the license, lease or other agreement applicable
thereto (but solely to the extent that any such restriction shall be
enforceable under applicable law), without the consent of the licensor
or lessor thereof or other applicable party thereto and (b) such
consent has not been obtained; provided, however, that the foregoing
-------- -------
grant of security interest shall extend to, and the term "Collateral"
shall include, (i) any and all proceeds of such chattel paper and
general intangibles to the extent that the assignment or encumbering
of such proceeds is not so restricted and (ii) upon any such licensor,
lessor or other applicable party consent with respect to any such
otherwise excluded chattel paper or general intangibles being
obtained, thereafter such chattel paper or general intangibles as well
as any and all proceeds thereof that might have theretofore have been
excluded from such grant of a security interest and the term
"Collateral".
2.4. STOCK PLEDGE AGREEMENT. Concurrently herewith SalesLink is
----------------------
executing and delivering to the Agent, for the benefit of the Banks
and the Agent, a stock pledge agreement pursuant to which SalesLink is
pledging to the Agent, for the benefit of the Banks and the Agent, all
the shares of the capital stock of its subsidiary. Such pledge shall
be governed by the terms of such stock pledge agreement and not by the
terms of this Agreement
2.5. TRADEMARK ASSIGNMENTS. SalesLink has also executed and
---------------------
delivered to the Agent, for the benefit of the Banks and the Agent,
the Trademark Assignment pursuant to which SalesLink has assigned to
the Agent, for the benefit of the Banks and the Agent, certain
Collateral consisting of trademarks, service marks and trademark and
service mark rights, together with the goodwill appurtenant thereto.
The provisions of the Trademark Assignment from SalesLink are
supplemental to the provisions of this Agreement, and nothing
contained in the Trademark Assignment shall derogate from any of the
rights or remedies of the Agent or any of the Banks hereunder. Nor
shall anything contained in the Trademark Assignment be deemed to
prevent or extend the time of attachment or perfection of any security
interest in such Collateral created. Concurrently herewith InSolutions
is also executing and delivering to the Agent, for the benefit of the
Banks and the Agent, the Trademark Assignment pursuant to which
InSolutions is assigning to the Agent, for the benefit of the Banks
and the Agent, certain Collateral consisting of trademarks, service
marks and trademark and service mark rights, together with the
goodwill appurtenant thereto. The provisions of the Trademark
Assignment are supplemental to the provisions of this Agreement, and
nothing contained in the Trademark Assignment shall derogate from any
of the rights or remedies of the Agent or any of the Banks hereunder.
Nor shall anything contained in the Trademark Assignment be deemed to
prevent or extend the time of attachment or perfection of any security
interest in such Collateral created hereby.
-5-
3. Title to Collateral, etc. Each Company is the owner of its Collateral
-------------------------
free from any adverse lien, security interest or other encumbrance, except for
the security interest created by this Agreement and other liens permitted by the
Credit Agreement. None of the Collateral constitutes, or is the proceeds of,
"farm products" as defined in (S)9-109(3) of the Uniform Commercial Code of the
Commonwealth of Massachusetts. None of the account debtors in respect of any
accounts, chattel paper or general intangibles and none of the obligors in
respect of any instruments included in the Collateral is a governmental
authority subject to the Federal Assignment of Claims Act.
4. CONTINUOUS PERFECTION. Each Company's place of business or, if more
---------------------
than one, chief executive office is indicated on the Perfection Certificate
delivered by such Company to the Agent herewith (the "Perfection Certificates").
Neither Company will change the same, or the name, identity or corporate
structure of such Company in any manner, without providing at least 30 days
prior written notice to the Agent. The Collateral, to the extent not delivered
to the Agent pursuant to (S)2.2, will be kept at those locations listed on the
respective Perfection Certificate and neither Company will remove the Collateral
from such locations, without providing at least 30 days prior written notice to
the Agent.
5. NO LIENS. Except for the security interest herein granted and liens
--------
permitted by the Credit Agreement, each Company shall be the owner of its
Collateral free from any lien, security interest or other encumbrance, and each
Company shall defend the same against all claims and demands of all persons at
any time claiming the same or any interests therein adverse to the Agent or any
of the Banks. Neither Company shall pledge, mortgage or create, or suffer to
exist a security interest in the Collateral in favor of any person other than
the Agent, for the benefit of the Banks and the Agent, except for liens
permitted by the Credit Agreement.
6. NO TRANSFERS. Neither Company will sell or offer to sell or otherwise
------------
transfer the Collateral or any interest therein except for (a) sales and leases
of inventory and licenses of general intangibles in the ordinary course of
business and (b) sales or other dispositions of obsolescent items of equipment
in the ordinary course of business consistent with past practices.
7. INSURANCE.
---------
7.1. MAINTENANCE OF INSURANCE. Each Company will maintain with
------------------------
financially sound and reputable insurers insurance with respect to its
properties and business against such casualties and contingencies as shall
be in accordance with general practices of businesses engaged in similar
activities in similar geographic areas. Such insurance shall be in such
minimum amounts that each Company will not be deemed a co-insurer under
applicable insurance laws, regulations and policies and otherwise shall be
in such amounts, contain such terms, be in such forms and be for such
periods as may be reasonably satisfactory to the Agent. In addition, all
-6-
such insurance shall be payable to the Agent as loss payee under a
"standard" or "New York" loss payee clause for the benefit of the Banks and
the Agent. Without limiting the foregoing, each Company will (a) keep all
of its physical property insured with casualty or physical hazard insurance
on an "all risks" basis, with broad form flood and earthquake coverages and
electronic data processing coverage, with a full replacement cost
endorsement and an "agreed amount" clause in an amount equal to 100% of the
full replacement cost of such property, (b) maintain all such workers'
compensation or similar insurance as may be required by law and (c)
maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar
geographic areas, general public liability insurance against claims of
bodily injury, death or property damage occurring, on, in or about the
properties of such Company; business interruption insurance; and product
liability insurance.
7.2. INSURANCE PROCEEDS. The proceeds of any casualty insurance in
------------------
respect of any casualty loss of any of the Collateral shall, subject to the
rights, if any, of other parties with a prior interest in the property
covered thereby, (a) so long as no Default or Event of Default has occurred
and is continuing and to the extent that the amount of such proceeds is
less than $25,000, be disbursed to the applicable Company for direct
application by such Company solely to the repair or replacement of the
applicable Company's property so damaged or destroyed and (b) in all other
circumstances, be held by the Agent as cash collateral for the Obligations.
The Agent may, at its sole option, disburse from time to time all or any
part of such proceeds so held as cash collateral, upon such terms and
conditions as the Agent may reasonably prescribe, for direct application by
the applicable Company solely to the repair or replacement of such
Company's property so damaged or destroyed, or the Agent may apply all or
any part of such proceeds to the Obligations with the Total Commitment (if
not then terminated) being reduced by the amount so applied to the
Obligations.
7.3. NOTICE OF CANCELLATION, ETC. All policies of insurance shall
----------------------------
provide for at least thirty (30) days prior written cancellation notice to
the Agent. In the event of failure by either Company to provide and
maintain insurance as herein provided, the Agent may, at its option,
provide such insurance and charge the amount thereof to such Company. Each
Company shall furnish the Agent with certificates of insurance and policies
evidencing compliance with the foregoing insurance provision.
8. MAINTENANCE OF COLLATERAL; COMPLIANCE WITH LAW. Each Company will keep
----------------------------------------------
the Collateral in good order and repair and will not use the same in violation
of law or any policy of insurance thereon. The Agent, or its designee, may
inspect the Collateral at any reasonable time, wherever located. Each Company
will pay promptly when due all taxes, assessments, governmental charges and
levies upon the Collateral or incurred in connection with the use or operation
of such Collateral
-7-
or incurred in connection with this Agreement. Each Company has at all times
operated, and each Company will continue to operate, its business in compliance
with all applicable provisions of the federal Fair Labor Standards Act, as
amended, and with all applicable provisions of federal, state and local statutes
and ordinances dealing with the control, shipment, storage or disposal of
hazardous materials or substances.
9. COLLATERAL PROTECTION EXPENSES; PRESERVATION OF COLLATERAL.
----------------------------------------------------------
9.1. EXPENSES INCURRED BY AGENT. In its discretion, the Agent may
--------------------------
discharge taxes and other encumbrances at any time levied or placed on any
of the Collateral, make necessary repairs thereto and pay any necessary
filing fees. Each Company agrees to reimburse the Agent on demand for any
and all expenditures so made. The Agent shall have no obligation to either
Company to make any such expenditures, nor shall the making thereof relieve
such Company of any default.
9.2. AGENT'S OBLIGATIONS AND DUTIES. Anything herein to the contrary
------------------------------
notwithstanding, each Company shall remain liable under each contract or
agreement comprised in the Collateral to be observed or performed by such
Company thereunder. Neither the Agent nor any Bank shall have any
obligation or liability under any such contract or agreement by reason of
or arising out of this Agreement or the receipt by the Agent or any Bank of
any payment relating to any of the Collateral, nor shall the Agent or any
Bank be obligated in any manner to perform any of the obligations of any
Company under or pursuant to any such contract or agreement, to make
inquiry as to the nature or sufficiency of any payment received by the
Agent or any Bank in respect of the Collateral or as to the sufficiency of
any performance by any party under any such contract or agreement, to
present or file any claim, to take any action to enforce any performance or
to collect the payment of any amounts which may have been assigned to the
Agent or to which the Agent or any Bank may be entitled at any time or
times. The Agent's sole duty with respect to the custody, safe keeping and
physical preservation of the Collateral in its possession, under (S)9-207
of the Uniform Commercial Code of the Commonwealth of Massachusetts or
otherwise, shall be to deal with such Collateral in the same manner as the
Agent deals with similar property for its own account.
10. SECURITIES AND DEPOSITS. The Agent may at any time after the
-----------------------
occurrence of an Event of Default, at its option, transfer to itself or any
nominee any securities constituting Collateral, receive any income thereon and
hold such income as additional Collateral or apply it to the Obligations.
Whether or not any Obligations are due, the Agent may, after the occurrence of
an Event of Default, demand, sue for, collect, or make any settlement or
compromise which it deems desirable with respect to the Collateral. Regardless
of the adequacy of Collateral or any other security for the Obligations, any
deposits or other sums at any time
-8-
credited by or due from the Agent or any Bank to any Company may at any time be
applied to or set off against any of the Obligations.
10.1. NOTIFICATION TO ACCOUNT DEBTORS AND OTHER OBLIGORS. If an Event of
--------------------------------------------------
Default shall have occurred and be continuing, each Company shall, at the
request of the Agent, notify account debtors on accounts, chattel paper and
general intangibles of such Company and obligors on instruments for which such
Company is an obligee of the security interest of the Agent in any account,
chattel paper, general intangible or instrument and that payment thereof is to
be made directly to the Agent or to any financial institution designated by the
Agent as the Agent's agent therefor, and the Agent may itself, if an Event of
Default shall have occurred and be continuing, without notice to or demand upon
such Company, so notify account debtors and obligors. After the making of such
a request or the giving of any such notification, each Company shall hold any
proceeds of collection of accounts, chattel paper, general intangibles and
instruments received by such Company as trustee for the Agent, for the benefit
of the Banks and the Agent, without commingling the same with other funds of
such Company and shall turn the same over to the Agent in the identical form
received, together with any necessary endorsements or assignments. The Agent
shall apply the proceeds of collection of accounts, chattel paper, general
intangibles and instruments received by the Agent to the Obligations, such
proceeds to be immediately entered after final payment in cash or solvent
credits of the items giving rise to them.
11. FURTHER ASSURANCES.
------------------
Each Company, at its own expense, shall do, make, execute and deliver all
such additional and further acts, things, deeds, assurances and instruments as
the Agent may require more completely to vest in and assure to the Agent and the
Banks their respective rights hereunder or in any of the Collateral, including,
without limitation, (i) executing, delivering and, where appropriate, filing
financing statements and continuation statements under the Uniform Commercial
Code, (ii) obtaining governmental and other third party consents and approvals,
including without limitation any consent of any licensor, lessor or other
applicable party referred to in (S)2.3, (iii) obtaining waivers from mortgagees
and landlords and (iv) taking all actions required by Sections 8-313 and 8-321
of the Uniform Commercial Code (1990) or Sections 8-106 and 9-115 of the Uniform
Commercial Code (1994), as applicable in each relevant jurisdiction, with
respect to certificated and uncertificated securities.
12. POWER OF ATTORNEY.
-----------------
12.1. APPOINTMENT AND POWERS OF AGENT. Each Company hereby
-------------------------------
irrevocably constitutes and appoints the Agent and any officer or agent
thereof, with full power of substitution, as its true and lawful attorneys-
in-fact with full irrevocable power and authority in the place and stead of
such Company or in the Agent's own name, for the purpose of carrying out
the terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments that may be necessary or
desirable to accomplish the purposes of this Agreement and, without
-9-
limiting the generality of the foregoing, hereby gives said attorneys the
power and right, on behalf of such Company, without notice to or assent by
such Company, to do the following:
(a) upon the occurrence and during the continuance of an Event
of Default, generally to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral in such
manner as is consistent with the Uniform Commercial Code of the
Commonwealth of Massachusetts and as fully and completely as though
the Agent were the absolute owner thereof for all purposes, and to do
at such Company' expense, at any time, or from time to time, all acts
and things which the Agent deems necessary to protect, preserve or
realize upon the Collateral and the Agent's security interest therein,
in order to effect the intent of this Agreement, all as fully and
effectively as such Company might do, including, without limitation,
(i) the filing and prosecuting of registration and transfer
applications with the appropriate federal or local agencies or
authorities with respect to trademarks, copyrights and patentable
inventions and processes, (ii) upon written notice to such Company,
the exercise of voting rights with respect to voting securities, which
rights may be exercised, if the Agent so elects, with a view to
causing the liquidation in a commercially reasonable manner of assets
of the issuer of any such securities and (iii) the execution, delivery
and recording, in connection with any sale or other disposition of any
Collateral, of the endorsements, assignments or other instruments of
conveyance or transfer with respect to such Collateral; and
(b) to file such financing statements with respect hereto, with
or without such Company's signature, or a photocopy of this Agreement
in substitution for a financing statement, as the Agent may deem
appropriate and to execute in such Company's name such financing
statements and amendments thereto and continuation statements which
may require such Company's signature.
12.2. RATIFICATION BY COMPANY. To the extent permitted by law, each
-----------------------
Company hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with
an interest and shall be irrevocable.
12.3. NO DUTY ON AGENT. The powers conferred on the Agent hereunder
----------------
are solely to protect the interests of the Agent and the Banks in the
Collateral and shall not impose any duty upon the Agent to exercise any
such powers. The Agent shall be accountable only for the amounts that it
actually receives as a result of the exercise of such powers and neither it
nor any of its officers, directors, employees or agents shall be
responsible to each Company for any act or failure to act, except for the
Agent's own gross negligence or willful misconduct.
-10-
13. REMEDIES. If an Event of Default shall have occurred and be
--------
continuing, the Agent may, without notice to or demand upon either Company,
declare this Agreement to be in default, and the Agent shall thereafter have in
any jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code, including, without limitation, the right to take
possession of the Collateral, and for that purpose the Agent may, so far as
either Company can give authority therefor, enter upon any premises on which the
Collateral may be situated and remove the same therefrom. The Agent may in its
discretion require any Company to assemble all or any part of the Collateral at
such location or locations within the state(s) of such Company's principal
office(s) or at such other locations as the Agent may designate. Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market, the Agent shall give to such
Company at least ten Business Days prior written notice of the time and place of
any public sale of Collateral or of the time after which any private sale or any
other intended disposition is to be made. Each Company hereby acknowledges that
ten Business Days prior written notice of such sale or sales shall be reasonable
notice. In addition, each Company waives any and all rights that it may have to
a judicial hearing in advance of the enforcement of any of the Agent's rights
hereunder, including, without limitation, its right following an Event of
Default to take immediate possession of the Collateral and to exercise its
rights with respect thereto. To the extent that any of the Obligations are to be
paid or performed by a person other than such Company, such Company waives and
agrees not to assert any rights or privileges which it may have under (S)9-112
of the Uniform Commercial Code of the Commonwealth of Massachusetts.
14. NO WAIVER, ETC. Each Company waives demand, notice, protest, notice of
---------------
acceptance of this Agreement, notice of loans made, credit extended, Collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description. With respect to both the Obligations and
the Collateral, each Company assents to any extension or postponement of the
time of payment or any other indulgence, to any substitution, exchange or
release of or failure to perfect any security interest in any Collateral, to the
addition or release of any party or person primarily or secondarily liable, to
the acceptance of partial payment thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Agent may deem advisable. The Agent shall have no duty as to the collection or
protection of the Collateral or any income thereon, nor as to the preservation
of rights against prior parties, nor as to the preservation of any rights
pertaining thereto beyond the safe custody thereof as set forth in (S)9.2. The
Agent shall not be deemed to have waived any of its rights upon or under the
Obligations or the Collateral unless such waiver shall be in writing and signed
by the Agent with the consent of the Majority Banks. No delay or omission on the
part of the Agent in exercising any right shall operate as a waiver of such
right or any other right. A waiver on any one occasion shall not be construed as
a bar to or waiver of any right on any future occasion. All rights and remedies
of the Agent with respect to the Obligations or the Collateral, whether
-11-
evidenced hereby or by any other instrument or papers, shall be cumulative and
may be exercised singularly, alternatively, successively or concurrently at such
time or at such times as the Agent deems expedient.
15. MARSHALLING. Neither the Agent nor any Bank shall be required to
-----------
any present or marshal future collateral security (including but not limited to
this Agreement and the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights of the
Agent hereunder and of the Agent or any Bank in respect of such collateral
security and other assurances of payment shall be cumulative and in addition to
all other rights, however existing or arising. To the extent that it lawfully
may, each Company hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Agent's rights under this Agreement or under any other instrument
creating or evidencing any of the Obligations or under which any of the
Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
each such Company hereby irrevocably waives the benefits of all such laws.
16. PROCEEDS OF DISPOSITIONS; EXPENSES. Each Company shall pay to the
----------------------------------
Agent on demand any and all expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Agent in protecting, preserving or
enforcing the Agent's rights under or in respect of any of the Obligations or
any of the Collateral. After deducting all of said expenses, the residue of any
proceeds of collection or sale of the Obligations or Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as the Bank may determine or in such order or
--
preference as is provided in the Credit Agreement, proper allowance and
provision being made for any Obligations not then due. Upon the final payment
and satisfaction in full of all of the Obligations and after making any payments
required by Section 9-504(1)(c) of the Uniform Commercial Code of the
Commonwealth of Massachusetts, any excess shall be returned to the applicable
Company, and such Company shall remain liable for any deficiency in the payment
of the Obligations.
17. OVERDUE AMOUNTS. Until paid, all amounts due and payable by the
---------------
Company hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Credit Agreement.
18. GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT IS INTENDED TO
--------------------------------------
TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. Each Company
agrees that any suit for the enforcement of this Agreement may be brought in the
courts of the Commonwealth of Massachusetts or any federal court sitting therein
and consents to the non-exclusive jurisdiction of such court and to service of
process in any such
-12-
suit being made upon such Company by mail at the address specified in the
signature page of the Credit Agreement. Each Company hereby waives any objection
that it may now or hereafter have to the venue of any such suit or any such
court or that such suit is brought in an inconvenient court.
19. WAIVER OF JURY TRIAL. EACH COMPANY WAIVES ITS RIGHT TO A JURY TRIAL
--------------------
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF
ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, each Company waives
any right which it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages. Each Company (a)
certifies that neither the Agent or any Bank nor any representative, agent or
attorney of the Agent or any Bank has represented, expressly or otherwise, that
the Agent or any Bank would not, in the event of litigation, seek to enforce the
foregoing waivers and (b) acknowledges that, in entering into the Credit
Agreement and the other Loan Documents to which the Agent or any Bank is a
party, the Agent and the Banks are relying upon, among other things, the waivers
and certifications contained in this (S)19.
20. MISCELLANEOUS. The headings of each section of this Agreement are for
-------------
convenience only and shall not define or limit the provisions thereof. This
Agreement and all rights and obligations hereunder shall be binding upon each
Company and its respective successors and assigns, and shall inure to the
benefit of the Agent, the Banks and their respective successors and assigns. If
any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall in no way be
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had not been included herein. Each
Company acknowledges receipt of a copy of this Agreement.
21. TRANSITIONAL ARRANGEMENTS. This Amended and Restated Security
-------------------------
Agreement shall supersede the Original Security Agreement on the Closing Date.
On the Closing Date, the rights and obligations of the respective parties under
the Original Security Agreement shall be subsumed within and governed by this
Amended and Restated Security Agreement; provided, that the provisions of the
Original Security Agreement shall remain in full force and effect prior to the
Closing Date, and that the liens granted pursuant to the Original Security
Agreement shall continue to be in effect hereunder as set forth in (S)2.1
hereof.
IN WITNESS WHEREOF, intending to be legally bound, each Company has caused
this Agreement to be duly executed as of the date first above written.
SALESLINK CORPORATION
By:_________________________
Title:
INSOLUTIONS CORPORATION
By:_________________________
Title:
Accepted:
BANKBOSTON, N.A.
(f/k/a The First National
Bank of Boston),
as Agent
By:_________________________
Title:
-2-
CERTIFICATE OF ACKNOWLEDGMENT
COMMONWEALTH OF MASSACHUSETTS __________)
) ss.
COUNTY OF ______________________________)
Before me, the undersigned, a Notary Public in and for the county
aforesaid, on this _______ day of June, 1998, personally appeared
________________________ to me known personally, and who, being by me duly
sworn, deposes and says that he is the ______________________ of SalesLink
Corporation, and that said instrument was signed and sealed on behalf of said
corporation by authority of its Board of Directors, and said
____________________________ acknowledged said instrument to be the free act and
deed of said corporation.
______________________________
Notary Public
My commission expires:
CERTIFICATE OF ACKNOWLEDGMENT
COMMONWEALTH OF MASSACHUSETTS __________)
) ss.
COUNTY OF ______________________________)
Before me, the undersigned, a Notary Public in and for the county
aforesaid, on this _______ day of June, 1998, personally appeared
________________________ to me known personally, and who, being by me duly
sworn, deposes and says that he is the ______________________ of InSolutions
Incorporated, and that said instrument was signed and sealed on behalf of said
corporation by authority of its Board of Directors, and said
____________________________ acknowledged said instrument to be the free act and
deed of said corporation.
______________________________
Notary Public
My commission expires:
EXHIBIT 10.65
AMENDED AND RESTATED SECURITY AGREEMENT
---------------------------------------
AMENDED AND RESTATED SECURITY AGREEMENT, dated as of June 11, 1998, between
Pacific Direct Marketing Corp., a California corporation (the "Company"), and
BankBoston, N.A. (f/k/a The First National Bank of Boston), a national banking
association, as agent (hereinafter, in such capacity, the "Agent") for itself
and other banking institutions (hereinafter, collectively, the "Banks") which
are or may become parties to an Amended and Restated Revolving Credit and Term
Loan Agreement dated as of June 11, 1998 (as amended and in effect from time to
time, the "Credit Agreement"), among the Company, SalesLink Corporation
("SalesLink"), InSolutions Incorporated ("InSolutions" and collectively with
SalesLink, the "Borrowers"), the Banks and the Agent.
WHEREAS, SalesLink as well as certain other parties entered into a
Revolving Credit and Term Loan Agreement dated as of October 24, 1996 (such
agreement as heretofore amended and in effect from time to time, the "Original
Loan Agreement"); and
WHEREAS, in connection with the Original Loan Agreement, the Company
entered into a Guaranty dated as of October 24, 1996 and a Security Agreement
dated as of July 17, 1997 (such agreement as heretofore amended and in effect
form time to time, the "Original Security Agreement") in favor of BankBoston,
N.A. as agent for the lending institutions party to the Original Loan Agreement;
and
WHEREAS, the Company is expected to receive substantial direct and indirect
benefits from the extensions of credit by the Banks to the Borrowers pursuant to
the Credit Agreement; and
WHEREAS, the Original Loan Agreement will be superseded by the Credit
Agreement on the Closing Date (as defined in the Credit Agreement); and
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement that the Company execute and deliver to the Agent, for the benefit of
the Banks and the Agent, a security agreement in substantially the form hereof;
and
WHEREAS, the Company desires to amend and restate all of its rights and
obligations under the Security Agreement and grant security interests in favor
of and as provided herein;
NOW, THEREFORE, in consideration of the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
-2-
1. DEFINITIONS. All capitalized terms used herein without definitions
-----------
shall have the respective meanings provided therefor in the Credit Agreement.
All terms defined in the Uniform Commercial Code of the Commonwealth of
Massachusetts and used herein shall have the same definitions herein as
specified therein.
2. GRANT OF SECURITY INTEREST.
--------------------------
2.1. COLLATERAL GRANTED. (a) The Company ratifies and affirms the
------------------
grant of security interests made pursuant to the Original Security
Agreement and, (b) to the extent not covered under clause (a) hereof,
the Company further grants to the Agent, for the benefit of the Banks
and the Agent, to secure the payment and performance in full of all of
the Obligations (which includes the Company's obligations under the
Guaranty), a security interest in and so pledges and assigns to the
Agent, for the benefit of the Banks and the Agent, the following
properties, assets and rights of the Company, wherever located,
whether now owned or hereafter acquired or arising, and all proceeds
and products thereof (all of the same being hereinafter called the
"Collateral"):
All personal and fixture property of every kind and nature
including without limitation all furniture, fixtures, equipment,
raw materials, inventory, other goods, accounts, contract rights,
rights to the payment of money, insurance refund claims and all
other insurance claims and proceeds, tort claims, chattel paper,
documents, instruments, securities and other investment property,
deposit accounts and all general intangibles including, without
limitation, all tax refund claims, license fees, patents, patent
applications, trademarks, trademark applications, trade names,
copyrights, copyright applications, rights to sue and recover for
past infringement of patents, trademarks and copyrights, computer
programs, computer software, engineering drawings, service marks,
customer lists, goodwill, and all licenses, permits, agreements
of any kind or nature pursuant to which the Company possesses,
uses or has authority to possess or use property (whether
tangible or intangible) of others or others possess, use or have
authority to possess or use property (whether tangible or
intangible) of the Company, and all recorded data of any kind or
nature, regardless of the medium of recording including, without
limitation, all software, writings, plans, specifications and
schematics.
2.2. DELIVERY OF INSTRUMENTS, ETC.
----------------------------
(a) Pursuant to the terms hereof, the Company has endorsed,
assigned and delivered to the Agent all negotiable or non-
negotiable instruments (including certificated securities) and
chattel paper pledged by it hereunder, together with instruments
of transfer or assignment duly executed in blank as the Agent may
have specified.
-3-
In the event that the Company shall, after the date of this
Agreement, acquire any other negotiable or non-negotiable
instruments (including certificated securities) or chattel paper
to be pledged by it hereunder, the Company shall forthwith
endorse, assign and deliver the same to the Agent, accompanied by
such instruments of transfer or assignment duly executed in blank
as the Agent may from time to time specify.
(b) To the extent that any securities now or hereafter
acquired by the Company are uncertificated and are issued to the
Company or its nominee directly by the issuer thereof, the
Company shall cause the issuer to note on its books the security
interest of the Agent in such securities and shall cause the
issuer, pursuant to an agreement in form and substance
satisfactory to the Agent, to agree to comply with instructions
from the Agent as to such securities, without further consent of
the Company or such nominee. To the extent that any securities,
whether certificated or uncertificated, or other financial assets
now or hereafter acquired by the Company are held by the Company
or its nominee through a securities intermediary, the Company
shall (i) cause such securities intermediary to note on its books
the security interest of the Agent in such securities or other
financial assets and to confirm such notation promptly to the
Agent and (ii), at the request of the Agent, cause such
securities intermediary, pursuant to an agreement in form and
substance satisfactory to the Agent, to agree to comply with
entitlement orders or other instructions from the Agent as to
such securities or other financial assets, without further
consent of the Company or such nominee. The Agent agrees with the
Company that the Agent shall not give any such entitlement orders
or instructions to any such issuer or securities intermediary
unless an Event of Default has occurred and is continuing and the
Agent has elected to exercise its rights and remedies as
contemplated by (S)13.
2.3. EXCLUDED COLLATERAL. Notwithstanding the foregoing
-------------------
provisions of this (S)2, such grant of security interest shall not
extend to, and the term "Collateral" shall not include, any chattel
paper and general intangibles which are now or hereafter held by the
Company as licensee, lessee or otherwise, to the extent that (a) such
chattel paper and general intangibles are not assignable or capable of
being encumbered as a matter of law or under the terms of the license,
lease or other agreement applicable thereto (but solely to the extent
that any such restriction shall be enforceable under applicable law),
without the consent of the licensor or lessor thereof or other
applicable party thereto and (b) such consent has not been obtained;
provided, however, that the foregoing grant of security interest shall
-------- -------
extend to, and the term "Collateral" shall include, (i) any and all
proceeds of such chattel paper and general intangibles to the extent
that the assignment or encumbering of such proceeds is not so
restricted and (ii) upon any such
-4-
licensor, lessor or other applicable party consent with respect to any
such otherwise excluded chattel paper or general intangibles being
obtained, thereafter such chattel paper or general intangibles as well
as any and all proceeds thereof that might have theretofore have been
excluded from such grant of a security interest and the term
"Collateral".
2.4. STOCK PLEDGE AGREEMENT. Concurrently herewith SalesLink is
----------------------
executing and delivering to the Agent, for the benefit of the Banks
and the Agent, a stock pledge agreement pursuant to which SalesLink is
pledging to the Agent, for the benefit of the Banks and the Agent, all
the shares of the capital stock of SalesLink's subsidiary. Such pledge
shall be governed by the terms of such stock pledge agreement and not
by the terms of this Agreement
2.5. TRADEMARK ASSIGNMENTS. Concurrently herewith the Company
---------------------
is also executing and delivering to the Agent, for the benefit of the
Banks and the Agent, the Trademark Assignment pursuant to which the
Company is assigning to the Agent, for the benefit of the Banks and
the Agent, certain Collateral consisting of patents and patent rights
and trademarks, service marks and trademark and service mark rights,
together with the goodwill appurtenant thereto. The provisions of the
Trademark Assignment are supplemental to the provisions of this
Agreement, and nothing contained in the Trademark Assignment shall
derogate from any of the rights or remedies of the Agent or any of the
Banks hereunder. Nor shall anything contained in the Trademark
Assignment be deemed to prevent or extend the time of attachment or
perfection of any security interest in such Collateral created hereby.
3. TITLE TO COLLATERAL, ETC. The Company is the owner of the
-------------------------
Collateral free from any adverse lien, security interest or other encumbrance,
except for the security interest created by this Agreement and other liens
permitted by the Credit Agreement. None of the Collateral constitutes, or is the
proceeds of, "farm products" as defined in (S)9-109(3) of the Uniform Commercial
Code of the Commonwealth of Massachusetts. None of the account debtors in
respect of any accounts, chattel paper or general intangibles and none of the
obligors in respect of any instruments included in the Collateral is a
governmental authority subject to the Federal Assignment of Claims Act.
4. CONTINUOUS PERFECTION. The Company's place of business or, if
---------------------
more than one, chief executive office is indicated on the Perfection Certificate
delivered to the Agent herewith (the "Perfection Certificate"). The Company will
not change the same, or the name, identity or corporate structure of the Company
in any manner, without providing at least 30 days prior written notice to the
Agent. The Collateral, to the extent not delivered to the Agent pursuant to
(S)2.2, will be kept at those locations listed on the Perfection Certificate and
the Company will not remove the Collateral from such locations, without
providing at least 30 days prior written notice to the Agent.
-5-
5. NO LIENS. Except for the security interest herein granted and liens
--------
permitted by the Credit Agreement, the Company shall be the owner of the
Collateral free from any lien, security interest or other encumbrance, and the
Company shall defend the same against all claims and demands of all persons at
any time claiming the same or any interests therein adverse to the Agent or any
of the Banks. The Company shall not pledge, mortgage or create, or suffer to
exist a security interest in the Collateral in favor of any person other than
the Agent, for the benefit of the Banks and the Agent, except for liens
permitted by the Credit Agreement.
6. NO TRANSFERS. The Company will not sell or offer to sell or otherwise
------------
transfer the Collateral or any interest therein except for (a) sales and leases
of inventory and licenses of general intangibles in the ordinary course of
business and (b) sales or other dispositions of obsolescent items of equipment
in the ordinary course of business consistent with past practices.
7. INSURANCE.
---------
7.1. MAINTENANCE OF INSURANCE. The Company will maintain with
------------------------
financially sound and reputable insurers insurance with respect to its
properties and business against such casualties and contingencies as shall
be in accordance with general practices of businesses engaged in similar
activities in similar geographic areas. Such insurance shall be in such
minimum amounts that the Company will not be deemed a co-insurer under
applicable insurance laws, regulations and policies and otherwise shall be
in such amounts, contain such terms, be in such forms and be for such
periods as may be reasonably satisfactory to the Agent. In addition, all
such insurance shall be payable to the Agent as loss payee under a
"standard" or "New York" loss payee clause for the benefit of the Banks and
the Agent. Without limiting the foregoing, the Company will (a) keep all of
its physical property insured with casualty or physical hazard insurance on
an "all risks" basis, with broad form flood and earthquake coverages and
electronic data processing coverage, with a full replacement cost
endorsement and an "agreed amount" clause in an amount equal to 100% of the
full replacement cost of such property, (b) maintain all such workers'
compensation or similar insurance as may be required by law and (c)
maintain, in amounts and with deductibles equal to those generally
maintained by businesses engaged in similar activities in similar
geographic areas, general public liability insurance against claims of
bodily injury, death or property damage occurring, on, in or about the
properties of the Company; business interruption insurance; and product
liability insurance.
7.2. INSURANCE PROCEEDS. The proceeds of any casualty insurance
------------------
in respect of any casualty loss of any of the Collateral shall, subject to
the rights, if any, of other parties with a prior interest in the property
covered thereby, (a) so long as no Default or Event of Default has occurred
and is continuing and to the extent that the amount of such proceeds is
less than
-6-
$25,000, be disbursed to the Company for direct application by the Company
solely to the repair or replacement of the Company's property so damaged or
destroyed and (b) in all other circumstances, be held by the Agent as cash
collateral for the Obligations. The Agent may, at its sole option, disburse
from time to time all or any part of such proceeds so held as cash
collateral, upon such terms and conditions as the Agent may reasonably
prescribe, for direct application by the Company solely to the repair or
replacement of the Company's property so damaged or destroyed, or the Agent
may apply all or any part of such proceeds to the Obligations with the
Total Commitment (if not then terminated) being reduced by the amount so
applied to the Obligations.
7.3. NOTICE OF CANCELLATION, ETC. All policies of insurance shall
----------------------------
provide for at least thirty (30) days prior written cancellation notice to
the Agent. In the event of failure by the Company to provide and maintain
insurance as herein provided, the Agent may, at its option, provide such
insurance and charge the amount thereof to the Company. The Company shall
furnish the Agent with certificates of insurance and policies evidencing
compliance with the foregoing insurance provision.
8. MAINTENANCE OF COLLATERAL; COMPLIANCE WITH LAW. The Company will keep
----------------------------------------------
the Collateral in good order and repair and will not use the same in violation
of law or any policy of insurance thereon. The Agent, or its designee, may
inspect the Collateral at any reasonable time, wherever located. The Company
will pay promptly when due all taxes, assessments, governmental charges and
levies upon the Collateral or incurred in connection with the use or operation
of such Collateral or incurred in connection with this Agreement. The Company
has at all times operated, and the Company will continue to operate, its
business in compliance with all applicable provisions of the federal Fair Labor
Standards Act, as amended, and with all applicable provisions of federal, state
and local statutes and ordinances dealing with the control, shipment, storage or
disposal of hazardous materials or substances.
9. COLLATERAL PROTECTION EXPENSES; PRESERVATION OF COLLATERAL.
----------------------------------------------------------
9.1. EXPENSES INCURRED BY AGENT. In its discretion, the Agent may
--------------------------
discharge taxes and other encumbrances at any time levied or placed on any
of the Collateral, make repairs thereto and pay any necessary filing fees.
The Company agrees to reimburse the Agent on demand for any and all
expenditures so made. The Agent shall have no obligation to the Company to
make any such expenditures, nor shall the making thereof relieve the
Company of any default.
9.2. AGENT'S OBLIGATIONS AND DUTIES. Anything herein to the
------------------------------
contrary notwithstanding, the Company shall remain liable under each
contract or agreement comprised in the Collateral to be observed or
performed by the Company thereunder. Neither the Agent nor any Bank
-7-
shall have any obligation or liability under any such contract or agreement
by reason of or arising out of this Agreement or the receipt by the Agent
or any Bank of any payment relating to any of the Collateral, nor shall the
Agent or any Bank be obligated in any manner to perform any of the
obligations of the Company under or pursuant to any such contract or
agreement, to make inquiry as to the nature or sufficiency of any payment
received by the Agent or any Bank in respect of the Collateral or as to the
sufficiency of any performance by any party under any such contract or
agreement, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to the Agent or to which the Agent or any Bank may be entitled at
any time or times. The Agent's sole duty with respect to the custody, safe
keeping and physical preservation of the Collateral in its possession,
under (S)9-207 of the Uniform Commercial Code of the Commonwealth of
Massachusetts or otherwise, shall be to deal with such Collateral in the
same manner as the Agent deals with similar property for its own account.
10. SECURITIES AND DEPOSITS. The Agent may at any time, at its option,
-----------------------
transfer to itself or any nominee any securities constituting Collateral,
receive any income thereon and hold such income as additional Collateral or
apply it to the Obligations. Whether or not any Obligations are due, the Agent
may demand, sue for, collect, or make any settlement or compromise which it
deems desirable with respect to the Collateral. Regardless of the adequacy of
Collateral or any other security for the Obligations, any deposits or other sums
at any time credited by or due from the Agent or any Bank to the Company may at
any time be applied to or set off against any of the Obligations.
10.1. NOTIFICATION TO ACCOUNT DEBTORS AND OTHER OBLIGORS. If an Event of
--------------------------------------------------
Default shall have occurred and be continuing, the Company shall, at the request
of the Agent, notify account debtors on accounts, chattel paper and general
intangibles of the Company and obligors on instruments for which the Company is
an obligee of the security interest of the Agent in any account, chattel paper,
general intangible or instrument and that payment thereof is to be made directly
to the Agent or to any financial institution designated by the Agent as the
Agent's agent therefor, and the Agent may itself, if an Event of Default shall
have occurred and be continuing, without notice to or demand upon the Company,
so notify account debtors and obligors. After the making of such a request or
the giving of any such notification, the Company shall hold any proceeds of
collection of accounts, chattel paper, general intangibles and instruments
received by the Company as trustee for the Agent, for the benefit of the Banks
and the Agent, without commingling the same with other funds of the Company and
shall turn the same over to the Agent in the identical form received, together
with any necessary endorsements or assignments. The Agent shall apply the
proceeds of collection of accounts, chattel paper, general intangibles and
instruments received by the Agent to the Obligations, such proceeds to be
immediately entered after final payment in cash or solvent credits of the items
giving rise to them.
-8-
11. FURTHER ASSURANCES. The Company, at its own expense, shall do, make,
------------------
execute and deliver all such additional and further acts, things, deeds,
assurances and instruments as the Agent may require more completely to vest in
and assure to the Agent and the Banks their respective rights hereunder or in
any of the Collateral, including, without limitation, (i) executing, delivering
and, where appropriate, filing financing statements and continuation statements
under the Uniform Commercial Code, (ii) obtaining governmental and other third
party consents and approvals, including without limitation any consent of any
licensor, lessor or other applicable party referred to in (S)2.3, (iii)
obtaining waivers from mortgagees and landlords and (iv) taking all actions
required by Sections 8-313 and 8-321 of the Uniform Commercial Code (1990) or
Sections 8-106 and 9-115 of the Uniform Commercial Code (1994), as applicable in
each relevant jurisdiction, with respect to certificated and uncertificated
securities.
12. POWER OF ATTORNEY.
-----------------
12.1. APPOINTMENT AND POWERS OF AGENT. The Company hereby
-------------------------------
irrevocably constitutes and appoints the Agent and any officer or agent
thereof, with full power of substitution, as its true and lawful attorneys-
in-fact with full irrevocable power and authority in the place and stead of
the Company or in the Agent's own name, for the purpose of carrying out the
terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments that may be necessary or
desirable to accomplish the purposes of this Agreement and, without
limiting the generality of the foregoing, hereby gives said attorneys the
power and right, on behalf of the Company, without notice to or assent by
the Company, to do the following:
(a) upon the occurrence and during the continuance of an Event
of Default, generally to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral in such
manner as is consistent with the Uniform Commercial Code of the
Commonwealth of Massachusetts and as fully and completely as though
the Agent were the absolute owner thereof for all purposes, and to do
at the Company' expense, at any time, or from time to time, all acts
and things which the Agent deems necessary to protect, preserve or
realize upon the Collateral and the Agent's security interest therein,
in order to effect the intent of this Agreement, all as fully and
effectively as the Company might do, including, without limitation,
(i) the filing and prosecuting of registration and transfer
applications with the appropriate federal or local agencies or
authorities with respect to trademarks, copyrights and patentable
inventions and processes, (ii) upon written notice to the Company, the
exercise of voting rights with respect to voting securities, which
rights may be exercised, if the Agent so elects, with a view to
causing the liquidation in a commercially reasonable manner of assets
of the issuer of any such securities and (iii) the execution, delivery
and
-9-
recording, in connection with any sale or other disposition of any
Collateral, of the endorsements, assignments or other instruments of
conveyance or transfer with respect to such Collateral; and
(b) to file such financing statements with respect hereto, with
or without the Company's signature, or a photocopy of this Agreement
in substitution for a financing statement, as the Agent may deem
appropriate and to execute in the Company's name such financing
statements and amendments thereto and continuation statements which
may require the Company's signature.
12.2. RATIFICATION BY COMPANY. To the extent permitted by law, the
-----------------------
Company hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with
an interest and shall be irrevocable.
12.3. NO DUTY ON AGENT. The powers conferred on the Agent hereunder
----------------
are solely to protect the interests of the Agent and the Banks in the
Collateral and shall not impose any duty upon the Agent to exercise any
such powers. The Agent shall be accountable only for the amounts that it
actually receives as a result of the exercise of such powers and neither it
nor any of its officers, directors, employees or agents shall be
responsible to the Company for any act or failure to act, except for the
Agent's own gross negligence or willful misconduct.
13. REMEDIES. If an Event of Default shall have occurred and be
--------
continuing, the Agent may, without notice to or demand upon the Company, declare
this Agreement to be in default, and the Agent shall thereafter have in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code, including, without limitation, the right to take
possession of the Collateral, and for that purpose the Agent may, so far as the
Company can give authority therefor, enter upon any premises on which the
Collateral may be situated and remove the same therefrom. The Agent may in its
discretion require the Company to assemble all or any part of the Collateral at
such location or locations within the state(s) of the Company's principal
office(s) or at such other locations as the Agent may designate. Unless the
Collateral is perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market, the Agent shall give to the
Company at least five Business Days prior written notice of the time and place
of any public sale of Collateral or of the time after which any private sale or
any other intended disposition is to be made. The Company hereby acknowledges
that five Business Days prior written notice of such sale or sales shall be
reasonable notice. In addition, the Company waives any and all rights that it
may have to a judicial hearing in advance of the enforcement of any of the
Agent's rights hereunder, including, without limitation, its right following an
Event of Default to take immediate possession of the Collateral and to exercise
its rights with respect thereto. To the extent that any of the Obligations are
to be paid or performed by a
-10-
person other than the Company, the Company waives and agrees not to assert any
rights or privileges which it may have under (S)9-112 of the Uniform Commercial
Code of the Commonwealth of Massachusetts.
14. NO WAIVER, ETC. The Company waives demand, notice, protest, notice of
---------------
acceptance of this Agreement, notice of loans made, credit extended, Collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description. With respect to both the Obligations and
the Collateral, the Company assents to any extension or postponement of the time
of payment or any other indulgence, to any substitution, exchange or release of
or failure to perfect any security interest in any Collateral, to the addition
or release of any party or person primarily or secondarily liable, to the
acceptance of partial payment thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Agent may deem advisable. The Agent shall have no duty as to the collection or
protection of the Collateral or any income thereon, nor as to the preservation
of rights against prior parties, nor as to the preservation of any rights
pertaining thereto beyond the safe custody thereof as set forth in (S)9.2. The
Agent shall not be deemed to have waived any of its rights upon or under the
Obligations or the Collateral unless such waiver shall be in writing and signed
by the Agent with the consent of the Majority Banks. No delay or omission on the
part of the Agent in exercising any right shall operate as a waiver of such
right or any other right. A waiver on any one occasion shall not be construed as
a bar to or waiver of any right on any future occasion. All rights and remedies
of the Agent with respect to the Obligations or the Collateral, whether
evidenced hereby or by any other instrument or papers, shall be cumulative and
may be exercised singularly, alternatively, successively or concurrently at such
time or at such times as the Agent deems expedient.
15. MARSHALLING. Neither the Agent nor any Bank shall be required to
-----------
marshal any present or future collateral security (including but not limited to
this Agreement and the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights of the
Agent hereunder and of the Agent or any Bank in respect of such collateral
security and other assurances of payment shall be cumulative and in addition to
all other rights, however existing or arising. To the extent that it lawfully
may, the Company hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Agent's rights under this Agreement or under any other instrument
creating or evidencing any of the Obligations or under which any of the
Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
the Company hereby irrevocably waives the benefits of all such laws.
16. PROCEEDS OF DISPOSITIONS; EXPENSES. The Company shall pay to the
----------------------------------
Agent on demand any and all expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Agent in protecting, preserving or
enforcing
-11-
the Agent's rights under or in respect of any of the Obligations or any of the
Collateral. After deducting all of said expenses, the residue of any proceeds of
collection or sale of the Obligations or Collateral shall, to the extent
actually received in cash, be applied to the payment of the Obligations in such
order or preference as the Bank may determine or in such order or preference as
--
is provided in the Credit Agreement, proper allowance and provision being made
for any Obligations not then due. Upon the final payment and satisfaction in
full of all of the Obligations and after making any payments required by Section
9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of Massachusetts,
any excess shall be returned to the Company, and the Company shall remain liable
for any deficiency in the payment of the Obligations.
17. OVERDUE AMOUNTS. Until paid, all amounts due and payable by the
---------------
Company hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Credit Agreement.
18. GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT IS INTENDED TO
--------------------------------------
TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. The Company
agrees that any suit for the enforcement of this Agreement may be brought in the
courts of the Commonwealth of Massachusetts or any federal court sitting therein
and consents to the non-exclusive jurisdiction of such court and to service of
process in any such suit being made upon the Company by mail at the address
specified in the signature page of the Credit Agreement. The Company hereby
waives any objection that it may now or hereafter have to the venue of any such
suit or any such court or that such suit is brought in an inconvenient court.
19. WAIVER OF JURY TRIAL. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL
--------------------
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF
ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives
any right which it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages. The Company (i)
certifies that neither the Agent or any Bank nor any representative, agent or
attorney of the Agent or any Bank has represented, expressly or otherwise, that
the Agent or any Bank would not, in the event of litigation, seek to enforce the
foregoing waivers and (ii) acknowledges that, in entering into the Credit
Agreement and the other Loan Documents to which the Agent or any Bank is a
party, the Agent and the Banks are relying upon, among other things, the waivers
and certifications contained in this (S)19.
20. MISCELLANEOUS. The headings of each section of this Agreement are for
-------------
convenience only and shall not define or limit the provisions thereof. This
-12-
Agreement and all rights and obligations hereunder shall be binding upon the
Company and its respective successors and assigns, and shall inure to the
benefit of the Agent, the Banks and their respective successors and assigns. If
any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall in no way be
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had not been included herein. The
Company acknowledges receipt of a copy of this Agreement.
21. TRANSITIONAL ARRANGEMENTS. This Amended and Restated Security
-------------------------
Agreement shall supersede the Original Security Agreement on the Closing Date.
On the Closing Date, the rights and obligations of the respective parties under
the Original Security Agreement shall be subsumed within and governed by this
Amended and Restated Security Agreement; provided, that the provisions of the
Original Security Agreement shall remain in full force and effect prior to the
Closing Date, and that the liens granted pursuant to the Original Security
Agreement shall continue to be in effect hereunder as set forth in (S)2.1
hereof.
-13-
IN WITNESS WHEREOF, intending to be legally bound, the Company has caused
this Agreement to be duly executed as of the date first above written.
PACIFIC DIRECT MARKETING CORP.
By:________________________________
Title:
Accepted:
BANKBOSTON, N.A.
(f/k/a The First National
Bank of Boston),
as Agent
By:____________________________
Title:
CERTIFICATE OF ACKNOWLEDGMENT
COMMONWEALTH OF MASSACHUSETTS___________ )
) ss.
COUNTY OF SUFFOLK_______________________ )
Before me, the undersigned, a Notary Public in and for the county
aforesaid, on this _______ day of June, 1998, personally appeared
________________________ to me known personally, and who, being by me duly
sworn, deposes and says that he is the ______________________ of Pacific Direct
Marketing Corp., and that said instrument was signed and sealed on behalf of
said corporation by authority of its Board of Directors, and said
____________________________ acknowledged said instrument to be the free act and
deed of said corporation.
___________________________________
Notary Public
My commission expires:
EXHIBIT 10.66
AMENDED AND RESTATED TRADEMARK COLLATERAL
------------------------------------------
SECURITY AND PLEDGE AGREEMENT
-----------------------------
AMENDED AND RESTATED TRADEMARK COLLATERAL SECURITY AND PLEDGE AGREEMENT
dated as of June 11, 1998, between Saleslink Corporation, a Delaware corporation
having its principal place of business at 25 Drydock Avenue, Boston,
Massachusetts, (the "Assignor"), and BankBoston, N.A. (formerly known as The
First National Bank of Boston), a national banking association having an office
at 100 Federal Street, Boston, Massachusetts as agent (hereinafter, in such
capacity, the "Agent") for itself and other banking institutions (hereinafter,
collectively, the "Banks") which are, or may in the future become, parties to an
Amended and Restated Revolving Credit and Term Loan Agreement dated as of June
11, 1998 (as amended and in effect from time to time, the "Credit Agreement"),
among the Assignor, the Banks, the Agent and certain other parties thereto.
WHEREAS, it is a condition precedent to the Banks' making any loans or
otherwise extending credit to the Assignor under the Credit Agreement that the
Assignor execute and deliver to the Agent, for the benefit of the Banks and the
Agent, a trademark agreement in substantially the form hereof;
WHEREAS, the Assignor has executed and delivered to the Agent, for the
benefit of the Banks and the Agent, the Security Agreement (as defined in the
Credit Agreement), pursuant to which the Assignor has granted to the Agent, for
the benefit of the Banks and the Agent, a security interest in certain of the
Assignor's personal property and fixture assets, including without limitation
the trademarks, service marks, trademark and service mark registrations, and
trademark and service mark registration applications listed on Schedule A
-------- -
attached hereto, all to secure the payment and performance of the Obligations
(as defined in the Credit Agreement); and
WHEREAS, this Trademark Agreement is supplemental to the provisions
contained in the Security Agreement;
NOW, THEREFORE, in consideration of the premises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS.
-----------
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings provided therefor in the Credit Agreement and the
Security Agreement. In addition, the following terms shall have the meanings
set forth in this (S)1 or elsewhere in this Trademark Agreement referred to
below:
-2-
Assignment of Marks. See (S)2.1.
-------------------
Associated Goodwill. All goodwill of the Assignor and its business,
-------------------
products and services appurtenant to, associated with or symbolized by the
Trademarks and the use thereof.
Pledged Trademarks. All of the Assignor's right, title and interest in and
------------------
to all of the Trademarks, the Trademark Registrations, the Trademark License
Rights, the Trademark Rights, the Associated Goodwill, the Related Assets, and
all accessions to, substitutions for, replacements of, and all products and
proceeds of any and all of the foregoing.
PTO. The United States Patent and Trademark Office.
---
Related Assets. All assets, rights and interests of the Assignor that
--------------
uniquely reflect or embody the Associated Goodwill, including the following:
(a) all patents, inventions, copyrights, trade secrets, confidential
information, formulae, methods or processes, compounds, recipes, know-how,
methods and operating systems, drawings, descriptions, formulations,
manufacturing and production and delivery procedures, quality control
procedures, product and service specifications, catalogs, price lists, and
advertising materials, relating to the manufacture, production, delivery,
provision and sale of goods or services under or in association with any of
the Trademarks; and
(b) the following documents and things in the possession or under the
control of the Assignor, or subject to its demand for possession or
control, related to the production, delivery, provision and sale by the
Assignor, or any affiliate, franchisee, licensee or contractor, of products
or services sold by or under the authority of the Assignor in connection
with the Trademarks or Trademark Rights, whether prior to, on or subsequent
to the date hereof:
(i) all lists, contracts, ancillary documents and other
information that identify, describe or provide information with
respect to any customers, dealers or distributors of the Assignor, its
affiliates or franchisees or licensees or contractors, for products or
services sold under or in connection with the Trademarks or Trademark
Rights, including all lists and documents containing information
regarding each customer's, dealer's or distributor's name and address,
credit, payment, discount, delivery and other sale terms, and history,
pattern and total of purchases by brand, product, style, size and
quantity;
(ii) all agreements (including franchise agreements), product
and service specification documents and operating, production and
quality control manuals relating to or used in the design,
-3-
manufacture, production, delivery, provision and sale of products or
services under or in connection with the Trademarks or Trademark
Rights;
(iii) all documents and agreements relating to the identity and
locations of all sources of supply, all terms of purchase and
delivery, for all materials, components, raw materials and other
supplies and services used in the manufacture, production, provision,
delivery and sale of products or services under or in connection with
the Trademarks or Trademark Rights; and
(iv) all agreements and documents constituting or concerning
the present or future, current or proposed advertising and promotion
by the Assignor (or any of its affiliates, franchisees, licensees or
contractors) of products or services sold under or in connection with
the Trademarks or Trademark Rights.
Trademark Agreement. This Trademark Collateral Security and Pledge
-------------------
Agreement, as amended and in effect from time to time.
Trademark License Rights. Any and all past, present or future rights and
------------------------
interests of the Assignor pursuant to any and all past, present and future
franchising or licensing agreements in favor of the Assignor, or to which the
Assignor is a party, pertaining to any Trademarks, Trademark Registrations, or
Trademark Rights owned or used by third parties in the past, present or future,
including the right (but not the obligation) in the name of the Assignor or the
Agent to enforce, and sue and recover for, any breach or violation of any such
agreement to which the Assignor is a party.
Trademark Registrations. All past, present or future federal, state, local
-----------------------
and foreign registrations of the Trademarks, all past, present and future
applications for any such registrations (and any such registrations thereof upon
approval of such applications), together with the right (but not the obligation)
to apply for such registrations (and prosecute such applications) in the name of
the Assignor or the Agent, and to take any and all actions necessary or
appropriate to maintain such registrations in effect and renew and extend such
registrations.
Trademark Rights. Any and all past, present or future rights in, to and
----------------
associated with the Trademarks throughout the world, whether arising under
federal law, state law, common law, foreign law or otherwise, including the
following: all such rights arising out of or associated with the Trademark
Registrations; the right (but not the obligation) to register claims under any
state, federal or foreign trademark law or regulation; the right (but not the
obligation) to sue or bring opposition or cancellation proceedings in the name
of the Assignor or the Agent for any and all past, present and future
infringements or dilution of or any other damages or injury to the Trademarks,
the Trademark Rights, or the Associated Goodwill, and the rights to damages or
profits due or accrued arising
-4-
out of or in connection with any such past, present or future infringement,
dilution, damage or injury; and the Trademark License Rights.
Trademarks. All of the trademarks, service marks, designs, logos, indicia,
----------
trade names, corporate names, company names, business names, fictitious business
names, trade styles, elements of package or trade dress, and other source and
product or service identifiers, used or associated with or appurtenant to the
products, services and businesses of the Assignor, that (i) are set forth on
Schedule A hereto, or (ii) have been adopted, acquired, owned, held or used by
- - - -------- -
the Assignor or are now owned, held or used by the Assignor, in the Assignor's
business, or with the Assignor's products and services, or in which the Assignor
has any right, title or interest, or (iii) are in the future adopted, acquired,
owned, held and used by the Assignor in the Assignor's business or with the
Assignor's products and services, or in which the Assignor in the future
acquires any right, title or interest.
use. With respect to any Trademark, all uses of such Trademark by, for or
---
in connection with the Assignor or its business or for the direct or indirect
benefit of the Assignor or its business, including all such uses by the Assignor
itself, by any of the affiliates of the Assignor, or by any franchisee, licensee
or contractor of the Assignor.
Unless otherwise provided herein, the rules of interpretation set forth in
(S)* of the Credit Agreement shall be applicable to this Trademark Agreement.
2. GRANT OF SECURITY INTEREST.
--------------------------
2.1. SECURITY INTEREST; ASSIGNMENT OF MARKS.
--------------------------------------
As collateral security for the payment and performance in full of all of
the Obligations, the Assignor hereby unconditionally grants to the Agent, for
the benefit of the Banks and the Agent, a continuing security interest in and
first priority lien on the Pledged Trademarks, and pledges and mortgages (but
does not transfer title to) the Pledged Trademarks to the Agent for the benefit
of the Banks and the Agent. In addition, the Assignor has executed in blank and
delivered to the Agent an assignment of federally registered trademarks in
substantially the form of Exhibit 1 hereto (the "Assignment of Marks") but
------- -
specifically excluding all intent to use filing. The Assignor hereby authorizes
the Agent to complete as assignee and record with the PTO the Assignment of
Marks upon the occurrence and during the continuance of an Event of Default and
the proper exercise of the Agent's remedies under this Trademark Agreement and
the Security Agreement.
2.2. CONDITIONAL ASSIGNMENT.
----------------------
In addition to, and not by way of limitation of, the grant, pledge and
mortgage of the Pledged Trademarks provided in (S)2.1, the Assignor grants,
assigns, transfers, conveys and sets over to the Agent, for the benefit of the
Banks and the Agent, the Assignor's entire right, title and interest in and to
the Pledged Trademarks; provided that such grant, assignment, transfer and
--------
conveyance shall be and become of force and effect only (i) upon or after the
occurrence and during the continuance of an Event of Default and (ii) either (A)
-5-
upon the written demand of the Agent at any time during such continuance or (B)
immediately and automatically (without notice or action of any kind by the
Agent) upon an Event of Default for which acceleration of the Loans is automatic
under the Credit Agreement or upon the sale or other disposition of or
foreclosure upon the Collateral pursuant to the Security Agreement and
applicable law (including the transfer or other disposition of the Collateral by
the Assignor to the Agent or its nominee in lieu of foreclosure).
2.3. SUPPLEMENTAL TO SECURITY AGREEMENT.
----------------------------------
Pursuant to the Security Agreement the Assignor has granted to the Agent,
for the benefit of the Banks and the Agent, a continuing security interest in
and lien on the Collateral (including the Pledged Trademarks). The Security
Agreement, and all rights and interests of the Agent in and to the Collateral
(including the Pledged Trademarks) thereunder, are hereby ratified and confirmed
in all respects. In no event shall this Trademark Agreement, the grant,
assignment, transfer and conveyance of the Pledged Trademarks hereunder, or the
recordation of this Trademark Agreement (or any document hereunder) with the
PTO, adversely affect or impair, in any way or to any extent, the Security
Agreement, the security interest of the Agent in the Collateral (including the
Pledged Trademarks) pursuant to the Security Agreement and this Trademark
Agreement, the attachment and perfection of such security interest under the
Uniform Commercial Code (including the security interest in the Pledged Marks),
or any present or future rights and interests of the Agent in and to the
Collateral under or in connection with the Security Agreement, this Trademark
Agreement or the Uniform Commercial Code. Any and all rights and interests of
the Agent in and to the Pledged Trademarks (and any and all obligations of the
Assignor with respect to the Pledged Trademarks) provided herein, or arising
hereunder or in connection herewith, shall only supplement and be cumulative and
in addition to the rights and interests of the Agent (and the obligations of the
Assignor) in, to or with respect to the Collateral (including the Pledged
Trademarks) provided in or arising under or in connection with the Security
Agreement and shall not be in derogation thereof.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
-----------------------------------------
The Assignor represents, warrants and covenants that: (i) Schedule A sets
-------- -
forth a true and complete list of all Trademarks and Trademark Registrations now
owned, licensed, controlled or used by the Assignor; (ii) the Trademarks and
Trademark Registrations are subsisting and have not been adjudged invalid or
unenforceable, in whole or in part, and there is no litigation or proceeding
pending concerning the validity or enforceability of the Trademarks or Trademark
Registrations; (iii) to the best of the Assignor's knowledge, each of the
Trademarks and Trademark Registrations is valid and enforceable; (iv) to the
best of the Assignor's knowledge, there is no infringement by others of the
Trademarks, Trademark Registrations or Trademark Rights; (v) no claim has been
made that the use of any of the Trademarks does or may violate the rights of any
third person, and to the best of the Assignor's knowledge, there is no
infringement by the Assignor of the trademark rights of others; (vi) the
Assignor is the sole and
-6-
exclusive owner of the entire and unencumbered right, title and interest in and
to each of the Trademarks (other than ownership and other rights reserved by
third party owners with respect to Trademarks that the Assignor is licensed to
use), free and clear of any liens, charges, encumbrances and adverse claims,
including pledges, assignments, licenses, registered user agreements and
covenants by the Assignor not to sue third persons, other than the security
interest and assignment created by the Security Agreement and this Trademark
Agreement; (vii) the Assignor has the unqualified right to enter into this
Trademark Agreement and to perform its terms and has entered and will enter into
written agreements with each of its present and future employees, agents,
consultants, licensors and licensees that will enable them to comply with the
covenants herein contained; (viii) the Assignor has used, and will continue to
use, proper statutory and other appropriate proprietary notices in connection
with its use of the Trademarks; (ix) the Assignor has used, and will continue to
use for the duration of this Trademark Agreement, consistent standards of
quality in its manufacture and provision of products and services sold or
provided under the Trademarks; (x) this Trademark Agreement, together with the
Security Agreement, will create in favor of the Agent a valid and perfected
first priority security interest in the Pledged Trademarks upon making the
filings referred to in clause (xi) of this (S)3; and (xi) except for the filing
of financing statements with the Secretary of State for the Commonwealth of
Massachusetts under the Uniform Commercial Code and the recording of this
Trademark Agreement with the PTO, no authorization, approval or other action by,
and no notice to or filing with, any governmental or regulatory authority,
agency or office is required either (A) for the grant by the Assignor or the
effectiveness of the security interest and assignment granted hereby or for the
execution, delivery and performance of this Trademark Agreement by the Assignor,
or (B) for the perfection of or the exercise by the Agent of any of its rights
and remedies hereunder.
4. INSPECTION RIGHTS.
-----------------
The Assignor hereby grants to each of the Agent and the Banks and its
employees and agents the right to visit the Assignor's plants and facilities
that manufacture, inspect or store products sold under any of the Trademarks,
and to inspect the products and quality control records relating thereto at
reasonable times during regular business hours.
5. NO TRANSFER OR INCONSISTENT AGREEMENTS.
--------------------------------------
Without the Agent's prior written consent and except for licenses of the
Pledged Trademarks in the ordinary course of the Assignor's business consistent
with its past practices, the Assignor will not (i) mortgage, pledge, assign,
encumber, grant a security interest in, transfer, license or alienate any of the
Pledged Trademarks, or (ii) enter into any agreement (for example, a license
agreement) that is inconsistent with the Assignor's obligations under this
Trademark Agreement or the Security Agreement.
6. AFTER-ACQUIRED TRADEMARKS, ETC.
------------------------------
-7-
6.1. AFTER-ACQUIRED TRADEMARKS.
-------------------------
If, before the Obligations shall have been finally paid and satisfied in
full, the Assignor shall obtain any right, title or interest in or to any other
or new Trademarks, Trademark Registrations or Trademark Rights, the provisions
of this Trademark Agreement shall automatically apply thereto and the Assignor
shall promptly provide to the Agent notice thereof in writing and execute and
deliver to the Agent such documents or instruments as the Agent may reasonably
request further to implement, preserve or evidence the Agent's interest therein.
6.2. AMENDMENT TO SCHEDULE.
---------------------
The Assignor authorizes the Agent to modify this Trademark Agreement and
the Assignment of Marks, without the necessity of the Assignor's further
approval or signature, by amending Exhibit A hereto and the Annex to the
------- - -----
Assignment of Marks to include any future or other Trademarks, Trademark
Registrations or Trademark Rights under (S)2 or (S)6.
7. TRADEMARK PROSECUTION.
---------------------
7.1. ASSIGNOR RESPONSIBLE.
--------------------
The Assignor shall assume full and complete responsibility for the
prosecution, defense, enforcement or any other necessary or desirable actions in
connection with the Pledged Trademarks, and shall hold each of the Agent and the
Banks harmless from any and all costs, damages, liabilities and expenses that
may be incurred by the Agent or any Bank in connection with the Agent's interest
in the Pledged Trademarks or any other action or failure to act in connection
with this Trademark Agreement or the transactions contemplated hereby. In
respect of such responsibility, the Assignor shall retain trademark counsel
acceptable to the Agent.
7.2. ASSIGNOR'S DUTIES, ETC.
-----------------------
The Assignor shall have the right and the duty, through trademark counsel
acceptable to the Agent, to prosecute diligently any trademark registration
applications of the Trademarks pending as of the date of this Trademark
Agreement or thereafter, to preserve and maintain all rights in the Trademarks
and Trademark Registrations, including the filing of appropriate renewal
applications and other instruments to maintain in effect the Trademark
Registrations and the payment when due of all registration renewal fees and
other fees, taxes and other expenses that shall be incurred or that shall accrue
with respect to any of the Trademarks or Trademark Registrations. Any expenses
incurred in connection with such applications and actions shall be borne by the
Assignor. The Assignor shall not abandon any filed trademark registration
application, or any Trademark Registration or Trademark, without the consent of
the Agent, which consent shall not be unreasonably withheld.
7.3. ASSIGNOR'S ENFORCEMENT RIGHTS.
-----------------------------
The Assignor shall have the right and the duty to bring suit or other
action in the Assignor's own name to maintain and enforce the Trademarks, the
Trademark Registrations and the Trademark Rights. The Assignor may require the
Agent to join in such suit or action as necessary to assure the Assignor's
ability to bring and maintain any such suit or action in any proper forum if
(but only if) the Agent is completely satisfied that such joinder will
-8-
not subject the Agent or any Bank to any risk of liability. The Assignor shall
promptly, upon demand, reimburse and indemnify the Agent for all damages, costs
and expenses, including legal fees, incurred by the Agent pursuant to this
(S)7.3.
7.4. PROTECTION OF TRADEMARKS, ETC.
------------------------------
In general, the Assignor shall take any and all such actions (including
institution and maintenance of suits, proceedings or actions) as may be
necessary or appropriate to properly maintain, protect, preserve, care for and
enforce the Pledged Trademarks. The Assignor shall not take or fail to take any
action, nor permit any action to be taken or not taken by others under its
control, that would adversely affect the validity, grant or enforcement of the
Pledged Trademarks.
7.5. NOTIFICATION BY ASSIGNOR.
------------------------
Promptly upon obtaining knowledge thereof, the Assignor will notify the
Agent in writing of the institution of, or any final adverse determination in,
any proceeding in the PTO or any similar office or agency of the United States
or any foreign country, or any court, regarding the validity of any of the
Trademarks or Trademark Registrations or the Assignor's rights, title or
interests in and to the Pledged Trademarks, and of any event that does or
reasonably could materially adversely affect the value of any of the Pledged
Trademarks, the ability of the Assignor or the Agent to dispose of any of the
Pledged Trademarks or the rights and remedies of the Agent in relation thereto
(including but not limited to the levy of any legal process against any of the
Pledged Trademarks).
8. REMEDIES.
--------
Upon the occurrence and during the continuance of an Event of Default, the
Agent shall have, in addition to all other rights and remedies given it by this
Trademark Agreement (including, without limitation, those set forth in (S)2.2,
the Credit Agreement, the Security Agreement and the other Loan Documents, those
allowed by law and the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in the Commonwealth of Massachusetts, and, without
limiting the generality of the foregoing, the Agent may immediately, without
demand of performance and without other notice (except as set forth next below)
or demand whatsoever to the Assignor, all of which are hereby expressly waived,
sell or license at public or private sale or otherwise realize upon the whole or
from time to time any part of the Pledged Trademarks, or any interest that the
Assignor may have therein, and after deducting from the proceeds of sale or
other disposition of the Pledged Trademarks all expenses incurred by the Agent
in attempting to enforce this Trademark Agreement (including all reasonable
expenses for broker's fees and legal services), shall apply the residue of such
proceeds toward the payment of the Obligations as set forth in or by reference
in the Security Agreement. Notice of any sale, license or other disposition of
the Pledged Trademarks shall be given to the Assignor at least five (5) days
before the time that any intended public sale or other public disposition of the
Pledged Trademarks is to be made or after which any private sale or other
private disposition of the Pledged Trademarks may be made, which the Assignor
hereby agrees shall be reasonable
-9-
notice of such public or private sale or other disposition. At any such sale or
other disposition, the Agent may, to the extent permitted under applicable law,
purchase or license the whole or any part of the Pledged Trademarks or interests
therein sold, licensed or otherwise disposed of.
9. COLLATERAL PROTECTION.
---------------------
If the Assignor shall fail to do any act that it has covenanted to do
hereunder, or if any representation or warranty of the Assignor shall be
breached, the Agent, in its own name or that of the Assignor (in the sole
discretion of the Agent), may (but shall not be obligated to) do such act or
remedy such breach (or cause such act to be done or such breach to be remedied),
and the Assignor agrees promptly to reimburse the Agent for any cost or expense
incurred by the Agent in so doing.
10. POWER OF ATTORNEY.
-----------------
If any Event of Default shall have occurred and be continuing, the Assignor
does hereby make, constitute and appoint the Agent (and any officer or agent of
the Agent as the Agent may select in its exclusive discretion) as the Assignor's
true and lawful attorney-in-fact, with full power of substitution and with the
power to endorse the Assignor's name on all applications, documents, papers and
instruments necessary for the Agent to use the Pledged Trademarks, or to grant
or issue any exclusive or nonexclusive license of any of the Pledged Trademarks
to any third person, or to take any and all actions necessary for the Agent to
assign, pledge, convey or otherwise transfer title in or dispose of any of the
Pledged Trademarks or any interest of the Assignor therein to any third person,
and, in general, to execute and deliver any instruments or documents and do all
other acts that the Assignor is obligated to execute and do hereunder. The
Assignor hereby ratifies all that such attorney shall lawfully do or cause to be
done by virtue hereof and releases each of the Agent and the Banks from any
claims, liabilities, causes of action or demands arising out of or in connection
with any action taken or omitted to be taken by the Agent under this power of
attorney (except for the Agent's gross negligence or willful misconduct). This
power of attorney is coupled with an interest and shall be irrevocable for the
duration of this Trademark Agreement.
11. FURTHER ASSURANCES.
------------------
The Assignor shall, at any time and from time to time, and at its expense,
make, execute, acknowledge and deliver, and file and record as necessary or
appropriate with governmental or regulatory authorities, agencies or offices,
such agreements, assignments, documents and instruments, and do such other and
further acts and things (including, without limitation, obtaining consents of
third parties), as the Agent may request or as may be necessary or appropriate
in order to implement and effect fully the intentions, purposes and provisions
of this Trademark Agreement, or to assure and confirm to the Agent the grant,
perfection and priority of the Agent's security interest in the Pledged
Trademarks.
-10-
12. TERMINATION.
-----------
At such time as all of the Obligations have been finally paid and satisfied
in full, this Trademark Agreement shall terminate and the Agent shall, upon the
written request and at the expense of the Assignor, execute and deliver to the
Assignor all deeds, assignments and other instruments as may be necessary or
proper to reassign and reconvey to and re-vest in the Assignor the entire right,
title and interest to the Pledged Trademarks previously granted, assigned,
transferred and conveyed to the Agent by the Assignor pursuant to this Trademark
Agreement, as fully as if this Trademark Agreement had not been made, subject to
any disposition of all or any part thereof that may have been made by the Agent
pursuant hereto or the Security Agreement.
13. COURSE OF DEALING.
-----------------
No course of dealing between the Assignor and the Agent, nor any failure to
exercise, nor any delay in exercising, on the part of the Agent, any right,
power or privilege hereunder or under the Security Agreement or any other
agreement shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
14. EXPENSES.
--------
Any and all fees, costs and expenses, of whatever kind or nature, including
the reasonable attorneys' fees and expenses incurred by the Agent in connection
with the preparation of this Trademark Agreement and all other documents
relating hereto, the consummation of the transactions contemplated hereby or the
enforcement hereof, the filing or recording of any documents (including all
taxes in connection therewith) in public offices, the payment or discharge of
any taxes, counsel fees, maintenance or renewal fees, encumbrances, or otherwise
protecting, maintaining or preserving the Pledged Trademarks, or in defending or
prosecuting any actions or proceedings arising out of or related to the Pledged
Trademarks, shall be borne and paid by the Assignor.
15. OVERDUE AMOUNTS.
---------------
Until paid, all amounts due and payable by the Assignor hereunder shall be
a debt secured by the Pledged Trademarks and other Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Credit Agreement.
16. NO ASSUMPTION OF LIABILITY; INDEMNIFICATION.
-------------------------------------------
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NEITHER THE
AGENT NOR ANY BANK ASSUMES ANY LIABILITIES OF THE ASSIGNOR WITH RESPECT TO ANY
CLAIM OR CLAIMS REGARDING THE ASSIGNOR'S OWNERSHIP OR PURPORTED
-11-
OWNERSHIP OF, OR RIGHTS OR PURPORTED RIGHTS ARISING FROM, ANY OF THE PLEDGED
TRADEMARKS OR ANY USE, LICENSE OR SUBLICENSE THEREOF, WHETHER ARISING OUT OF ANY
PAST, CURRENT OR FUTURE EVENT, CIRCUMSTANCE, ACT OR OMISSION OR OTHERWISE. ALL
OF SUCH LIABILITIES SHALL BE EXCLUSIVELY THE RESPONSIBILITY OF THE ASSIGNOR, AND
THE ASSIGNOR SHALL INDEMNIFY THE AGENT AND THE BANKS FOR ANY AND ALL COSTS,
EXPENSES, DAMAGES AND CLAIMS, INCLUDING LEGAL FEES, INCURRED BY THE AGENT OR ANY
BANK WITH RESPECT TO SUCH LIABILITIES.
17. NOTICES.
-------
All notices and other communications made or required to be given pursuant
to this Trademark Agreement shall be in writing and shall be delivered in hand,
mailed by United States registered or certified first-class mail, postage
prepaid, or sent by telegraph, telecopy or telex and confirmed by delivery via
courier or postal service, addressed as follows:
(a) if to the Assignor, at 25 Drydock Avenue, Massachusetts,
Attention: President, or at such other address for notice as the Assignor
shall last have furnished in writing to the person giving the notice, with
copies to Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts,
Attention: William Williams, Esq.; and
(b) if to the Agent, at 100 Federal Street, Boston, Massachusetts,
Attention: Tena C. Lindenauer or at such other address for notice as the
Agent shall last have furnished in writing to the person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand to a responsible officer
of the party to which it is directed, at the time of the receipt thereof by such
officer, (ii) if sent by registered or certified first-class mail, postage
prepaid, two (2) Business Days after the posting thereof, and (iii) if sent by
telegraph, telecopy, or telex, at the time of the dispatch thereof, if in normal
business hours in the country of receipt, or otherwise at the opening of
business on the following Business Day.
18. AMENDMENT AND WAIVER.
--------------------
This Trademark Agreement is subject to modification only by a writing
signed by the Agent (with the consent of the Majority Banks) and the Assignor,
except as provided in (S)6.2. The Agent shall not be deemed to have waived any
right hereunder unless such waiver shall be in writing and signed by the Agent
and the Majority Banks. A waiver on any one occasion shall not be construed as
a bar to or waiver of any right on any future occasion.
19. GOVERNING LAW; CONSENT TO JURISDICTION.
--------------------------------------
-12-
THIS TRADEMARK AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT
AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS. The Assignor agrees that any suit for the
enforcement of this Trademark Agreement may be brought in the courts of the
Commonwealth of Massachusetts or any federal court sitting therein and consents
to the non-exclusive jurisdiction of such court and to service of process in any
such suit being made upon the Assignor by mail at the address specified in
(S)17. The Assignor hereby waives any objection that it may now or hereafter
have to the venue of any such suit or any such court or that such suit is
brought in an inconvenient court.
20. WAIVER OF JURY TRIAL.
--------------------
THE ASSIGNOR WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR
CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS TRADEMARK AGREEMENT,
ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY SUCH RIGHTS OR
OBLIGATIONS. Except as prohibited by law, the Assignor waives any right which
it may have to claim or recover in any litigation referred to in the preceding
sentence any special, exemplary, punitive or consequential damages or any
damages other than, or in addition to, actual damages. The Assignor (i)
certifies that neither the Agent or any Bank nor any representative, agent or
attorney of the Agent or any Bank has represented, expressly or otherwise, that
the Agent or any Bank would not, in the event of litigation, seek to enforce the
foregoing waivers, and (ii) acknowledges that, in entering into the Credit
Agreement and the other Loan Documents to which the Agent or any Bank is a
party, the Agent and the Banks are relying upon, among other things, the waivers
and certifications contained in this (S)20.
21. MISCELLANEOUS.
-------------
The headings of each section of this Trademark Agreement are for
convenience only and shall not define or limit the provisions thereof. This
Trademark Agreement and all rights and obligations hereunder shall be binding
upon the Assignor and its respective successors and assigns, and shall inure to
the benefit of the Agent, the Banks and their respective successors and assigns.
In the event of any irreconcilable conflict between the provisions of this
Trademark Agreement and the Credit Agreement, or between this Trademark
Agreement and the Security Agreement, the provisions of the Credit Agreement or
the Security Agreement, as the case may be, shall control. If any term of this
Trademark Agreement shall be held to be invalid, illegal or unenforceable, the
validity of all other terms hereof shall in no way be affected thereby, and this
Trademark Agreement shall be construed and be enforceable as if such invalid,
illegal or unenforceable term had not been included herein. The Assignor
acknowledges receipt of a copy of this Trademark Agreement.
-13-
IN WITNESS WHEREOF, this Trademark Agreement has been executed as of the
day and year first above written.
SALESLINK CORPORATION
By:______________________________
Name:
Title:
BANKBOSTON, N.A., as Agent
By:______________________________
Name:
Title:
CERTIFICATE OF ACKNOWLEDGMENT
COMMONWEALTH OF MASSACHUSETTS ______________)
) ss.
COUNTY OF SUFFOLK __________________________)
Before me, the undersigned, a Notary Public in and for the county
aforesaid, on this __ day of June, 1998, personally appeared __________________
to me known personally, and who, being by me duly sworn, deposes and says that
he is the _________________ of SalesLink Corporation, and that said instrument
was signed and sealed on behalf of said corporation by authority of its Board of
Directors, and said _________________ acknowledged said instrument to be the
free act and deed of said corporation.
______________________________
Notary Public
My commission expires:
SCHEDULE A
----------
TRADEMARKS AND TRADEMARK REGISTRATIONS
--------------------------------------
Trademark Registrations --
or United States Patent and Trademark Office
Service Mark Registration No. Registration Date
------------ ---------------- -----------------
Trademark Pending Applications --
or United States Patent and Trademark Office
Service Mark Serial No. Filing Date
------------ ---------- -----------
EXHIBIT 1
---------
ASSIGNMENT OF TRADEMARKS AND SERVICE MARKS (U.S.)
-------------------------------------------------
WHEREAS, SalesLink Corporation, a corporation organized and existing under
the laws of the State of Delaware, having a place of business at 25 Drydock
Avenue, Boston, Massachusetts (the "Assignor"), has adopted and used and is
using the trademarks and service marks (the "Marks") identified on the Annex
-----
hereto, and is the owner of the registrations of and pending registration
applications for such Marks in the United States Patent and Trademark Office
identified on such Annex; and
-----
WHEREAS, ______________, a __________________ organized and existing under
the laws of the State of ____________, having a place of business at
____________________ (the "Assignee"), is desirous of acquiring the Marks and
the registrations thereof and registration applications therefor;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, the Assignor does hereby assign, sell and transfer unto the
Assignee all right, title and interest in and to the Marks, together with (i)
the registrations of and registration applications for the Marks, (ii) the
goodwill of the business symbolized by and associated with the Marks and the
registrations thereof, and (iii) the right to sue and recover for, and the right
to profits or damages due or accrued arising out of or in connection with, any
and all past, present or future infringements or dilution of or damage or injury
to the Marks or the registrations thereof or such associated goodwill.
This Assignment of Trademarks and Service Marks (U.S.) is intended to and
shall take effect as a sealed instrument at such time as the Assignee shall
complete this instrument by inserting its name in the second paragraph above and
signing its acceptance of this Assignment of Trademarks and Service Marks (U.S.)
below.
-2-
IN WITNESS WHEREOF, the Assignor, by its duly authorized officer, has
executed this assignment, as an instrument under seal, on this __ day of ___,
199__.
SALESLINK CORPORATION
By:______________________________
Title:
The foregoing assignment of the Marks and the registrations thereof and
registration applications therefor by the Assignor to the Assignee is hereby
accepted as of the ____ day of __, 199__.
_______________________________
By:
Title:
COMMONWEALTH OR STATE OF*_____________________)
) ss.
COUNTY OF*____________________________________)
On this the ___ day of ___, 199__, before me appeared ____________, the
person who signed this instrument, who acknowledged that (s)he is the ____ of
___________ and that being duly authorized (s)he signed such instrument as a
free act on behalf of ____________________.
______________________________
Notary Public
[Seal]
My commission expires:
ANNEX
-----
Trademark Registrations --
or United States Patent and Trademark Office
Service Mark Registration No. Registration Date
------------ ---------------- -----------------
74/022783 July 22, 1996
Trademark Pending Applications --
or United States Patent and Trademark Office
Service Mark Serial No. Filing Date
------------ ---------- -----------
EXHIBIT 10.67
TRADEMARK COLLATERAL
---------------------
SECURITY AND PLEDGE AGREEMENT
-----------------------------
TRADEMARK COLLATERAL SECURITY AND PLEDGE AGREEMENT dated as of June 11,
1998, between InSolutions Incorporated, a Delaware corporation having its
principal place of business at 2940 Kifer Road, Santa Clara, California 95051,
(the "Assignor"), and BankBoston, N.A. (formerly known as The First National
Bank of Boston), a national banking association having an office at 100 Federal
Street, Boston, Massachusetts as agent (hereinafter, in such capacity, the
"Agent") for itself and other banking institutions (hereinafter, collectively,
the "Banks") which are, or may in the future become, parties to an Amended and
Restated Revolving Credit and Term Loan Agreement dated as of June 11, 1998 (as
amended and in effect from time to time, the "Credit Agreement"), among the
Assignor, the Banks, the Agent and certain other parties thereto.
WHEREAS, it is a condition precedent to the Banks' making any loans or
otherwise extending credit to the Assignor under the Credit Agreement that the
Assignor execute and deliver to the Agent, for the benefit of the Banks and the
Agent, a trademark agreement in substantially the form hereof;
WHEREAS, the Assignor has executed and delivered to the Agent, for the
benefit of the Banks and the Agent, the Security Agreement (as defined in the
Credit Agreement), pursuant to which the Assignor has granted to the Agent, for
the benefit of the Banks and the Agent, a security interest in certain of the
Assignor's personal property and fixture assets, including without limitation
the trademarks, service marks, trademark and service mark registrations, and
trademark and service mark registration applications listed on Schedule A
-------- -
attached hereto, all to secure the payment and performance of the Obligations
(as defined in the Credit Agreement); and
WHEREAS, this Trademark Agreement is supplemental to the provisions
contained in the Security Agreement;
NOW, THEREFORE, in consideration of the premises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS.
-----------
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings provided therefor in the Credit Agreement and the
Security Agreement. In addition, the following terms shall have the meanings
set forth in this (S)1 or elsewhere in this Trademark Agreement referred to
below:
Assignment of Marks. See (S)2.1.
-------------------
-2-
Associated Goodwill. All goodwill of the Assignor and its business,
-------------------
products and services appurtenant to, associated with or symbolized by the
Trademarks and the use thereof.
Pledged Trademarks. All of the Assignor's right, title and interest in and
------------------
to all of the Trademarks, the Trademark Registrations, the Trademark License
Rights, the Trademark Rights, the Associated Goodwill, the Related Assets, and
all accessions to, substitutions for, replacements of, and all products and
proceeds of any and all of the foregoing.
PTO. The United States Patent and Trademark Office.
---
Related Assets. All assets, rights and interests of the Assignor that
--------------
uniquely reflect or embody the Associated Goodwill, including the following:
(a) all patents, inventions, copyrights, trade secrets, confidential
information, formulae, methods or processes, compounds, recipes, know-how,
methods and operating systems, drawings, descriptions, formulations,
manufacturing and production and delivery procedures, quality control
procedures, product and service specifications, catalogs, price lists, and
advertising materials, relating to the manufacture, production, delivery,
provision and sale of goods or services under or in association with any of
the Trademarks; and
(b) the following documents and things in the possession or under
the control of the Assignor, or subject to its demand for possession or
control, related to the production, delivery, provision and sale by the
Assignor, or any affiliate, franchisee, licensee or contractor, of products
or services sold by or under the authority of the Assignor in connection
with the Trademarks or Trademark Rights, whether prior to, on or subsequent
to the date hereof:
(i) all lists, contracts, ancillary documents and other
information that identify, describe or provide information with
respect to any customers, dealers or distributors of the Assignor, its
affiliates or franchisees or licensees or contractors, for products or
services sold under or in connection with the Trademarks or Trademark
Rights, including all lists and documents containing information
regarding each customer's, dealer's or distributor's name and address,
credit, payment, discount, delivery and other sale terms, and history,
pattern and total of purchases by brand, product, style, size and
quantity;
(ii) all agreements (including franchise agreements), product
and service specification documents and operating, production and
quality control manuals relating to or used in the design,
manufacture, production, delivery, provision and sale of products or
-3-
services under or in connection with the Trademarks or Trademark
Rights;
(iii) all documents and agreements relating to the identity and
locations of all sources of supply, all terms of purchase and
delivery, for all materials, components, raw materials and other
supplies and services used in the manufacture, production, provision,
delivery and sale of products or services under or in connection with
the Trademarks or Trademark Rights; and
(iv) all agreements and documents constituting or concerning the
present or future, current or proposed advertising and promotion by
the Assignor (or any of its affiliates, franchisees, licensees or
contractors) of products or services sold under or in connection with
the Trademarks or Trademark Rights.
Trademark Agreement. This Trademark Collateral Security and Pledge
-------------------
Agreement, as amended and in effect from time to time.
Trademark License Rights. Any and all past, present or future rights and
------------------------
interests of the Assignor pursuant to any and all past, present and future
franchising or licensing agreements in favor of the Assignor, or to which the
Assignor is a party, pertaining to any Trademarks, Trademark Registrations, or
Trademark Rights owned or used by third parties in the past, present or future,
including the right (but not the obligation) in the name of the Assignor or the
Agent to enforce, and sue and recover for, any breach or violation of any such
agreement to which the Assignor is a party.
Trademark Registrations. All past, present or future federal, state, local
-----------------------
and foreign registrations of the Trademarks, all past, present and future
applications for any such registrations (and any such registrations thereof upon
approval of such applications), together with the right (but not the obligation)
to apply for such registrations (and prosecute such applications) in the name of
the Assignor or the Agent, and to take any and all actions necessary or
appropriate to maintain such registrations in effect and renew and extend such
registrations.
Trademark Rights. Any and all past, present or future rights in, to and
----------------
associated with the Trademarks throughout the world, whether arising under
federal law, state law, common law, foreign law or otherwise, including the
following: all such rights arising out of or associated with the Trademark
Registrations; the right (but not the obligation) to register claims under any
state, federal or foreign trademark law or regulation; the right (but not the
obligation) to sue or bring opposition or cancellation proceedings in the name
of the Assignor or the Agent for any and all past, present and future
infringements or dilution of or any other damages or injury to the Trademarks,
the Trademark Rights, or the Associated Goodwill, and the rights to damages or
profits due or accrued arising out of or in connection with any such past,
present or future infringement, dilution, damage or injury; and the Trademark
License Rights.
-4-
Trademarks. All of the trademarks, service marks, designs, logos, indicia,
----------
trade names, corporate names, company names, business names, fictitious business
names, trade styles, elements of package or trade dress, and other source and
product or service identifiers, used or associated with or appurtenant to the
products, services and businesses of the Assignor, that (i) are set forth on
Schedule A hereto, or (ii) have been adopted, acquired, owned, held or used by
- - - -------- -
the Assignor or are now owned, held or used by the Assignor, in the Assignor's
business, or with the Assignor's products and services, or in which the Assignor
has any right, title or interest, or (iii) are in the future adopted, acquired,
owned, held and used by the Assignor in the Assignor's business or with the
Assignor's products and services, or in which the Assignor in the future
acquires any right, title or interest.
use. With respect to any Trademark, all uses of such Trademark by, for or
---
in connection with the Assignor or its business or for the direct or indirect
benefit of the Assignor or its business, including all such uses by the Assignor
itself, by any of the affiliates of the Assignor, or by any franchisee, licensee
or contractor of the Assignor.
Unless otherwise provided herein, the rules of interpretation set forth in
(S)* of the Credit Agreement shall be applicable to this Trademark Agreement.
2. GRANT OF SECURITY INTEREST.
--------------------------
2.1. SECURITY INTEREST; ASSIGNMENT OF MARKS. As collateral security for
--------------------------------------
the payment and performance in full of all of the Obligations, the Assignor
hereby unconditionally grants to the Agent, for the benefit of the Banks and the
Agent, a continuing security interest in and first priority lien on the Pledged
Trademarks, and pledges and mortgages (but does not transfer title to) the
Pledged Trademarks to the Agent for the benefit of the Banks and the Agent. In
addition, the Assignor has executed in blank and delivered to the Agent an
assignment of federally registered trademarks in substantially the form of
Exhibit 1 hereto (the "Assignment of Marks") but specifically excluding all
- - - ------- -
intent to use filings. The Assignor hereby authorizes the Agent to complete as
assignee and record with the PTO the Assignment of Marks upon the occurrence and
during the continuance of an Event of Default and the proper exercise of the
Agent's remedies under this Trademark Agreement and the Security Agreement.
2.2. CONDITIONAL ASSIGNMENT. In addition to, and not by way of limitation
----------------------
of, the grant, pledge and mortgage of the Pledged Trademarks provided in (S)2.1,
the Assignor grants, assigns, transfers, conveys and sets over to the Agent, for
the benefit of the Banks and the Agent, the Assignor's entire right, title and
interest in and to the Pledged Trademarks; provided that such grant, assignment,
--------
transfer and conveyance shall be and become of force and effect only (i) upon or
after the occurrence and during the continuance of an Event of Default and (ii)
either (A) upon the written demand of the Agent at any time during such
continuance or (B) immediately and automatically (without notice or action of
any kind by the Agent)
-5-
upon an Event of Default for which acceleration of the Loans is automatic under
the Credit Agreement or upon the sale or other disposition of or foreclosure
upon the Collateral pursuant to the Security Agreement and applicable law
(including the transfer or other disposition of the Collateral by the Assignor
to the Agent or its nominee in lieu of foreclosure).
2.3. SUPPLEMENTAL TO SECURITY AGREEMENT. Pursuant to the Security
----------------------------------
Agreement the Assignor has granted to the Agent, for the benefit of the Banks
and the Agent, a continuing security interest in and lien on the Collateral
(including the Pledged Trademarks). The Security Agreement, and all rights and
interests of the Agent in and to the Collateral (including the Pledged
Trademarks) thereunder, are hereby ratified and confirmed in all respects. In no
event shall this Trademark Agreement, the grant, assignment, transfer and
conveyance of the Pledged Trademarks hereunder, or the recordation of this
Trademark Agreement (or any document hereunder) with the PTO, adversely affect
or impair, in any way or to any extent, the Security Agreement, the security
interest of the Agent in the Collateral (including the Pledged Trademarks)
pursuant to the Security Agreement and this Trademark Agreement, the attachment
and perfection of such security interest under the Uniform Commercial Code
(including the security interest in the Pledged Marks), or any present or future
rights and interests of the Agent in and to the Collateral under or in
connection with the Security Agreement, this Trademark Agreement or the Uniform
Commercial Code. Any and all rights and interests of the Agent in and to the
Pledged Trademarks (and any and all obligations of the Assignor with respect to
the Pledged Trademarks) provided herein, or arising hereunder or in connection
herewith, shall only supplement and be cumulative and in addition to the rights
and interests of the Agent (and the obligations of the Assignor) in, to or with
respect to the Collateral (including the Pledged Trademarks) provided in or
arising under or in connection with the Security Agreement and shall not be in
derogation thereof.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
-----------------------------------------
The Assignor represents, warrants and covenants that: (i) Schedule A
-------- -
sets forth a true and complete list of all Trademarks and Trademark
Registrations now owned, licensed, controlled or used by the Assignor; (ii) the
Trademarks and Trademark Registrations are subsisting and have not been adjudged
invalid or unenforceable, in whole or in part, and there is no litigation or
proceeding pending concerning the validity or enforceability of the Trademarks
or Trademark Registrations; (iii) to the best of the Assignor's knowledge, each
of the Trademarks and Trademark Registrations is valid and enforceable; (iv) to
the best of the Assignor's knowledge, there is no infringement by others of the
Trademarks, Trademark Registrations or Trademark Rights; (v) no claim has been
made that the use of any of the Trademarks does or may violate the rights of any
third person, and to the best of the Assignor's knowledge, there is no
infringement by the Assignor of the trademark rights of others; (vi) the
Assignor is the sole and exclusive owner of the entire and unencumbered right,
title and interest in and to each of the Trademarks (other than ownership and
other rights reserved by third
-6-
party owners with respect to Trademarks that the Assignor is licensed to use),
free and clear of any liens, charges, encumbrances and adverse claims, including
pledges, assignments, licenses, registered user agreements and covenants by the
Assignor not to sue third persons, other than the security interest and
assignment created by the Security Agreement and this Trademark Agreement; (vii)
the Assignor has the unqualified right to enter into this Trademark Agreement
and to perform its terms and has entered and will enter into written agreements
with each of its present and future employees, agents, consultants, licensors
and licensees that will enable them to comply with the covenants herein
contained; (viii) the Assignor has used, and will continue to use, proper
statutory and other appropriate proprietary notices in connection with its use
of the Trademarks; (ix) the Assignor has used, and will continue to use for the
duration of this Trademark Agreement, consistent standards of quality in its
manufacture and provision of products and services sold or provided under the
Trademarks; (x) this Trademark Agreement, together with the Security Agreement,
will create in favor of the Agent a valid and perfected first priority security
interest in the Pledged Trademarks upon making the filings referred to in clause
(xi) of this (S)3; and (xi) except for the filing of financing statements with
the Secretary of State for the Commonwealth of Massachusetts under the Uniform
Commercial Code and the recording of this Trademark Agreement with the PTO, no
authorization, approval or other action by, and no notice to or filing with, any
governmental or regulatory authority, agency or office is required either (A)
for the grant by the Assignor or the effectiveness of the security interest and
assignment granted hereby or for the execution, delivery and performance of this
Trademark Agreement by the Assignor, or (B) for the perfection of or the
exercise by the Agent of any of its rights and remedies hereunder.
4. INSPECTION RIGHTS.
-----------------
The Assignor hereby grants to each of the Agent and the Banks and its
employees and agents the right to visit the Assignor's plants and facilities
that manufacture, inspect or store products sold under any of the Trademarks,
and to inspect the products and quality control records relating thereto at
reasonable times during regular business hours.
5. NO TRANSFER OR INCONSISTENT AGREEMENTS.
--------------------------------------
Without the Agent's prior written consent and except for licenses of the
Pledged Trademarks in the ordinary course of the Assignor's business consistent
with its past practices, the Assignor will not (i) mortgage, pledge, assign,
encumber, grant a security interest in, transfer, license or alienate any of the
Pledged Trademarks, or (ii) enter into any agreement (for example, a license
agreement) that is inconsistent with the Assignor's obligations under this
Trademark Agreement or the Security Agreement.
6. AFTER-ACQUIRED TRADEMARKS, ETC.
------------------------------
6.1. AFTER-ACQUIRED TRADEMARKS. If, before the Obligations shall have
-------------------------
been finally paid and satisfied in full, the Assignor shall obtain any right,
title or interest
-7-
in or to any other or new Trademarks, Trademark Registrations or Trademark
Rights, the provisions of this Trademark Agreement shall automatically apply
thereto and the Assignor shall promptly provide to the Agent notice thereof in
writing and execute and deliver to the Agent such documents or instruments as
the Agent may reasonably request further to implement, preserve or evidence the
Agent's interest therein.
6.2. AMENDMENT TO SCHEDULE. The Assignor authorizes the Agent to modify
---------------------
this Trademark Agreement and the Assignment of Marks, without the necessity of
the Assignor's further approval or signature, by amending Exhibit A hereto and
------- -
the Annex to the Assignment of Marks to include any future or other Trademarks,
-----
Trademark Registrations or Trademark Rights under (S)2 or (S)6.
7. TRADEMARK PROSECUTION.
---------------------
7.1. ASSIGNOR RESPONSIBLE. The Assignor shall assume full and complete
--------------------
responsibility for the prosecution, defense, enforcement or any other necessary
or desirable actions in connection with the Pledged Trademarks, and shall hold
each of the Agent and the Banks harmless from any and all costs, damages,
liabilities and expenses that may be incurred by the Agent or any Bank in
connection with the Agent's interest in the Pledged Trademarks or any other
action or failure to act in connection with this Trademark Agreement or the
transactions contemplated hereby. In respect of such responsibility, the
Assignor shall retain trademark counsel acceptable to the Agent.
7.2. ASSIGNOR'S DUTIES, ETC. The Assignor shall have the right and the
-----------------------
duty, through trademark counsel acceptable to the Agent, to prosecute diligently
any trademark registration applications of the Trademarks pending as of the date
of this Trademark Agreement or thereafter, to preserve and maintain all rights
in the Trademarks and Trademark Registrations, including the filing of
appropriate renewal applications and other instruments to maintain in effect the
Trademark Registrations and the payment when due of all registration renewal
fees and other fees, taxes and other expenses that shall be incurred or that
shall accrue with respect to any of the Trademarks or Trademark Registrations.
Any expenses incurred in connection with such applications and actions shall be
borne by the Assignor. The Assignor shall not abandon any filed trademark
registration application, or any Trademark Registration or Trademark, without
the consent of the Agent, which consent shall not be unreasonably withheld.
7.3. ASSIGNOR'S ENFORCEMENT RIGHTS. The Assignor shall have the right
-----------------------------
and the duty to bring suit or other in the Assignor's own name to maintain and
enforce the Trademarks, the Trademark Registrations and the Trademark Rights.
The Assignor may require the Agent to join in such suit or action as necessary
to assure the Assignor's ability to bring and maintain any such suit or action
in any proper forum if (but only if) the Agent is completely satisfied that such
joinder will not subject the Agent or any Bank to any risk of liability. The
Assignor shall
-8-
promptly, upon demand, reimburse and indemnify the Agent for all damages, costs
and expenses, including legal fees, incurred by the Agent pursuant to this
(S)7.3.
7.4. PROTECTION OF TRADEMARKS, ETC. In general, the Assignor shall take
------------------------------
any and all such actions (including institution and maintenance of suits,
proceedings or actions) as may be necessary or appropriate to properly maintain,
protect, preserve, care for and enforce the Pledged Trademarks. The Assignor
shall not take or fail to take any action, nor permit any action to be taken or
not taken by others under its control, that would adversely affect the validity,
grant or enforcement of the Pledged Trademarks.
7.5. NOTIFICATION BY ASSIGNOR. Promptly upon obtaining knowledge thereof,
------------------------
the Assignor will notify the Agent in writing of the institution of, or any
final adverse determination in, any proceeding in the PTO or any similar office
or agency of the United States or any foreign country, or any court, regarding
the validity of any of the Trademarks or Trademark Registrations or the
Assignor's rights, title or interests in and to the Pledged Trademarks, and of
any event that does or reasonably could materially adversely affect the value of
any of the Pledged Trademarks, the ability of the Assignor or the Agent to
dispose of any of the Pledged Trademarks or the rights and remedies of the Agent
in relation thereto (including but not limited to the levy of any legal process
against any of the Pledged Trademarks).
8. REMEDIES.
--------
Upon the occurrence and during the continuance of an Event of Default, the
Agent shall have, in addition to all other rights and remedies given it by this
Trademark Agreement (including, without limitation, those set forth in (S)2.2,
the Credit Agreement, the Security Agreement and the other Loan Documents, those
allowed by law and the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in the Commonwealth of Massachusetts, and, without
limiting the generality of the foregoing, the Agent may immediately, without
demand of performance and without other notice (except as set forth next below)
or demand whatsoever to the Assignor, all of which are hereby expressly waived,
sell or license at public or private sale or otherwise realize upon the whole or
from time to time any part of the Pledged Trademarks, or any interest that the
Assignor may have therein, and after deducting from the proceeds of sale or
other disposition of the Pledged Trademarks all expenses incurred by the Agent
in attempting to enforce this Trademark Agreement (including all reasonable
expenses for broker's fees and legal services), shall apply the residue of such
proceeds toward the payment of the Obligations as set forth in or by reference
in the Security Agreement. Notice of any sale, license or other disposition of
the Pledged Trademarks shall be given to the Assignor at least five (5) days
before the time that any intended public sale or other public disposition of the
Pledged Trademarks is to be made or after which any private sale or other
private disposition of the Pledged Trademarks may be made, which the Assignor
hereby agrees shall be reasonable notice of such public or private sale or other
disposition. At any such sale or other
-9-
disposition, the Agent may, to the extent permitted under applicable law,
purchase or license the whole or any part of the Pledged Trademarks or interests
therein sold, licensed or otherwise disposed of.
9. COLLATERAL PROTECTION.
---------------------
If the Assignor shall fail to do any act that it has covenanted to do
hereunder, or if any representation or warranty of the Assignor shall be
breached, the Agent, in its own name or that of the Assignor (in the sole
discretion of the Agent), may (but shall not be obligated to) do such act or
remedy such breach (or cause such act to be done or such breach to be remedied),
and the Assignor agrees promptly to reimburse the Agent for any cost or expense
incurred by the Agent in so doing.
10. POWER OF ATTORNEY.
-----------------
If any Event of Default shall have occurred and be continuing, the Assignor
does hereby make, constitute and appoint the Agent (and any officer or agent of
the Agent as the Agent may select in its exclusive discretion) as the Assignor's
true and lawful attorney-in-fact, with full power of substitution and with the
power to endorse the Assignor's name on all applications, documents, papers and
instruments necessary for the Agent to use the Pledged Trademarks, or to grant
or issue any exclusive or nonexclusive license of any of the Pledged Trademarks
to any third person, or to take any and all actions necessary for the Agent to
assign, pledge, convey or otherwise transfer title in or dispose of any of the
Pledged Trademarks or any interest of the Assignor therein to any third person,
and, in general, to execute and deliver any instruments or documents and do all
other acts that the Assignor is obligated to execute and do hereunder. The
Assignor hereby ratifies all that such attorney shall lawfully do or cause to be
done by virtue hereof and releases each of the Agent and the Banks from any
claims, liabilities, causes of action or demands arising out of or in connection
with any action taken or omitted to be taken by the Agent under this power of
attorney (except for the Agent's gross negligence or willful misconduct). This
power of attorney is coupled with an interest and shall be irrevocable for the
duration of this Trademark Agreement.
11. FURTHER ASSURANCES.
------------------
The Assignor shall, at any time and from time to time, and at its expense,
make, execute, acknowledge and deliver, and file and record as necessary or
appropriate with governmental or regulatory authorities, agencies or offices,
such agreements, assignments, documents and instruments, and do such other and
further acts and things (including, without limitation, obtaining consents of
third parties), as the Agent may request or as may be necessary or appropriate
in order to implement and effect fully the intentions, purposes and provisions
of this Trademark Agreement, or to assure and confirm to the Agent the grant,
perfection and priority of the Agent's security interest in the Pledged
Trademarks.
12. TERMINATION.
-----------
-10-
At such time as all of the Obligations have been finally paid and satisfied
in full, this Trademark Agreement shall terminate and the Agent shall, upon the
written request and at the expense of the Assignor, execute and deliver to the
Assignor all deeds, assignments and other instruments as may be necessary or
proper to reassign and reconvey to and re-vest in the Assignor the entire right,
title and interest to the Pledged Trademarks previously granted, assigned,
transferred and conveyed to the Agent by the Assignor pursuant to this Trademark
Agreement, as fully as if this Trademark Agreement had not been made, subject to
any disposition of all or any part thereof that may have been made by the Agent
pursuant hereto or the Security Agreement.
13. COURSE OF DEALING.
-----------------
No course of dealing between the Assignor and the Agent, nor any failure to
exercise, nor any delay in exercising, on the part of the Agent, any right,
power or privilege hereunder or under the Security Agreement or any other
agreement shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
14. EXPENSES.
--------
Any and all fees, costs and expenses, of whatever kind or nature, including
the reasonable attorneys' fees and expenses incurred by the Agent in connection
with the preparation of this Trademark Agreement and all other documents
relating hereto, the consummation of the transactions contemplated hereby or the
enforcement hereof, the filing or recording of any documents (including all
taxes in connection therewith) in public offices, the payment or discharge of
any taxes, counsel fees, maintenance or renewal fees, encumbrances, or otherwise
protecting, maintaining or preserving the Pledged Trademarks, or in defending or
prosecuting any actions or proceedings arising out of or related to the Pledged
Trademarks, shall be borne and paid by the Assignor.
15. OVERDUE AMOUNTS.
---------------
Until paid, all amounts due and payable by the Assignor hereunder shall be
a debt secured by the Pledged Trademarks and other Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Credit Agreement.
16. NO ASSUMPTION OF LIABILITY; INDEMNIFICATION.
-------------------------------------------
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, NEITHER THE
AGENT NOR ANY BANK ASSUMES ANY LIABILITIES OF THE ASSIGNOR WITH RESPECT TO ANY
CLAIM OR CLAIMS REGARDING THE ASSIGNOR'S OWNERSHIP OR PURPORTED OWNERSHIP OF, OR
RIGHTS OR PURPORTED RIGHTS ARISING FROM, ANY OF THE PLEDGED TRADEMARKS OR ANY
USE, LICENSE OR
-11-
SUBLICENSE THEREOF, WHETHER ARISING OUT OF ANY PAST, CURRENT OR FUTURE EVENT,
CIRCUMSTANCE, ACT OR OMISSION OR OTHERWISE. ALL OF SUCH LIABILITIES SHALL BE
EXCLUSIVELY THE RESPONSIBILITY OF THE ASSIGNOR, AND THE ASSIGNOR SHALL INDEMNIFY
THE AGENT AND THE BANKS FOR ANY AND ALL COSTS, EXPENSES, DAMAGES AND CLAIMS,
INCLUDING LEGAL FEES, INCURRED BY THE AGENT OR ANY BANK WITH RESPECT TO SUCH
LIABILITIES.
17. NOTICES.
-------
All notices and other communications made or required to be given pursuant
to this Trademark Agreement shall be in writing and shall be delivered in hand,
mailed by United States registered or certified first-class mail, postage
prepaid, or sent by telegraph, telecopy or telex and confirmed by delivery via
courier or postal service, addressed as follows:
(a) if to the Assignor, at 25 Drydock Avenue, Massachusetts,
Attention: President, or at such other address for notice as the Assignor
shall last have furnished in writing to the person giving the notice, with
copies to Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts,
Attention: William Williams, Esq.; and
(b) if to the Agent, at 100 Federal Street, Boston, Massachusetts,
Attention: Tena C. Lindenauer., or at such other address for notice as the
Agent shall last have furnished in writing to the person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand to a responsible officer
of the party to which it is directed, at the time of the receipt thereof by such
officer, (ii) if sent by registered or certified first-class mail, postage
prepaid, two (2) Business Days after the posting thereof, and (iii) if sent by
telegraph, telecopy, or telex, at the time of the dispatch thereof, if in normal
business hours in the country of receipt, or otherwise at the opening of
business on the following Business Day.
18. AMENDMENT AND WAIVER.
--------------------
This Trademark Agreement is subject to modification only by a writing
signed by the Agent (with the consent of the Majority Banks) and the Assignor,
except as provided in (S)6.2. The Agent shall not be deemed to have waived any
right hereunder unless such waiver shall be in writing and signed by the Agent
and the Majority Banks. A waiver on any one occasion shall not be construed as
a bar to or waiver of any right on any future occasion.
19. GOVERNING LAW; CONSENT TO JURISDICTION.
--------------------------------------
THIS TRADEMARK AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT
AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
-12-
COMMONWEALTH OF MASSACHUSETTS. The Assignor agrees that any suit for the
enforcement of this Trademark Agreement may be brought in the courts of the
Commonwealth of Massachusetts or any federal court sitting therein and consents
to the non-exclusive jurisdiction of such court and to service of process in any
such suit being made upon the Assignor by mail at the address specified in
(S)17. The Assignor hereby waives any objection that it may now or hereafter
have to the venue of any such suit or any such court or that such suit is
brought in an inconvenient court.
20. WAIVER OF JURY TRIAL.
--------------------
THE ASSIGNOR WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR
CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS TRADEMARK AGREEMENT,
ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY SUCH RIGHTS OR
OBLIGATIONS. Except as prohibited by law, the Assignor waives any right which
it may have to claim or recover in any litigation referred to in the preceding
sentence any special, exemplary, punitive or consequential damages or any
damages other than, or in addition to, actual damages. The Assignor (i)
certifies that neither the Agent or any Bank nor any representative, agent or
attorney of the Agent or any Bank has represented, expressly or otherwise, that
the Agent or any Bank would not, in the event of litigation, seek to enforce the
foregoing waivers, and (ii) acknowledges that, in entering into the Credit
Agreement and the other Loan Documents to which the Agent or any Bank is a
party, the Agent and the Banks are relying upon, among other things, the waivers
and certifications contained in this (S)20.
21. MISCELLANEOUS.
-------------
The headings of each section of this Trademark Agreement are for
convenience only and shall not define or limit the provisions thereof. This
Trademark Agreement and all rights and obligations hereunder shall be binding
upon the Assignor and its respective successors and assigns, and shall inure to
the benefit of the Agent, the Banks and their respective successors and assigns.
In the event of any irreconcilable conflict between the provisions of this
Trademark Agreement and the Credit Agreement, or between this Trademark
Agreement and the Security Agreement, the provisions of the Credit Agreement or
the Security Agreement, as the case may be, shall control. If any term of this
Trademark Agreement shall be held to be invalid, illegal or unenforceable, the
validity of all other terms hereof shall in no way be affected thereby, and this
Trademark Agreement shall be construed and be enforceable as if such invalid,
illegal or unenforceable term had not been included herein. The Assignor
acknowledges receipt of a copy of this Trademark Agreement.
IN WITNESS WHEREOF, this Trademark Agreement has been executed as of the
day and year first above written.
INSOLUTIONS INCORPORATED
By:___________________________
Name:
Title:
BANKBOSTON, N.A., as Agent
By:___________________________
Name:
Title:
CERTIFICATE OF ACKNOWLEDGMENT
COMMONWEALTH OF MASSACHUSETTS ________ )
) ss.
COUNTY OF SUFFOLK ____________________ )
Before me, the undersigned, a Notary Public in and for the county
aforesaid, on this __ day of June, 1997, personally appeared __________________
to me known personally, and who, being by me duly sworn, deposes and says that
he is the _________________ of InSolutions Incorporated, and that said
instrument was signed and sealed on behalf of said corporation by authority of
its Board of Directors, and said _________________ acknowledged said instrument
to be the free act and deed of said corporation.
______________________________
Notary Public
My commission expires:
SCHEDULE A
----------
TRADEMARKS AND TRADEMARK REGISTRATIONS
--------------------------------------
Trademark Registrations --
or United States Patent and Trademark Office
Service Mark Registration No. Registration Date
------------ ---------------- -----------------
Trademark Pending Applications --
or United States Patent and Trademark Office
Service Mark Serial No. Filing Date
------------ --------- -----------
EXHIBIT 1
---------
ASSIGNMENT OF TRADEMARKS AND SERVICE MARKS (U.S.)
-------------------------------------------------
WHEREAS, InSolutions Incorporated, a corporation organized and existing
under the laws of the State of Delaware, having a place of business at
_____________ (the "Assignor"), has adopted and used and is using the trademarks
and service marks (the "Marks") identified on the Annex hereto, and is the owner
-----
of the registrations of and pending registration applications for such Marks in
the United States Patent and Trademark Office identified on such Annex; and
-----
WHEREAS, ______________, a __________________ organized and existing under
the laws of the State of ____________, having a place of business at
____________________ (the "Assignee"), is desirous of acquiring the Marks and
the registrations thereof and registration applications therefor;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, the Assignor does hereby assign, sell and transfer unto the
Assignee all right, title and interest in and to the Marks, together with (i)
the registrations of and registration applications for the Marks, (ii) the
goodwill of the business symbolized by and associated with the Marks and the
registrations thereof, and (iii) the right to sue and recover for, and the right
to profits or damages due or accrued arising out of or in connection with, any
and all past, present or future infringements or dilution of or damage or injury
to the Marks or the registrations thereof or such associated goodwill.
This Assignment of Trademarks and Service Marks (U.S.) is intended to and
shall take effect as a sealed instrument at such time as the Assignee shall
complete this instrument by inserting its name in the second paragraph above and
signing its acceptance of this Assignment of Trademarks and Service Marks (U.S.)
below.
-2-
IN WITNESS WHEREOF, the Assignor, by its duly authorized officer, has
executed this assignment, as an instrument under seal, on this __ day of ___,
199__.
INSOLUTIONS INCORPORATED
By: ______________________________
Title:
The foregoing assignment of the Marks and the registrations thereof and
registration applications therefor by the Assignor to the Assignee is hereby
accepted as of the ____ day of __, 199__.
________________________
By:______________________________
Title:
COMMONWEALTH OR STATE OF *__________ )
) ss.
COUNTY OF * ________________________ )
On this the ___ day of ___, 199__, before me appeared ____________, the
person who signed this instrument, who acknowledged that (s)he is the ____ of
___________ and that being duly authorized (s)he signed such instrument as a
free act on behalf of ____________________.
______________________________
Notary Public
[Seal]
My commission expires:
ANNEX
-----
Trademark Registrations --
or United States Patent and Trademark Office
Service Mark Registration No. Registration Date
------------ --------------- -----------------
Insolutions 2,054,299 April 22, 1997
Trademark Pending Applications --
or United States Patent and Trademark Office
Service Mark Serial No. Filing Date
------------ --------- -----------
EXHIBIT 10.68
REGISTRATION RIGHTS AGREEMENT
June 16, 1998
To each of the several Shareholders named in
Schedule I hereto
- - - ----------
Dear Gentlemen:
This will confirm that in consideration of the provisions contained in the
Agreement and Plan of Merger dated June 16, 1998 (the "Merger Agreement"), among
CMG Information Services, Inc. (the "Buyer"), InSolutions Incorporated and CMG-
InSolutions Merger Corporation ("Merger Sub"), the Buyer covenants and agrees
with each of you as follows:
A. Certain Definitions. As used in this Agreement, the following terms shall
-------------------
have the following meanings:
"Commission" shall mean the Securities and Exchange Commission, or any other
----------
federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $.01 par value, of the Buyer, as
------------
constituted as of the date of this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or
------------
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Lock-up" shall mean the Investment Representation and Lock-Up Agreement
-------
delivered to the Buyer by each of the Shareholders named in Schedule I hereto
----------
pursuant to the Merger Agreement.
"Merger Shares" shall mean the Common Stock issued pursuant to the Merger
-------------
Agreement.
"Registration Expenses" shall mean the expenses so described in Section 6.
---------------------
"Restricted Stock" shall mean the Merger Shares, excluding Merger Shares which
----------------
have been (a) registered under the Securities Act pursuant to an effective
registration statement filed thereunder and disposed of in accordance with the
registration statement covering them or (b) sold pursuant to Rule 144 under the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
--------------
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
1
"Selling Expenses" shall mean the expenses so described in Section 6.
----------------
.2. Required Registration.
---------------------
(a) The Buyer will use its reasonable best efforts to cause to be declared
effective one registration statement on Form S-3 or any successor thereto
(or in the event the Buyer is not eligible to use Form S-3 or such
successor form, Form S-1 or any other form then available for such purpose)
following the date which is twelve months after the date hereof. Forty-
five days prior to such date, the Buyer shall send a Notice of Registration
Statement and Selling Securityholder Questionnaire to each individual or
entity which holds Restricted Stock which, as a result of such twelve month
date referenced above, will no longer be subject to the "Lock-Up" described
in the Investment Representation and Lock-Up Agreement executed on the date
hereof. To be included on such registration statement, a holder must
return a completed Notice of Registration Statement and Selling
Securityholder Questionnaire within fifteen days of the date of the Notice
of Registration Statement and Selling Securityholder Questionnaire. If
after expiration of such fifteen day period, the holders of Restricted
Stock have not indicated a desire to have eligible shares with an aggregate
price to the public of at least $600,000 included in the registration
statement, the Buyer shall not be required to file a registration statement
at such time. If holders of Restricted Stock have indicated a desire to
have eligible shares with an aggregate price to the public of at least
$600,000 included in the registration statement, the Buyer shall as
promptly as practicable file a registration statement covering such shares
and shall use its reasonable best efforts to have such registration
statement declared effective.
(b) If holders of a majority of the Restricted Stock to be registered request
that the intended method of disposition be an underwritten public offering,
the holders of a majority of the shares of Restricted Stock to be sold in
such offering shall designate the managing underwriter of such offering,
subject to the approval of the Buyer, which approval shall not be
unreasonably withheld.
(c) The Buyer shall be entitled to include in any registration statement
referred to in this Section 2 shares of Common Stock to be sold by the
Buyer for its own account, except as and to the extent that such method of
disposition is an underwritten public offering and in the opinion of the
managing underwriter such inclusion would adversely affect the marketing of
the Restricted Stock to be sold.
(d) The Buyer's obligation to file a registration statement or cause such
registration statement to become effective shall be suspended for up to 30
days if there exists at the time material non-public information relating
to the Buyer which the Buyer determines in good faith would interfere with
or affect the negotiation or completion of a contemplated transaction
(whether or not a final decision has been made to undertake such
transaction) or involve initial or continuing disclosure obligations that
are not in the best interest of the Buyer.
(e) The Buyer shall be obligated to keep a registration statement filed
pursuant to Section 2(a) effective until the earliest of (i) the sale of
all of the shares included thereunder, (ii) the agreement by the holders of
such shares to terminate the registration, (iii) each holder of such shares
becoming eligible, under Rule 144 under the Securities Act, to make
unregistered sales in a three-month period of all its shares included on
such registration statement
2
or (iv) the registration rights of the holders of such shares have
terminated hereunder. At such time, the Buyer may file a post-effective
amendment to such registration statement removing from registration the
shares included in such registration statement.
.3. Incidental Registration. If the Buyer at any time (other than pursuant to
-----------------------
Section 2) proposes to register any of its Common Stock under the Securities Act
for sale to the public (except with respect to registration statements on Forms
S-4, S-8 or another form not available for registering the Restricted Stock for
sale to the public), it shall give written notice to all holders of outstanding
Restricted Stock of its intention so to do. Upon the written request of any such
holder, received by the Buyer within 30 days after the giving of any such notice
by the Buyer, to register any of its Restricted Stock which has been released
from its respective Lock-Up (which request shall state the intended method of
disposition thereof), the Buyer will use its reasonable commercial efforts to
cause the Restricted Stock as to which registration shall have been so requested
to be included in the securities to be covered by the registration statement
proposed to be filed by the Buyer. In the event that any registration pursuant
to this Section 3 shall be, in whole or in part, an underwritten public offering
of Common Stock, the number of shares of Restricted Stock to be included in such
an underwriting may be reduced (pro rata among the requesting holders based upon
the number of shares of Restricted Stock owned by such holders) if and to the
extent that the managing underwriter or underwriters shall be of the opinion
that such inclusion would adversely affect the marketing of the securities to be
sold by the Buyer. Notwithstanding the foregoing provisions, the Buyer may
elect not to file, withdraw or file a post-effective amendment terminating any
registration statement referred to in this Section 3 without thereby incurring
any liability to the holders of Restricted Stock.
.4. Registration Procedures. If the Buyer is required by the provisions of
-----------------------
Sections 2 or 3 to file a registration statement covering shares of Restricted
Stock, the Buyer agrees to:
(a) subject to the provisions of Sections 2 and 3, prepare and file with the
Commission such registration statement including such securities and use
reasonable commercial efforts to cause such registration statement to
become effective;
(b) subject to the provision of Section 4(a), prepare and file with the
Commission such amendments and supplements to such registration statement
and the prospectus included therein as may be necessary to keep such
registration statement effective for the period of distribution set forth
herein, and comply with the provisions of the Securities Act;
(c) use reasonable efforts to prevent the issuance of any stop order or other
order suspending the effectiveness of such registration statement and, if
such an order is issued, to obtain the withdrawal thereof at the earliest
possible time and to notify each holder of Restricted Stock included in
such registration statement of such order and its withdrawal;
(d) furnish to each seller of Restricted Stock such number of copies of the
prospectus included in such registration statement (including each
preliminary prospectus) as such persons reasonably may request in order to
comply with the requirements of the Securities Act;
3
(e) notify the holders of Restricted Stock included in the registration
statement upon the occurrence of any event as a result of which the
prospectus included in such registration statement, as then in effect,
contains an untrue statement of material fact or omits to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and as
promptly as practicable, prepare, file and furnish to such holders a
reasonable number of copies of a supplement or an amendment to such
prospectus as may be necessary so that such prospectus does not contain an
untrue statement of material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing; provided, however,
-------- -------
that the Buyer may delay preparing, filing and distributing any such
supplement or amendment if the Buyer determines in good faith that such
supplement or amendment might, in the reasonable judgment of the Buyer, (i)
interfere with or affect the negotiation or completion of a transaction
that is being contemplated by the Buyer (whether or not a final decision
has been made to undertake such transaction) or (ii) involve initial or
continuing disclosure obligations that are not in the best interests of the
Buyer's stockholders at such time; provided, further, that (x) the Buyer
-------- -------
shall give notice (a "Standstill Notice") of any such delay, (y) such delay
shall not extend for a period of more than thirty (30) days without the
written consent of the holders of a majority of the Registered Stock
requested to be included in such registration statement and (z) the Buyer
shall not exercise such right more than twice during any twelve-month
period.
(f) if required, use reasonable efforts to register or qualify the Restricted
Stock covered by such registration statement under the securities or "blue
sky" laws of such United States jurisdictions as the sellers of Restricted
Stock or, in the case of an underwritten public offering, the managing
underwriter or underwriters reasonably shall request, provided, however,
-------- -------
that the Buyer shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process in
any such jurisdiction;
(g) use reasonable efforts to include the Restricted Stock covered by such
registration statement on the Nasdaq National Market or any securities
exchange on which the Common Stock of the Buyer is then listed; and
(h) in the event of an underwritten public offering of the Restricted
Securities, enter into and perform its obligations under an underwriting
agreement, in usual and customary form reasonably acceptable to the Buyer,
with the managing underwriter of such offering.
.5. Obligations of Holder. In connection with the registration of the
---------------------
Restricted Stock pursuant to a registration statement, each holder of shares of
Restricted Stock included thereon shall:
(a) furnish to the Buyer such information regarding itself and the intended
method of disposition as necessary to assure compliance with federal and
applicable state securities laws or as the Buyer shall reasonably request;
(b) upon receipt of any notice from the Buyer of the happening of any event of
the kind described in Section 4(c), immediately discontinue disposition of
Restricted Stock pursuant to the registration statement until withdrawal of
the stop order referred to in Section 4(c); and
4
(c) not sell or otherwise transfer any Restricted Stock during the period from
the date specified in the Standstill Notice given by the Buyer pursuant to
Section 4(e) above that the Buyer has determined that it will delay the
preparation and filing of an amendment or supplement to the prospectus
included in the registration statement until the expiration date specified
in such notice.
.6. Expenses. All expenses incurred by the Buyer in complying with Sections
--------
2, 3 or 4, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Buyer, fees and expenses incurred in connection with
complying with state securities or "blue sky" laws, fees payable to the National
Association of Securities Dealers, Inc., fees payable to any securities exchange
or over-the-counter market quotation system (e.g. Nasdaq National Market
System), and fees of transfer agents and registrars, but excluding any Selling
Expenses, are called "Registration Expenses." All underwriting discounts and
selling commissions, fees of counsel and other advisors to sellers of Restricted
Stock and transfer and similar taxes are called "Selling Expenses."
The Buyer shall pay all Registration Expenses. All Selling Expenses shall be
borne by the participating sellers.
.7. Indemnification. In the event that any Restricted Stock is included in a
---------------
registration statement under this Agreement:
(a) to the extent permitted by law, the Buyer shall indemnify and hold harmless
each selling stockholder against any losses, claims, damages, liabilities
or reasonable out-of-pocket expenses (whether joint or
several)(collectively, including legal or other expenses reasonably
incurred in connection with investigating or defending same, "Losses"),
insofar as any such Losses arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Buyer will reimburse such stockholders for any
legal or other expenses as reasonably incurred by any such stockholder in
connection with investigating or defending any Loss; provided, however,
that the foregoing indemnity shall not apply to amounts paid in settlement
of any Loss if such settlement is effected without the consent of the Buyer
(which consent shall not be unreasonably withheld), nor shall the Buyer be
obligated to indemnify any person for any Loss to the extent that such Loss
arises out of or is based upon and in conformity with information furnished
by such person specifically for use in such registration statement; and
provided, further, that the Buyer shall not be required to indemnify any
-------- -------
person to the extent that any Loss results from such person selling Common
Stock (i) to a person to whom there was not sent or given, at or prior to
the written confirmation of the sale of such shares, a copy of the
prospectus, as most recently amended or supplemented, if the Buyer has
previously furnished or made available copies thereof or (ii) following
written notice by the Buyer of an event described in Section 4(c) or 4(e).
5
(b) to the extent permitted by law, each selling stockholder agrees to
indemnify and hold harmless the Buyer, the officers, directors, employees,
agents and representatives of the Buyer, and each person, if any, who
controls the Buyer within the meaning of the Securities Act or the Exchange
Act, against any Losses to the extent that any such Losses arise out of or
are based upon and in conformity with information furnished by such
stockholder specifically for use in such registration statement; and such
selling stockholder agrees to reimburse any legal or other expenses as
reasonably incurred by the Buyer and any such officer, director, employee,
agent, representative, or controlling person, in connection with
investigating or defending any such Loss; provided, however, that the
-------- -------
foregoing indemnity shall not apply to amounts paid in settlement of any
such Loss if such settlement is effected without the consent of such
stockholder, which consent shall not be unreasonably withheld; provided,
--------
further, that, in no event shall any indemnity under this subsection 7(b)
-------
exceed the sales price of the Restricted Stock sold by such stockholder
under the registration statement; and
(c) promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 7, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right to retain
-------- -------
its own counsel, with the reasonably incurred fees and expenses of one such
counsel to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would
be inappropriate under applicable standards of professional conduct due to
actual or potential conflicting interests between such indemnified party
and any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within a
reasonable time after the commencement of any such action, shall not
relieve such indemnifying party of any liability to the indemnified party
under this Section 7 with respect to such action unless and only to the
extent prejudicial to its ability to defend such action, and the omission
so to deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than
under this Section 7 of with respect to any other action.
.8. SEC Reporting. With a view to making available to the holders of
-------------
Restricted Stock the benefits of certain rules and regulations of the Commission
which may permit the sale of the Restricted Securities to the public without
registration, the Buyer agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are understood
and defined in Commission Rule 144 or any similar or analogous rule
promulgated under the Securities Act;
(b) File with the Commission, in a timely manner, all reports and other
documents required of the Buyer under the Exchange Act;
(c) So long as the holders own any Restricted Stock, furnish to the holders
forthwith upon request: a written statement by the Buyer as to its
compliance with the reporting requirements of said Rule 144 under the
Securities Act, and of the Exchange Act, a copy of the
6
most recent annual or quarterly report of the Buyer; and such other reports
and documents as a holder of Restricted Stock may reasonably request in
availing itself of any rule or regulation of the Commission allowing it to
sell any such securities without registration.
.9. Miscellaneous.
-------------
(a) Any notice or other communication required or permitted hereunder shall be
in writing and shall be deemed given when so delivered in person, by
overnight courier, by facsimile transmission (with receipt confirmed by
telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
(i) if to the Buyer, to:
CMG Information Services, Inc.
100 Brickstone Square, 1st Floor
Andover, MA 01810
Attention: Chief Financial Officer
Telephone: 781-684-3660
Facsimile: 781-684-3172
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108-3190
Attention: William Williams II
Telephone: 617-573-0100
Facsimile: 617-227-4420
(ii) if to a current holder of Restricted Stock, to:
InSolutions Incorporated
2940 Kifer Road
Santa Clara, CA 95051
Attention: President
Telephone: 408-986-6344
Facsimile: 408-986-6344
7
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Christopher J. Ozburn
Telephone: 650-493-9300
Facsimile: 650-493-6811
(iii) if to any subsequent holder of Restricted Stock, at the address that
has been furnished to the Buyer in writing, or, in any case, at such other
address or addresses as shall have been furnished in writing to the Buyer (in
the case of a holder of Restricted Stock) or to the holders of Restricted Stock
(in the case of the Buyer) in accordance with the provisions of this paragraph.
(b) This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware without regard to choice of law provisions.
(c) This Agreement may not be amended or modified, and no provision hereof may
be waived, without the written consent of the Buyer and the holders of at
least a majority of the outstanding shares of Restricted Stock.
(d) This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
(e) The obligations of the Buyer to register shares of Restricted Stock, or to
keep a registration statement including shares of Restricted Stock
effective, under Sections 2 or 3 shall terminate with respect to each
holder upon such time as all of the holder's Merger Shares are eligible for
sale during a single three month period under Rule 144.
(f) The rights hereunder of the holder may be assigned to a transferee of the
Restricted Stock as long as: (i) the Buyer is, within thirty (30) days
following such transfer, furnished with written notice of the name and
address of such transferee, (ii) immediately following such transfer, the
further disposition of Restricted Stock is restricted under the Securities
Act, (iii) the transferee agrees in writing with the Buyer to be bound by
all of the provisions hereof and (iv) such transfer is made in accordance
with the applicable requirements of the Lock-Up. No rights under this
Agreement shall be assigned to any person or entity to whom less than all
of the Restricted Stock held by transferor are transferred, unless such
transfer is made in connection with distributions without consideration,
such as by a partnership to its partners.
(g) If any provision of this Agreement shall be held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability shall attach
only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement,
and this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
8
Please indicate your acceptance of the foregoing by signing and returning the
enclosed counterpart of this letter, whereupon this Agreement shall be a binding
agreement between the Buyer and you.
CMG INFORMATION SERVICES, INC.
By
---------------------------------
Name: Andrew J. Hajducky III
Title: Chief Financial Officer
9
AGREED TO AND ACCEPTED as of the date first above written.
---------------------------------
(Name of Shareholder)
---------------------------------
(Signature)
---------------------------------
(Print Name)
---------------------------------
(Title, if applicable)
Shareholder's Address for Notice:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
10
SCHEDULE I
Robert F. Lee
Sam L. Williams
K&G Consulting, Inc.
11
EXHIBIT 10.69
CMG @ VENTURES II LLC
OPERATING AGREEMENT
(A DELAWARE LIMITED LIABILITY COMPANY)
CMG @ VENTURES II LLC
OPERATING AGREEMENT
TABLE OF CONTENTS
-----------------
Page No.
--------
ARTICLE ONE THE COMPANY........................................................................ - 1 -
Section 1.1 Organization; Name................................................................. - 1 -
------------------
Section 1.2 Purpose and Character of Business.................................................. - 1 -
---------------------------------
Section 1.3 Place of Business; Registered Agent................................................ - 2 -
-----------------------------------
Section 1.4 Term............................................................................... - 2 -
----
Section 1.5 Statutory Compliance; Qualification In Other Jurisdictions......................... - 2 -
----------------------------------------------------------
ARTICLE TWO MEMBERS AND CAPITAL CONTRIBUTIONS.................................................. - 3 -
Section 2.1 Capital Commitments and Contributions.............................................. - 3 -
-------------------------------------
Section 2.2 Admission of Additional Members.................................................... - 3 -
-------------------------------
Section 2.3 Capital Accounts and Revaluations.................................................. - 3 -
---------------------------------
Section 2.4 No Rights to Demand Return of Capital Contributions................................ - 4 -
---------------------------------------------------
Section 2.5 Liabilities of Members............................................................. - 4 -
----------------------
ARTICLE THREE ALLOCATIONS; DISTRIBUTIONS......................................................... - 5 -
Section 3.1 Net Operating Profits and New Operating Losses-Allocation.......................... - 5 -
---------------------------------------------------------
Section 3.2 Capital Gains and Capital Losses with Respect to
------------------------------------------------
Portfolio Securities-Allocation............................................... - 6 -
-------------------------------
Section 3.3 Special Allocation Rules........................................................... - 8 -
------------------------
Section 3.4 Corrective Allocations............................................................. - 9 -
----------------------
Section 3.5 Tax Allocations.................................................................... - 9 -
---------------
Section 3.6 Distributions Prior to Liquidation................................................. - 10 -
----------------------------------
Section 3.7 Distributions Upon Liquidation..................................................... - 10 -
------------------------------
Section 3.8 Distributions of Securities in Kind................................................ - 11 -
-----------------------------------
Section 3.9 Valuation.......................................................................... - 12 -
---------
ARTICLE FOUR MANAGEMENT; PAYMENT OF EXPENSES.................................................... - 13 -
Section 4.1 Description of Managing Members.................................................... - 13 -
-------------------------------
Section 4.2 Management by the Managing Members................................................. - 13 -
----------------------------------
Section 4.3 Actions Requiring Member Consent................................................... - 14 -
--------------------------------
Section 4.4 Indemnification.................................................................... - 15 -
---------------
Section 4.5 Payment of Fees and Expenses....................................................... - 15 -
----------------------------
ARTICLE FIVE MANAGING MEMBERS................................................................... - 15 -
Section 5.1 Managing Members; Rights Thereof................................................... - 15 -
--------------------------------
-i-
Section 5.2 Award and Vesting of Carried Interest Percentages.................................. - 16 -
-------------------------------------------------
Section 5.3 Termination of Employment and Partnership Status................................... - 18 -
------------------------------------------------
Section 5.4 Change of Control.................................................................. - 20 -
-----------------
Section 5.5 No Recruitment or Solicitation..................................................... - 24 -
------------------------------
Section 5.6 Non-Disclosure and Invention Assignment Agreement.................................. - 24 -
-------------------------------------------------
Section 5.7 Admission of Additional Managing Members........................................... - 24 -
----------------------------------------
ARTICLE SIX OTHER ACTIVITIES OF MEMBERS; CONFLICTS OF INTEREST................................. - 25 -
Section 6.1 Commitment of Members.............................................................. - 25 -
---------------------
Section 6.2 Agreements with Portfolio Companies................................................ - 25 -
-----------------------------------
Section 6.3 Obligations and Opportunities for Members.......................................... - 25 -
-----------------------------------------
Section 6.4 Conflicts of Interest.............................................................. - 26 -
---------------------
ARTICLE SEVEN TRANSFERABILITY.................................................................... - 26 -
Section 7.1 Assignment of Member Interest...................................................... - 26 -
-----------------------------
Section 7.2 Restrictions on Transfer........................................................... - 27 -
------------------------
ARTICLE EIGHT LIABILITY OF MEMBERS; INDEMNIFICATION.............................................. - 28 -
Section 8.1 Liability of Managing Members...................................................... - 28 -
-----------------------------
Section 8.2 Liability of Capital Members....................................................... - 29 -
----------------------------
Section 8.3 Indemnification of the Managing Members and the Capital Member..................... - 29 -
--------------------------------------------------------------
Section 8.4 Payment of Expenses................................................................ - 30 -
-------------------
ARTICLE NINE DISSOLUTION, LIQUIDATION AND
TERMINATION OF THE COMPANY.................................................... - 30 -
Section 9.1 Events Causing Dissolution......................................................... - 30 -
--------------------------
Section 9.2 Wind Up and Liquidation............................................................ - 31 -
-----------------------
ARTICLE TEN CONSENTS, VOTING AND MEETINGS...................................................... - 31 -
Section 10.1 Method of Giving Consent........................................................... - 31 -
------------------------
Section 10.2 Meetings........................................................................... - 31 -
---------
Section 10.3 Submissions to Members............................................................. - 32 -
----------------------
ARTICLE ELEVEN BOOKS AND RECORDS; ACCOUNTING; TAX ELECTIONS....................................... - 32 -
Section 11.1 Accounting for the Company......................................................... - 32 -
--------------------------
Section 11.2 Books and Records.................................................................. - 32 -
-----------------
Section 11.3 Reports to Members................................................................. - 32 -
------------------
Section 11.4 Elections.......................................................................... - 33 -
---------
ARTICLE TWELVE DEFINITIONS........................................................................ - 33 -
ARTICLE THIRTEEN MISCELLANEOUS PROVISIONS........................................................... - 38 -
Section 13.1 Appointment of Tax Matters Partner................................................. - 38 -
----------------------------------
-ii-
Section 13.2 Notification....................................................................... - 38 -
------------
Section 13.3 Amendments......................................................................... - 38 -
----------
Section 13.4 Binding Provisions................................................................. - 39 -
-----------------
Section 13.5 No Waiver.......................................................................... - 39 -
---------
Section 13.6 Certification of Interests......................................................... - 39 -
--------------------------
Section 13.7 Legends............................................................................ - 39 -
-------
Section 13.8 Applicable Law..................................................................... - 39 -
--------------
Section 13.9 Separability of Provisions......................................................... - 39 -
--------------------------
Section 13.10 Entire Agreement................................................................... - 40 -
----------------
Section 13.11 Section Titles..................................................................... - 40 -
--------------
Section 13.12 Counterparts....................................................................... - 40 -
------------
Section 13.13 Variation of Pronouns.............................................................. - 40 -
---------------------
-iii-
CMG @ VENTURES II LLC
OPERATING AGREEMENT
THIS OPERATING AGREEMENT OF CMG @ VENTURES II LLC (the "Company"), dated as
of February 26, 1998 is among CMG@ Ventures Capital Corp., a Delaware
corporation ("@Ventures Capital"), CMG@Ventures, Inc., a Delaware corporation
("@Ventures, Inc." and together with @Ventures Capital Corp., the "Capital
Members") and David S. Wetherell, Guy A. Bradley, Jonathan Callaghan, Andrew
Hajducky and Peter H. Mills (collectively, the "Managing Members" and together
with the Capital Members, the "Members" and each individually a "Member").
Definitions of certain terms used in this Agreement are contained in Article
Twelve.
RECITALS
WHEREAS, the Company has been formed as a limited liability company pursuant
to the Limited Liability Company Act of the State of Delaware, 6 Del. C. ch. 18
et. seq., by the filing on October 9, 1996 of a Certificate of Formation in the
- - - --- ----
Office of the Secretary of State of the State of Delaware; and
WHEREAS, the Members wish to set out fully their respective rights,
obligations and duties with respect to the Company.
NOW THEREFORE, in consideration of the mutual covenants expressed herein,
the parties hereto hereby agree as follows:
ARTICLE ONE
THE COMPANY
Section 1.1 Organization; Name.
------------------
The Company has been organized as a limited liability company pursuant to
the provisions of the Act. The name of the Company is CMG @ VENTURES II LLC.
The business of the Company may be conducted under any other name designated in
writing by the Managing Member upon compliance with applicable law.
Section 1.2 Purpose and Character of Business.
---------------------------------
The Company's purpose and character of business shall be to (a) make
investments directly or through holding companies in equity and equity-related
securities, notes, debentures, limited partnership interests, limited liability
company interests, or other equity or debt instruments or other interests or
investments of any nature whatsoever, including, without limitation, notes,
-1-
debentures and common or preferred stock (whether or not convertible or
exchangeable), and rights, options and warrants to purchase notes, debentures
and common or preferred stock or other securities or debt instruments, or direct
or indirect interests in tangible or intangible assets of any kind whatsoever
(all of the foregoing being hereafter referred to as "Investments" or as
"Portfolio Securities"), in privately or publicly held or solely owned operating
or investment businesses or other entities or parts thereof or assets, (b)
manage, supervise and dispose of such investments, receiving the profits, losses
and income from such activities and engaging in all other activities that are
necessary, incidental and ancillary thereto, and (c) pending utilization or
disbursement of funds, to invest such funds in Temporary Investments.
Notwithstanding anything to the contrary contained herein, the Members
acknowledge and agree that the Company shall not make any Investments after the
date on which @Ventures III, L.P. completes the initial closing of the sale of
limited partnership interests, except that this limitation shall not restrict
the Company's right to make Follow-on Investments after such date.
Section 1.3 Place of Business; Registered Agent.
-----------------------------------
The principal place of business of the Company shall be maintained at 100
Brickstone Square, Andover, Massachusetts 01801. The Company shall maintain a
registered agent in the State of Delaware. The name and address of the resident
agent of the Company in the State of Delaware and the address of the registered
office of the Company in the State of Delaware is The Corporation Trust Company,
1209 Orange Street, Wilmington, Delaware 19801. The Managing Members may at any
time change the location of the Company's principal place of business, establish
additional offices and places of business and change the registered agent and
registered office of the Company and upon any such change shall give prompt
notice to each Member of any such change.
Section 1.4 Term.
----
The Company shall continue in full force and effect until December 31,
2007, unless extended or earlier terminated pursuant to Section 8.1.
Section 1.5 Statutory Compliance; Qualification In Other Jurisdictions.
----------------------------------------------------------
The Company shall exist under and be governed by, and this Agreement shall
be construed in accordance with, the applicable laws of the State of Delaware
including the Act. The Managing Members promptly shall make such filings as
they believe necessary or as are required by applicable law to give effect to
the provisions of this Agreement and to cause the Company to be treated as a
limited liability company under the laws of the State of Delaware. The Managing
Members shall cause the Company to be registered or qualified under its own name
or under an assumed or fictitious name pursuant to a foreign limited liability
company statute or similar laws in any jurisdictions in which the Company owns
property or transacts business if such registration or qualification is
necessary to protect the limited liability of the
-2-
Members or to permit the Company lawfully to own property or transact business
in such jurisdiction.
ARTICLE TWO
MEMBERS AND CAPITAL CONTRIBUTIONS
Section 2.1 Capital Commitments and Contributions.
-------------------------------------
(a) The Capital Members hereby commit and agree to make cash
contributions to the capital of the Company in such amounts as may be determined
from time to time by the Capital Members in consultation with the Managing
Members, which cash contributions shall be allocated between the Capital Members
in proportion to their respective Percentages in Interest as set forth on
Schedule I attached hereto. The amount of such commitment is referred to herein
- - - ----------
as a "Capital Commitment." The amount of capital contributed pursuant to such
Capital Commitment is referred to as "Capital Contributions." The Managing
Members shall call for payment of the Capital Members' Capital Commitment as
needed to fund the Company's investments in Portfolio Companies and other
permitted uses under this Agreement. All such calls shall be made in writing
and shall specify the intended use of such called capital. Such call shall be
made at least ten (10) Business Days before the date on which the installment
payable in response to that call is due. With respect to the funding of the
initial Capital Commitment of the Capital Members hereunder, the Capital Members
shall fund such Capital Commitment by contributing to the Company the equity
securities of the companies listed on Schedule 2 attached hereto with a cost
----------
basis set forth on such Schedule. No Capital Contribution returned to the
Capital Members shall be callable by the Managing Members pursuant to this
Section 2.1 thereafter.
(b) From time to time, the Members, acting unanimously, may
determine that capital in excess of the aggregate Capital Commitment of the
Capital Members is required in order for the Company to meet its obligations and
to pursue its business activities. The Members shall agree on the amount of any
additional capital required to be contributed and the timing of the funding of
such capital by the Members.
Section 2.2 Admission of Additional Members.
-------------------------------
Additional Members may be admitted to the Company at such times and on such
terms as shall be determined by a Majority of the Managing Members.
Section 2.3 Capital Accounts and Revaluations.
---------------------------------
The Company shall establish and maintain a capital account (a "Capital
Account") for each Member. A Member's Capital Account shall be (i) increased by
(a) the amount of such Member's Capital Contribution, (b) such Member's
allocations of Profit pursuant to Section 3.1
-3-
and (c) items of income or gain specially allocated to such Member pursuant to
Sections 3.2 or 3.3, (ii) decreased by (x) the amount of money and the fair
market value of any property distributed to such Member by the Company, (y) such
Member's allocations of Loss pursuant to Section 3.1 and (z) items of loss,
deduction or expenditure specially allocated to such Member pursuant to Sections
3.2 or 3.3, and (iii) adjusted to reflect any liabilities that are assumed by
such Member or the Company (within the meaning of Section 1.704-1(b)(2)(iv)(c)
of the Regulations), all in accordance with Sections 1.704-1(b)(2)(iv) and
1.704-2 of the Regulations. Except as otherwise provided in the Regulations, a
transferee of all or a portion of a Member's Interest shall succeed to the
Capital Account of his transferor to the extent allocable to the transferred
Interest.
Notwithstanding any provision of this Agreement other than Section 3.6, the
Managing Members may revalue Company properties, and make corresponding
adjustments to the Members' Capital Accounts, as prescribed by the Regulations
in connection with any contribution to or distribution by the Company of more
than a de minimis amount of money or other property in exchange for an interest
- -------
in the Company unless the Managing Members reasonably determine that such
revaluations and adjustments are not necessary to reflect the economic interests
of the Members in the Company. In addition, the book values of Company
properties shall be increased or decreased, as the case may be, to reflect any
adjustments to the adjusted tax bases of such properties pursuant to Section
734(b) or Section 743(b) of the Code to the extent that such basis adjustments
(i) are taken into account in determining Capital Account balances pursuant to
Section 3.2.3 and (ii) have not been reflected in adjustments to the book values
of such properties pursuant to the preceding sentence of this Section 2.3.
Section 2.4 No Rights to Demand Return of Capital Contributions.
---------------------------------------------------
No Member shall be entitled to withdraw any part of its or his Capital
Account or Capital Contribution, to receive any distribution from the Company or
to cause a partition of the assets of the Company except as expressly provided
in this Agreement. No Member shall be paid interest on any Capital Contribution
or receive any salary or drawing with respect to its Capital Contribution or
Capital Account or for services rendered on behalf of the Company or otherwise
in its capacity as a Member, except as otherwise provided in this Agreement.
Section 2.5 Liabilities of Members.
----------------------
Except as otherwise expressly set forth herein or in the Act, the Members
shall not have, and the Managing Members shall at all times conduct their
affairs and the affairs of the Company so that no Member shall have, any
personal liability whatsoever in his capacity as a Member, whether to the
Company, to any Member or to the creditors of the Company, for the debts,
liabilities, contracts or other obligations of the Company or for any losses of
the Company.
-4-
ARTICLE THREE
ALLOCATIONS; DISTRIBUTIONS
Section 3.1 Net Operating Profits and Net Operating Losses-Allocation.
---------------------------------------------------------
(a) Prior to the allocation of any Net Realized Capital Gains or
Net Realized Capital Losses for each Fiscal Year as provided in Section 3.2
below, Net Operating Profits, if any, of the Company for each Fiscal Year shall
be allocated to the Members as follows and in the following order of priority as
of the end of such Fiscal Year:
(i) First, so much of such Net Operating Profits for such
Fiscal Year as shall not exceed the @Ventures, Inc. Loss, if any,
as of the end of the preceding Fiscal Year shall be allocated to
@Ventures, Inc. to cover part or all of such @Ventures, Inc. Loss.
(ii) Second, so much of any remaining Net Operating Profits
for such Fiscal Year as shall not exceed the Capital Members Loss,
if any, as of the end of the preceding Fiscal Year shall be
allocated to all of the Capital Members in proportion to their
Percentages in Interests as set forth in Schedule I.
----------
(iii) Third, so much of any remaining Net Operating Profits
for such Fiscal Year as shall not exceed the Managing Member Loss,
if any, as of the end of the preceding Fiscal Year shall be
allocated to the Managing Members as a group to be further
allocated among the Managing Members pro rata according to each
Managing Member's Carried Interest Percentage and added to their
respective Capital Accounts to cover part or all of such Managing
Member Loss.
(iv) Fourth, the balance of any remaining Net Operating
Profits, if any, for such Fiscal Year shall be allocated as
follows: (A) twenty percent (20%) shall be allocated to the
Managing Members as a group to be further allocated among the
Managing Members pro rata according to each Managing Member's
Carried Interest Percentage and added to their respective Capital
Accounts, and (B) eighty percent (80%) shall be allocated to
@Ventures, Inc. and added to its Capital Account
(b) Prior to the allocation of any Net Realized Capital Gains or
Net Realized Capital Losses for each Fiscal Year as provided in Section 3.2
below, Net Operating Losses, if any, of the Company for each Fiscal Year shall
be allocated to the Members as follows and in the following order of priority as
of the end of such Fiscal Year:
(i) First, such Net Operating Losses for such Fiscal Year
shall be allocated as follows: (A) twenty percent (20%) of such Net
Operating Losses (but
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not to exceed the Managing Members' positive account balances, if
any, existing in their Capital Accounts as of the end of the
preceding Fiscal Year) shall be allocated to the Managing Members
as a group as a Managing Member Loss to be further allocated
among such Managing Members in proportion to each Managing
Member's Carried Interest Percentage and debited pro rata to
their respective Capital Accounts, and (B) eighty percent (80%)
of such Net Operating Losses shall be allocated to @Ventures,
Inc. and added to its Capital Account.
(ii) Second, the balance of such Net Operating Losses as
shall exceed (A) the positive account balances, if any, existing
in the Managing Members' Capital Accounts as of the end of the
preceding Fiscal Year and (B) the excess of the Unrecovered
Capital of the Capital Members of the Capital Members Loss, if
any, as of the end of the preceding Fiscal Year, shall be
allocated to @Ventures, Inc. as an @Ventures, Inc. Loss.
Section 3.2 Capital Gains and Capital Losses with Respect to Portfolio
----------------------------------------------------------
Securities-Allocation.
---------------------
(a) Following the allocation of any Net Operating Profits or Net
Operating Losses for each Fiscal Year as provided in Section 3.1 above, Net
Realized Capital Gains, if any, of the Company for each Fiscal Year shall be
allocated to the Members as follows and in the following order of priority as of
the end of such Fiscal Year.
(i) First, so much of such Net Realized Capital Gains
for such Fiscal Year as shall not exceed the @Ventures, Inc.
Loss, if any, as of the end of the preceding Fiscal Year (as
increased or decreased by the allocation of any Net Operating
Losses or Net Operating Profits for the current Fiscal Year)
shall be allocated to @Ventures, Inc. to cover part or all of
such @Ventures, Inc. Loss.
(ii) Second, so much of any remaining Net Realized
Capital Gains for such Fiscal Year as shall not exceed the
Capital Member Loss, if any, as of the end of the preceding
Fiscal Year (as increased or decreased by the allocation of any
Net Operating Losses or Net Operating Profits for the current
Fiscal Year) shall be allocated to the Capital Members in
proportion to their Percentages in Interest to cover part or all
of such Capital Member Loss.
(iii) Third, so much of any remaining Net Realized Capital
Gains for such Fiscal Year as shall not exceed the Managing
Member Loss, if any, as of the end of the preceding Fiscal Year
(as increased or decreased by the allocation of any Net Operating
Losses or Net Operating Profits for the current Fiscal Year)
shall be allocated to the Managing Members as a group to be
further allocated among the Managing Members pro rata according
to each Managing Member's Carried
-6-
Interest Percentage and added to their respective Capital
Accounts to cover part or all of such Managing Member Loss.
(iv) Fourth, the balance of such Net Realized Capital Gains,
if any, for such Fiscal Year shall be allocated as follows: (A)
twenty percent (20%) shall be allocated to the Managing Members
as a group to be further allocated among the Managing Members pro
rata according to each Managing Member's Carried Interest
Percentage and added to their respective Capital Accounts, and
(B) eighty percent (80%) shall be allocated pro rata to the
Capital Members as a group to be further allocated between the
Capital Members according to each Capital Member Percentage in
Interest as set forth in Schedule 1, and added to its Capital
----------
Account.
(b) Following the allocation of any Net Operating Profits or Net
Operating Losses for each Fiscal Year as provided in Section 3.1 above, Net
Realized Capital Losses, if any, of the Company for each Fiscal Year shall be
allocated to the Members as follows and in the following order of priority as of
the end of such Fiscal Year:
(i) First, such Net Realized Capital Losses for such Fiscal
Year shall be allocated as follows: (A) twenty percent (20%) of
such Net Realized Capital Losses (but not to exceed the Managing
Members' positive account balances, if any, existing in their
Capital Accounts as of the end of the preceding Fiscal Year as
increased or decreased by the allocation of any Net Operating
Losses or Net Operating Profits for the current Fiscal Year)
shall be allocated to the Managing Members as a group as a
Managing Member Loss to be further allocated among the Managing
Members according to each Managing Member's Carried Interest
Percentage and debited pro rata to their respective Capital
Accounts, and (B) eighty percent (80%) of such Net Realized
Capital Losses (but not to exceed the excess of the Unrecovered
Capital of the Capital Members over the Capital Member Loss, if
any, as of the end of the preceding Fiscal Year as increased or
decreased by the allocation of any Net Operation Losses or Net
Operating Profits for the current Fiscal Year) shall be allocated
to the Capital Members as a Capital Member Loss in proportion to
their respective Percentages in Interest as set forth in Schedule
--------
I and debited to their respective Capital Accounts.
-
(ii) Second, the balance of such Net Realized Capital Losses
as shall exceed (A) the positive account balances, if any,
existing in the Managing Members' Capital Accounts as of the end
of the preceding Fiscal Year and (B) the excess of the
Unrecovered Capital of the Capital Members over the Capital
Member Loss, if any, as of the end of the preceding Fiscal Year,
shall be allocated to @Ventures, Inc. as an @Ventures, Inc. Loss.
Section 3.3 Special Allocation Rules.
------------------------
-7-
Before any allocations are made pursuant to Section 3.1 or 3.2, the
following special allocations shall be made in the following order
3.3.1 If any Member unexpectedly receives any adjustment, allocation or
distribution described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6) of the Regulations which causes it
to have an, or increases the amount of its, Adjusted Capital Account Deficit,
items of Company income and gain shall be specially allocated to such Member in
an amount and manner sufficient to eliminate, to the extent required by the
Regulations, such Member's Adjusted Capital Account Deficit as quickly as
possible, provided that an allocation pursuant to this Section 3.3.1 shall be
made to a Member only if and to the extent that such Member would have an
Adjusted Capital Account Deficit after all other allocations provided for in
this Article Three have been tentatively made as if this Section 3.3.1 were not
in this Agreement. This Section 3.2.1 is intended to constitute a "qualified
income offset" as defined in Section 1.704-1(b)(2)(ii)(d) of the Regulations.
3.3.2 If any Member has an Adjusted Capital Account Deficit as of the
end of any Fiscal Year or other accounting period of the Company that is in
excess of the amount such Member is deemed to be obligated to restore to his
Capital Account pursuant to the penultimate sentences of Sections 1.704-2(g)(1)
and 1.704-2(h)(5) of the Regulations (the so-called deficit restoration rule),
items of Company income and gain in the amount of such excess shall be specially
allocated to such Member as quickly as possible, provided that an allocation
pursuant to this Section 3.3.2 shall be made to a Member only if and to the
extent that such Member would have an Adjusted Capital Account Deficit that is
in excess of the amount such Member is deemed to be obligated to restore to his
Capital Account pursuant to the penultimate sentences of Sections 1.704-2(g)(1)
and 1.704-2(h)(5) of the Regulations after all other allocations provided for in
this Article Three have been tentatively made as if this Section 3.3.2 were not
in this Agreement.
3.3.3 To the extent an adjustment to the adjusted tax basis of any asset
of the Company pursuant to Section 734(b) or Section 743(b) of the Code is
required, pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations, to be
taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases the basis of the asset), and such gain or loss shall be specially
allocated to the Members in a manner that is consistent with the manner in which
their Capital Accounts are required to be adjusted pursuant to Section 1.704-
1(b)(2)(iv)(m) of the Regulations.
3.3.4 Notwithstanding Section 3.1 or 3.2, an allocation of Loss shall
not be made to a Member to the extent that such allocation would cause such
Member to have an Adjusted Capital Account Deficit. An allocation of Loss that
would be made to a Member but for this Section 3.3.4 shall instead be made to
the other Members to the extent of and in proportion to the amounts of such loss
that they could then be allocated without themselves having Adjusted Capital
Account Deficits (or, if such other Members would not have Adjusted Capital
Account
-8-
Deficits, in proportion to their respective Percentages of Contribution Capital)
and thereafter to the Capital Members.
Section 3.4 Corrective Allocations.
----------------------
The allocations set forth in Section 3.3 (the "Regulatory Allocations") are
intended to comply with certain requirements of Sections 1.704-1(b) and 1.704-2
of the Regulations. Notwithstanding any other provision of this Article Three,
the Regulatory Allocations shall be taken into account in making allocations of
items of income, gain, loss, deduction and expenditure among the Members so
that, to the extent possible consistent with the Code and the Regulations and on
a cumulative basis, the respective net amounts of such allocations of other
items and the Regulatory Allocations to the Members are equal to the respective
net amounts that would have been allocated to the Members had no Regulatory
Allocations been made. The Managing Member shall apply this Section 3.4 at such
times and in whatever order, and shall divide allocations made pursuant to this
Section 3.4 among the Members in such manner, as it determines is likely to
minimize any economic distortions that might otherwise be caused by the
Regulatory Allocations.
Section 3.5 Tax Allocations.
---------------
3.5.1 Tax allocations for each fiscal year or other accounting period of
the Company shall be made consistent with the allocations of Profit and Loss and
items specially allocated pursuant to Sections 3.3 and 3.4 for such year or
period, except that, solely for tax purposes, (i) items of income, gain, loss
and deduction with respect to Company assets reflected hereunder in the Members'
Capital Accounts and on the books of the Company at values that differ from the
Company's adjusted tax bases in such assets shall be allocated among the Members
so as to take account of those differences pursuant to the "traditional method
with curative allocations" set forth in Section 1.704-3(c) of the Regulations
and in such manner as the Managing Members reasonably determine is in accordance
with the principles of Section 704(c) of the Code and with Sections 1.704-
1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g), 1.704-1(b)(4)(i) and 1.704-3 of the
Regulations, and (ii) adjustments made pursuant to Section 734(b) or Section
743(b) of the Code shall be taken into account.
3.5.2 The Members are aware of the federal income tax consequences of
the allocations made by this Article Three and agree to report their shares of
Company income and loss for income tax purposes in accordance with this Article
Three.
Section 3.6 Distributions Prior to Liquidation.
----------------------------------
3.6.1 Subject to Sections 3.7, 3.8 and Article Five, Available Cash for
each fiscal year (or fractional portion thereof) shall be distributed to the
Members at such time or times determined by the Managing Members (but not less
often than annually) in proportion to their respective allocations of Net
Operating Profits and Net Realized Capital Gains as determined
-9-
pursuant to ARTICLE III; provided, however, that Available Cash may first be
applied to the payment of expenses incurred by the Company in the sale or other
disposition of Portfolio Securities or any other expenses with respect to which
the Company does not receive sufficient cash to pay such expenses. In the event
the Company is unable, for any reason, to pay any portion of such expenses, the
amount not paid shall be carried forward, as a priority item, without interest,
to be paid out of Available Cash or on liquidation. Final distributions of
Available Cash for each Fiscal Year, determined in accordance with the
provisions of this Section 3.6, shall be made as soon as practicable following
such Fiscal Year.
3.6.2 In addition to any other obligations hereunder including that set
forth in Schedule 5.2(h), the Managing Members shall endeavor (if practical and
reasonable to do so in light of the circumstances of the Company) to distribute,
if available, sufficient amounts of Available Cash to the Members in accordance
with this Section 3.6 to enable such Members to make timely payment of any
Federal, state, local and foreign income tax liabilities incurred by them as a
result of their participation in the Company.
Section 3.7 Distributions Upon Liquidation.
------------------------------
3.7.1 Upon the liquidation of the Company, the assets of the Company
shall first be applied to the payment of, or the establishment of adequate
reserves or other provision for the payment of, the debts and obligations of the
Company. Thereafter, there shall be made a final allocation of Profit or Loss,
as the case may be, and other items to the Members' Capital Accounts in
accordance with Sections 3.1 through 3.4. The assets of the Company (or the
proceeds of sales or other dispositions in liquidation of assets of the Company)
remaining after the payment or other provision for the Company's debts and
obligations shall then be distributed to the Members in proportion to the
positive balances in their Capital Accounts determined after the final
allocation of Profit or Loss and other items to Capital Accounts has been made.
Amounts reserved or otherwise set aside in connection with the Company's
liquidation for the payment of Company debts and obligations shall be
distributed to the Members, in the same proportions that such amounts would have
been distributed hereunder if distributed upon the Company's liquidation, as
soon as practicable. No Member shall be required or otherwise obligated to
restore or contribute any deficit balance in such Member's Capital Account upon
the liquidation of the Company.
3.7.2 The Managing Members, or an authorized liquidating trustee if one
is appointed, may distribute assets of the Company in kind upon the liquidation
of the Company. Any asset to be distributed in kind shall be distributed on the
basis of its Fair Market Value as determined in accordance with the provisions
of Section 3.9. For purposes of making the final allocation of Profit or Loss,
and other items required by Section 3.7.1, any asset other than cash that is to
be distributed to one or more Members in kind shall be treated as having then
been sold by the Company for its Fair Market Value as determined in accordance
with the provisions of Section 3.9. Each Member who receives an interest in any
Company asset distributed hereunder
-10-
shall hold his interest in such asset as a tenant-in-common with all other
Members who receive an interest in such asset.
Section 3.8 Distributions of Securities in Kind.
-----------------------------------
3.8.1 The Managing Members, upon the affirmative vote of a Majority of
the Managing Members, shall distribute to the Members Portfolio Securities which
are Marketable Securities, unless the Capital Member determines that a
distribution of such securities would not serve the best interests of the
Company. The Managing Members shall notify the Members each time a Portfolio
Security becomes a Marketable Security. The Managing Members shall not
distribute Portfolio Securities that are not Marketable Securities at any time
other than upon the liquidation of the Company.
3.8.2 With respect to securities distributed in kind to the Members in
liquidation or otherwise, (i) any unrealized appreciation or unrealized
depreciation in the values of such securities shall be deemed to be realized by
the Company immediately prior to the liquidation or other distribution event;
and (ii) such appreciation or depreciation shall be allocated to the Members as
part of the allocation of Profit or Loss, as the case may be, for the year of
the distribution in accordance with Sections 3.1 through 3.4 hereof, and
treating any property so distributed as a distribution of an amount in cash
equal to the Fair Market Value of the property determined pursuant to Section
3.9. For the purposes of this Section 3.8.2, "unrealized appreciation" or
"unrealized depreciation" shall mean the difference between the fair market
value of such assets and the adjusted basis of such assets for Federal income
tax purposes (or, in the case of any asset that is reflected on the books of the
Company at a value that is different from the Company's Federal tax basis in
such asset in compliance with the Regulations, the value of such asset as shown
on the Company's books). This Section 3.8.2 is merely intended to provide a
rule for allocating unrealized gains and losses upon a liquidation or other
distribution event, and nothing contained in this Section 3.8.2 or elsewhere in
this Agreement is intended to treat or cause such distributions to be treated as
sales for value.
3.8.3 The Managing Members may cause certificates evidencing any
securities to be distributed to be imprinted with legends as to such
restrictions on transfers that it may deem necessary, including legends as to
applicable Federal or state securities laws or other legal or contractual
restrictions, and may require any Member to which securities are to be
distributed to agree in writing that such securities will not be transferred
except in compliance with such restrictions and applicable law.
Section 3.9 Valuation.
---------
For all purposes of this Agreement, the Fair Market Value of securities and
other property of the Company shall be determined as follows:
-11-
3.9.1 Marketable Securities shall (i) if traded on a national securities
exchange, be valued at their last sales price on such exchange on which such
Marketable Securities shall have traded on the last trading day on which such
Marketable Securities were traded immediately preceding the date of
determination, or (ii) if the trading of such Marketable Securities is reported
through the National Association of Securities Dealers Automated Quotation
System, such Marketable Securities shall be valued at the last sale price as
shown by the National Association of Securities Dealers Automated Quotation
System on the last trading day on which such Marketable Securities were traded
immediately preceding the date of determination.
3.9.2 All property other than Marketable Securities shall be valued by
the Managing Members in good faith. Factors considered in valuing individual
securities shall include, but need not be limited to, purchase price, estimates
of liquidation value, the price at which Members receiving a distribution of
securities will be able to sell them and the time at which such securities may
be sold, the existence of restrictions on transferability, prices received in
recent significant private placements of securities of the same issuer, prices
of securities of comparable public companies engaged in similar businesses and
changes in the financial condition and prospects of the issuer.
3.9.3 Upon any valuation of securities or other property of the Company
pursuant to Section 3.8, the Managing Members shall notify the Capital Member in
writing of the Fair Market Value of such securities or other property as
determined by the Managing Members in accordance with the provisions of Section
3.9. The Capital Members shall, not more than ten Business Days after the
receipt of such notice from the Managing Members, furnish notice in writing to
the Managing Members stating whether or not it has approved or has not approved
the Managing Members' valuation. If the Capital Members approve such valuation
(or shall have failed to provide the Managing Members with the aforementioned
notice within such ten Business Days), such valuation shall constitute the Fair
Market Value of such property for all purposes hereof. If the Capital Members
does not approve such valuation, and if the Managing Members and the Capital
Members cannot agree on a valuation within five Business Days (or such other
period of time as the Managing Members and the Capital Members may determine) of
the date on which the Capital Members advise the Managing Members that they have
not approved such valuation, the Managing Members and the Capital Members shall
jointly select an independent appraiser who shall be retained to determine, as
promptly as practicable, the Fair Market Value of the property to be
distributed. The Company shall pay the expenses of such appraiser.
-12-
ARTICLE FOUR
MANAGEMENT; PAYMENT OF EXPENSES
Section 4.1 Description of Managing Members.
-------------------------------
The Managing Members of the Company shall initially be David S. Wetherell,
Guy A. Bradley, Jonathan Callaghan, Andrew Hajducky, and Peter H. Mills.
Section 4.2 Management by the Managing Members.
----------------------------------
The management, policy and operation of the Company shall be vested
exclusively in the Managing Members who shall perform all acts and enter into
and perform all contracts and other undertakings which they deem necessary or
advisable to carry out any and all of the purposes of the Company. Except as
may otherwise be required by law, all actions which Managing Members are
permitted or required to take hereunder shall require the approval of a Majority
of the Managing Members. Without limiting the foregoing general powers and
duties, and except as is otherwise expressly set forth herein, the Managing
Members are hereby authorized and empowered on behalf of the Company and, as
relevant herein, is required:
(1) To identify investment opportunities for the Company, negotiate and
structure the terms of such investments, arrange additional financing needed to
consummate such investments and monitor such investments.
(2) To invest the assets of the Company in accordance with the purposes set
forth herein in the securities of any organization, domestic or foreign, without
other limitation as to kind and without other limitation as to marketability of
the securities, and pending such investment, to invest the assets of the Company
in Temporary Investments.
(3) To exercise all rights, powers, privileges and other incidents of
ownership with respect to the Portfolio Securities, including, without
limitation the voting of such Portfolio Securities, the approval of a
restructuring of an investment, participation in arrangements with creditors,
the institution and settlement or compromise of suits and administrative
proceedings, and other similar matters.
(4) To sell, transfer, liquidate or otherwise terminate investments made by
the Company.
(5) To employ or consult brokers, accountants, attorneys, or specialists in
any field of endeavor whatsoever, including, subject to the provisions of
Article Six, such persons or firms who may be Members.
-13-
(6) To deposit any funds of the Company in any bank or trust company or
money market fund provided that, in the case of any bank or trust company such
bank or trust company qualifies as a Financial Institution and in the case of
any money market fund such fund would qualify as a money market fund in which
the Company may make a Temporary Investment, and to entrust to such bank or
trust company any of the securities, monies, documents and papers belonging to
or relating to the Company; provided, however, that from time to time, in order
to facilitate any transaction, any of the said securities, monies, documents and
papers belonging to or relating to the Company may be deposited in and entrusted
to any brokerage firm that is a member of the New York Stock Exchange and which
has minimum net capital of $10 million as calculated in accordance with the
Securities Exchange Act of 1934.
(7) To determine, settle and pay all expenses, debts and obligations of and
claims against the Company and, in general, to make all accounting and financial
determinations and decisions.
(8) To provide bridge financing to Portfolio Companies.
(9) To enter into, make and perform all contracts, agreements and other
undertakings as may be determined to be necessary or advisable or incident to
the carrying out of the foregoing objectives and purposes, the execution thereof
by the Managing Member to be conclusive evidence of such determination.
(10) To execute all other instruments of any kind or character which the
Managing Member determines to be necessary or appropriate in connection with the
business of the Company, the execution thereof by the Managing Member to be
conclusive evidence of such determination.
(11) To make Follow-on Investments in Portfolio Companies from either
Capital Contributions called from the Members pursuant to Section 2.1 or
Available Cash.
(12) To guarantee obligations of Portfolio Companies.
(13) To interpret and construe the terms, conditions and other provisions of
this Agreement or any agreement entered into in connection herewith such
construction or interpretation to be binding on the Members.
Section 4.3 Actions Requiring Member Consent.
--------------------------------
Notwithstanding any other provision of this Agreement, the Managing Members
shall have no authority without the Consent of the Capital Members to (i) do
any act that is in contravention of this Agreement or that is not consistent
with the purposes of the Company, (ii) do any act that would make it impossible
to carry on the ordinary business of the Company, (iii)
-14-
guarantee obligations of Portfolio Companies, (iv) to provide bridge financing
to any Portfolio Company, or (v) invest more than 25% of the aggregate Capital
Commitments in the securities of any one issuer. Other than as set forth in this
Section 4.3 or elsewhere in the Agreement, the Capital Members shall not
participate in the management, operation or control of the Company.
Section 4.4 Indemnification.
----------------
The Managing Members and the Capital Members shall be entitled to indemnity
from the Company for any liability incurred and/or for any act performed by any
of them within the scope of the authority conferred on them, by this Agreement,
and/or for any act omitted to be performed, provided, however, that no
indemnification shall be available in the event that any such Managing Member or
Capital Member shall have been adjudicated in any proceeding not to have acted
in good faith in the reasonable belief that his or her action was in the best
interest of the Company. Indemnification hereunder shall include all reasonable
expenses incurred, including reasonable legal and other professional fees and
expenses.
Section 4.5 Payment of Fees and Expenses.
----------------------------
The Company shall be responsible for and shall pay all fees and reasonable
expenses of the Company, including without limitation: (i) out-of-pocket
expenses incurred and fees paid by the Company or the Managing Members in
connection with the formation of the Company and the offering and distribution
of interests therein; and (ii) expenses which relate to office space, supplies
and other facilities of its business and salary, fees and expenses of officers,
employees, consultants, outside counsel and accountants and similar outside
advisors; provided that, with respect to consummated investments, it is
expected, and the Managing Members will use their reasonable best efforts to
ensure that such fees and expenses are paid by the Portfolio Company in which
the investment is made.
ARTICLE FIVE
MANAGING MEMBERS
Section 5.1 Managing Members; Rights Thereof.
--------------------------------
Set forth on the signature pages hereto are the names of the Managing
Members. Each Managing Member shall possess a Carried Interest Percentage
determined pursuant to this Article Five with respect to such Managing Member's
Vested Units. A Managing Member's Carried Interest Percentage shall, subject to
the provisions of this Article Five, entitle such Managing Member to allocations
of Profits and distributions of Available Cash, Marketable Securities and other
assets of the Company pursuant to Article Three.
-15-
Section 5.2 Award and Vesting of Carried Interest Percentages.
-------------------------------------------------
(a) Each Managing Member shall be awarded units ("Units") by the
Capital Members to participate in the 20% allocation and distribution set forth
in Sections 3.1, 3.2 and 3.6 (the "Carried Interest") in such amounts as the
Capital Members may determine in their sole discretion (except as provided
herein) and set forth in Schedule 3 hereto. Units awarded to each Managing
----------
Member shall entitle such Managing Member to a percentage (the "Carried Interest
Percentage") of the Profit and Loss and the Available Cash, Marketable
Securities and other assets of the Company allocated and distributed to the
Managing Member as determined pursuant to the provisions of this Agreement.
Units awarded to each Managing Member hereunder shall vest with respect to that
particular Managing Member (the "Vested Units") in twenty (20) equal quarterly
cumulative consecutive installments of five percent (5%) for each calendar
quarter with each installment vesting in arrears at the end of each consecutive
quarterly period following the Managing Member's date of hire set forth in
Schedule 3 and with all such Units to have vested by the fifth anniversary of
- - - ----------
such date of hire provided that on each such vesting date each such Managing
Member must then be a full-time employee of the Company and must be in
compliance with, and not in default of, all of his or her obligations hereunder
in order for such vesting to occur. Units awarded to each Managing Member
hereunder which have not yet vested shall be referred to herein as Unvested
Units (the "Unvested Units") with respect to that particular Managing Member.
(b) The Carried Interest Percentage of each Managing Member
(including Former Managing Members to the extent that they have not forfeited
their Vested Units as hereinafter provided) with respect to the allocation of
Profits and Losses of the Company as determined pursuant to the provisions of
this Agreement shall be determined at any time or from time to time by dividing
the number of Units (including Unvested Units) owned by that particular Managing
Member by the total number of Units (including Unvested Units) owned by all
Managing Members (including Former Managing Members to the extent they have not
forfeited their Units as hereinafter provided).
(c) That portion of any allocation of Profits and Losses of the
Company which is attributable to Unvested Units which have not been forfeited
shall be added to the Capital Account maintained by the Company for each
respective Managing Member and shall be accompanied by a corresponding
allocation of all tax items but shall not be distributed to such Managing Member
except to the extent that such Units have vested. As of any distribution date,
each Managing Member shall therefore be entitled to receive (subject to the
terms and conditions of this Agreement) distributions of Available Cash pursuant
to Section 3.6 only to the extent of (i) his or her vested percentage
(determined by dividing his or her Vested Units as of the distribution date by
the total of his or her Vested and Unvested Units as of such date) of all
amounts allocated to such Capital Account up to the distribution date less (ii)
any prior distributions. Any Managing Member whose relationship with the Company
is terminated as provided in Section 5.3 below (a "Former Managing Member"),
shall forfeit all of his or her Units to the extent that such Units are unvested
at the time of
-16-
termination but shall retain that portion of his or her Capital Account, if any,
which is at that time held with respect to Vested Units. Such Managing Member
shall become a Former Managing Member and shall retain his or her Vested Units
subject to the terms and conditions of this Agreement. A Managing Member whose
relationship with the Company is terminated for Cause as hereinafter defined,
shall immediately forfeit all of his or her Vested and Unvested Units and shall
forfeit that portion of his or her Capital Account, if any, which is at that
time held in suspense pending vesting of such Unvested Units, but shall retain
that portion of his or her Capital Account, if any, which is at that time held
with respect to Vested Units. The Managing Members shall invest Available Cash
that would otherwise be distributable to the Managing Members pursuant to
Section 3.6 but which arises with respect to Unvested Units of the Managing
Members and is retained by the Partnership in Temporary Investments pending the
vesting of Unvested Units or other distribution events pursuant to this Section
5.2.
(d) No portion of any Carried Interest Percentage allocation shall be
made with respect to Vested or Unvested Units which have been forfeited as
hereinafter provided, but any such previously allocated portion (to the extent
not previously distributed) shall be reallocated to the Capital Members in
proportion to their respective Percentage in Interest as set forth on Schedule I
for subsequent allocation to existing or additional Managing Members as may be
determined by the Capital Members in their sole discretion.
(e) Any Units belonging to any Former Managing Members must only be
Units which were Vested Units belonging to such Former Managing Members at the
time of his or her termination. No Units shall vest whatsoever in a Managing
Member after his or her partnership relationship with the Company has terminated
for any reason whatsoever.
(f) Additional Units may be awarded from time to time by the Managing
Members or by the Capital Members to one or more Managing Members and to one or
more additional Managing Members but only with the approval of a Majority of the
Managing Members. Furthermore, the Managing Members may reallocate Units (both
vested and unvested) among the Managing Members but only with the approval of a
Majority of the Managing Members provided that no Managing Member shall give up
any Units (either vested or unvested) without his or her consent, except as
herein provided with respect to termination). The Managing Members may
accelerate the vesting of any Units for any one or more of the Managing Members
or by fulfillment of such conditions as the Managing Members shall approve or
otherwise, but only with the approval of a Majority of the Managing Members.
The Managing Members may also attach conditions or restrictions to the award or
vesting of Units with respect to any Managing Members but only with the approval
of a Majority of the Managing Members.
(g) Upon the discontinuance of the activities of the Company, or the
discontinuance by the Parent or any of its Affiliates, of activities related to
the funding of additional investment funds after the Company has been fully
invested, and with the approval of a Majority of the Managing Members, the
Unvested Units belonging to the Managing
-17-
Members shall all become Vested Units, provided, however, that the provisions of
Sections 5.2(e) and 5.3 shall nonetheless control in the case of Former Managing
Members.
(h) The Members acknowledge that as a result of the vesting provisions
of this Section 5.2, the Managing Members shall be allocated Profit with respect
to Unvested Units in a year in which there is no distribution of Available Cash
with respect to such Unvested Units. The Managing Members shall, accordingly,
use their best efforts to distribute Available Cash to the Managing Members each
year in an amount equal to the product of each Managing Member's allocation of
Profit with respect to his or her Unvested Units and the highest marginal
federal and state income tax rates applicable to a resident of Massachusetts.
This provision shall be in addition and in priority to the tax distribution
provision set forth in Section 3.6.2.
Section 5.3 Termination of Employment and Partnership Status.
------------------------------------------------
(a) In the event of termination of a Managing Member's employment
relationship with the Company (i) by a Managing Member voluntarily, or (ii) by
the Capital Members with the concurrence of a Majority of the Members but
otherwise in their sole discretion for any reason or for no reason except for
Cause as hereinafter defined, or (iii) by the death of a Managing Member, or
(iv) by the Capital Members on account of the continuous disability of a
Managing Member for a period of more than three (3) months (provided that the
Capital Members determine in their sole discretion that such Managing Member
cannot continue to fulfill his or her executive responsibilities to the Company
on account of such disability and gives such Managing Member at least thirty
(30) days notice of such determination), then in each such case such Managing
Member's employment relationship with the Company and status as a Managing
Member shall terminate forthwith and said Managing Member shall become a Former
Managing Member and shall retain his or her Vested Units for purposes of
determining his or her Vested Carried Interest Percentage at any time and from
time to time, but said Former Managing Member shall forfeit all of his or her
Units to the extent not vested at the time of termination. In the event of
termination of a Managing Member's employment relationship with the Company by
the Capital Members in their sole discretion for Cause as hereinafter defined,
then such Managing Member's employment relationship with the Company and status
as a Managing Member shall terminate forthwith and said Managing Member shall
not become a Former Managing Member but rather shall forfeit all of his or her
Units both vested and unvested and shall forfeit in its entirety such Managing
Member's Vested Carried Interest Percentage and any and all other interests he
or she may have in the Company or in any Capital Account held for the benefit of
such Managing Member pursuant hereto except that said Managing Member shall
retain that portion of his or her Capital Account, if any, which is at that time
held with respect to Vested Units and shall also retain the right to participate
to the extent of his or her Vested Units at the time of his or her termination
in the Carried Interest Percentage but only to the extent of any Profit or Loss
with respect to Portfolio Company Securities owned by the Company at the time of
his or her termination for Cause. The status of a Former Managing Member and
his or her
-18-
relationship as such with the Company may also be terminated by the Capital
Members in their sole discretion at any time for Cause as hereinafter defined,
in which event the Former Managing Member shall immediately forfeit all of his
or her Vested Units and shall forfeit in its entirety such Former Managing
Member's Vested Carried Interest Percentage and any and all other interests he
or she may have in the Company or in any Capital Account held for the benefit of
such Former Managing Member pursuant hereto except that said Managing Member
shall retain that portion of his or her Capital Account, if any, which is at
that time held with respect to Vested Units.
(b) Cause. For purposes of this Agreement, termination of a
Managing Member's employment relationship with the Company and status as a
Managing Member or status as a Former Managing Member for Cause shall be
determined in each instance in the sole discretion of the Boards of Directors of
the Capital Members and shall mean:
(i) conviction for, or plea of nolo contenders to, (A) a
felony, whether or not business related, which may injure the business
or reputation of the Company, the Capital Member or an Affiliate of
either of them, or (B) a crime of moral turpitude;
(ii) theft or embezzlement of assets of the Company, the Capital
Member or an Affiliate of either of them;
(iii) a material breach of any agreement between the Managing
Member and the Company, the Capital Member or an Affiliate of either of
them including, without limitation, any violation of the non-competition
covenant hereinafter set forth in Section 5.5 (the "Non-Competition
Covenant");
(iv) the willful and continued failure by the Managing Member to
substantially perform his or her duties (other than as a result of
incapacity due to physical or mental illness);
(v) gross neglect of duties or responsibilities as an employee
of the Company or as a Managing Member, or dishonesty or incompetence,
or willful misconduct, which in any case seriously and adversely affects
the business of the Company or of the Capital Members or of an Affiliate
of either of them but only if there has been a good faith determination
by the Boards of Directors of the Capital Members that such neglect or
misconduct or dishonesty or incompetence has occurred.
Termination for Cause can only be effected by the Boards of Directors of
the Capital Members by notice to the Managing Member, which notice must be given
within five (5) days following a hearing before the Board at which the Managing
Member will have an opportunity to answer the charges constituting Cause. The
hearing before the Board can be held only after
-19-
at least twenty (20) days' written notice to the Managing Member (unless the
Managing Member agrees to a shorter period) of the date and time of the hearing
and the nature of the charges constituting Cause. At the time of a notice of the
hearing or any time thereafter but prior to the Board's decision following the
hearing, the Board may immediately relieve the Managing Member of his or her
duties and responsibilities hereunder pending its decision.
Section 5.4 Change of Control.
-----------------
(a) Upon a Change of Control, as hereinafter defined, the Company
shall repurchase all, and not less than all, of the Units of each of the
Managing Members and each of the Former Managing Members, at the individual
election (an "Initial Election") of each Managing Member and each Former
Managing Member (such election to be exercised within two (2) months of the date
of the Change of Control) for an aggregate purchase price per Unit (the "Change
of Control Repurchase Price per Unit") equal to twenty percent (20%) of the fair
market value of the Company (determined as if the Company were a publicly traded
entity) in excess of the Capital Member's Unrecovered Capital (as calculated in
accordance with Section 5.4(b), the "Fair Market Value of the Capital"), divided
by the total number of Units (both vested and unvested) owned by the Managing
Members and Former Managing Members at the time of the Change of Control.
(b) For purposes of determining the Change of Control Repurchase Price
per Unit, the Fair Market Value of the Company (determined as if the Company
were a publicly traded entity) shall be determined by an independent firm of
investment bankers of national reputation (the "Appraiser"), the selection of
which by either the Managing Members or the Capital Member is acceptable to both
(i) a majority of all the members of the Board of Directors of the Capital
Member and (ii) a Majority of the Managing Members. The Appraiser must be
selected within one (1) month of the date of the Change of Control. If a
majority of all the members of the Board of Directors of the Capital Member and
a Majority of the Managing Members fail to select an Appraiser, then each shall
select an independent firm of investment bankers of national reputation and
those two firms shall select an Appraiser in no case more than two (2) months
following the date of the Change of Control. The Fair Market Value of the
Company shall be (i) the fair market value of the Company determined by the
Appraiser as if the Company were a publicly traded entity at the time of the
Change of Control (ii) less the Capital Member's Unrecovered Capital. In
determining the Fair Market Value of the Company as if it were a publicly traded
entity, the Appraiser shall give primary and substantial weight as a relevant
frame of reference to the fair market value of the Company determined in
accordance with the following methodology:
(i) The Appraiser shall first determine the consideration or value
belonging or accruing to all the stockholders of the Parent as the ultimate
owners of both (A) 100% of the Unrecovered Capital and 20% of the profits of
the Company and (B) all the other assets of the Parent, at the time of the
Change of Control, which consideration or value shall be deemed to be equal
to the Common Stock Price, as hereinafter defined,
-20-
multiplied by the number of shares of Common Stock of the Parent outstanding
at the time of the Change of Control determined after giving effect to (X)
the conversion of all convertible securities of the Parent and (Y) the
exercise of all options, whether or not exercisable, outstanding at such
time.
(ii) The Appraiser shall then deduct from that consideration or value
(A) all cash, cash equivalents and the amount of any invested cash held
directly or indirectly by the Parent (including, without limitation, all
Unrecovered Capital of the Company as appearing on the books of the Company)
and (B) the fair market value of the Parent's other core businesses
(excluding the Company and its Investments, Portfolio Companies and other
activities) comprised of companies, tangible assets and operating divisions
to the extent owned by the Parent (determined as if these other core
businesses were, in the aggregate, a separate publicly traded entity), the
fair market value of which shall also be determined by the Appraiser as of
the time of the Change of Control. The purpose of this calculation is to
determine the value of the Company considered as if it were a publicly
traded entity at the time of the Change of Control by determining that
portion of the value of the Parent as measured by the Common Stock Price
(less cash, cash equivalents and the amount of any invested cash including
the Unrecovered Capital of the Company and the appraised value of the
Parent's interest in other core businesses) which reflects the value of all
the Company's Internet-related Investments, Portfolio Companies and
activities which have been invested in by the Company determined as if the
Company were a publicly traded entity owned by the stockholders of the
Parent immediately prior to the time of the Change of Control with the
remainder of the value of the Parent as measured by the Common Stock Price
reflecting the value of the Parent's other core businesses (excluding the
Company and its investments, Portfolio Companies and other activities)
determined as if those other core businesses were a separate publicly traded
entity also owned by the stockholders of the Parent immediately prior to the
time of the Change of Control.
The Appraiser must first determine the Fair Market Value of the Company
determined as if it were a publicly traded entity by applying the methodology
set forth above, since this is the best available evidence of the actual value
of the Company as if it were a publicly traded entity at the time of the Change
of Control to the extent that the Common Stock Price reflects the Fair Market
Value of the Company. Thereafter, the Appraiser, in its discretion, may also
(but need not) consider and take into account the following criteria in
descending order of importance:
(x) The fair market value of other publicly traded entities dealing
primarily in Internet-related investments and activities of a kind similar
to those of the Company; and
(y) The Fair Market Value of the Company (determined as if the
Company were a publicly traded entity) taken as a whole after taking into
account the future earnings potential business prospects of all its various
Internet-related investments and
-21-
activities taken as a whole, with particular emphasis on the Company's
business plan and strategy for implementing that plan, taken as a whole, and
the general market conditions in the venture capital industry for Internet-
related investments and activities of the kind owned by the Company.
In determining the Fair Market Value of the Company, the Appraiser in no
event shall determine the individual value of each of the Portfolio Company
Securities or Investments of the Company and then add these values together
because such a methodology would fail to take into account the overall business
plan and strategy of the Company to build a business comprised of Intemet-
related investments and activities which complement and support each other as
parts of an overall strategy for the development of an Internet business), but
must in all events consider the Fair Market Value of the Company taken as a
whole.
(c) Upon a Change of Control, as hereinafter defined, the Unvested
Units belonging to the Managing Members shall all become Vested Units, provided,
however, that the provisions of Sections 5.2(e) and 5.3 shall nonetheless
control in the case of Former Managing Members.
(d) The Company, the Capital Members, and the Parent shall be jointly
and severally liable to the Managing Members for the payment of the Change of
Control Repurchase Price per Unit with respect to the Company's repurchase of
the Vested Units pursuant to this Section 5.4.
(e) Upon the consummation of the repurchase by the Company of any of
the Units of the Managing Members upon a Change of Control pursuant to the terms
of this Section 5.4, the Managing Member may, in its sole discretion, and
without the approval of the Managing Members (i) retire the repurchased Units or
(ii) admit additional Managing Members in accordance with Section 5.7 hereof and
award to the additional Profit General Partners any or all of the repurchased
Units.
(f) For purposes of this Agreement, a "Change of Control" shall be
deemed to have occurred when there has occurred a change of control of the
Parent (i) which has not been approved by a majority of all the members of the
Board of Directors of the Parent, or (ii) which has been approved by a majority
of all the members of the Board of Directors of the Parent but which has not
been approved by a Majority of the Members and which is likely by its terms to
have a material adverse effect upon the business and prospects of the Company as
currently, or planned to be, conducted, and which change of control in either
event is of a nature that would be required to be reported in response to Items
6(e) or 14(i), (iv), or (v) of Schedule 14A of Regulation 14A promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") provided
that, in the case of a Change of Control reportable under Item 6(e), such Change
of Control involves the acquisition by any "person" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but expressly excluding
David S. Wetherell) of beneficial ownership, directly or indirectly, of
securities or
-22-
interests in the Parent which represent more than thirty percent (30%) of the
combined voting power of the Parent's outstanding securities. For purposes of
this Agreement, a "Change of Control" shall also be deemed to have occurred
when there has occurred a change of control of the Capital Member (i) which has
not been approved by a majority of all the members of the Board of Directors of
the Parent, or (ii) which has been approved by a majority of all the members of
the Board of Directors of the Parent but which has not been approved by a
Majority of the Managing Members and which is likely by its terms to have a
material adverse effect upon the business and prospects of the Company as
currently, or planned to be, conducted, and which change of control in either
event involves (i) the acquisition by any "person" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) of beneficial ownership,
directly or indirectly, of securities or interests in the Capital Member which
represents more than fifty percent (50%) of the combined voting power of the
Capital Member's outstanding securities, or (ii) a sale of all or substantially
all of the assets of the Company or of the Capital Members, or (iii) either the
merger or consolidation of the Company or the Capital Members with another
entity which is the surviving entity of such merger or consolidation provided
that such other entity, prior to such merger or consolidation, was not
controlled directly or indirectly by the Parent.
(g) All fees and expenses associated with the appraisal process set
forth above shall be paid by the Parent.
(h) Each Managing Member or Former Managing Member making an Initial
Election to have his or her Units repurchased by the Company as provided in
Section 5.4(a) above following a Change of Control shall have one (1) month
following the determination of the Change of Control Repurchase Price per Unit
as provided above to reconsider and withdraw such Initial Election. Any
withdrawal of an Initial Election must be made by the Managing Member or Former
Managing Member by written notice to the Company within said one (1) month
period. In the event any such Initial Election is not withdrawn in a timely
manner, then it shall become final and binding on the parties and the Company
shall proceed to repurchase the Units owned by such Managing Member or Former
Managing Member within two (2) months following the date of the determination of
the Change of Control Repurchase Price per Unit as provided above. In the event
that any Managing Member or Former Managing Member fails to make a timely
Initial Election (except for reasons beyond his or her control) to have his or
her Units repurchased by the Company as provided in Section 5.4(a) above
following a Change of Control, such right shall immediately become null and void
and shall be of no further force or effect with respect to that Change of
Control, but said Managing Member or Former Managing Member shall retain his or
her rights hereunder with respect to any other or future Change of Control.
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Section 5.5 No Recruitment or Solicitation.
------------------------------
Each Managing Member agrees that during his or her employment by the
Company and while, he or she is a Managing Member and for a period of three (3)
years following termination of his or her employment relationship with the
Company (i) by the Managing Member voluntarily, or (ii) by the Capital Member
for Cause, such Managing Member will not, directly or indirectly: (A) recruit,
solicit or induce, or attempt to induce, any employee or consultant of the
Parent or of the Capital Member or of the Company or of any Portfolio Company or
of any Affiliate of any of them to terminate his or her employment with, or
otherwise cease any relationship with, the Parent or the Capital Member or the
Company or any Portfolio Company or any Affiliate of any of them; or (B)
solicit, divert, take away, or attempt to divert or take away, any investment
opportunity with respect to any Portfolio Company or any investment opportunity
with respect to any prospective investment or prospective portfolio company
which the Capital Member or the Company contacted or solicited during such
Managing Member's employment relationship with the Company. If any restriction
set forth herein is found by any court to be unenforceable because it extends
for too long a period of time, or over too great a range of activities, or over
too broad a geographic area, the restriction shall be interpreted to extend only
over the maximum period of time, range of activities, or geographic area which
the court finds to be enforceable. Each Managing Member acknowledges and agrees
that the restrictions contained in this Section 5.5 are necessary for the
protection of the business and goodwill of the Parent and of the Capital Member
and of the Company and of the Portfolio Companies and of the Affiliates of any
of them and are considered by such Managing Member to be reasonable for such
purpose and that his or her interest in the Company is being received partly in
consideration for the foregoing non-competition covenant.
Section 5.6 Non-Disclosure and Invention Assignment Agreement.
-------------------------------------------------
Each Managing Member shall enter into a Non-Disclosure and Invention
Assignment Agreement with the Partnership in the form of Exhibit A attached
hereto.
Section 5.7 Admission of Additional Managing Members.
----------------------------------------
The Capital Member may admit one or more additional Managing Members
subject only to satisfaction of the following conditions: (i) each such
additional Managing Member shall execute and deliver a counterpart signature
page to this Agreement pursuant to which such additional Managing Member agrees
to be bound by the terms and provisions hereof, and (ii) such admission would
not result in a violation of any applicable law, including the federal or state
securities laws, or any term or condition of this Agreement and, as a result of
such admission, the Company would not be required to register as an investment
company under the Investment Company Act. The name and business address of each
Managing Member admitted to the Company under this Section 5.7 and the number of
his or her Units awarded to such additional Managing Member and his or her date
of hire shall be added to Schedule 2,
----------
-24-
and each such Managing Member shall be bound by all the provisions hereof. Each
additional Managing Member admitted pursuant to this Section 5.7 shall be deemed
for purposes of all allocations pursuant to Article Three to have been admitted
on the date of hire. Admission of an additional Managing Member in accordance
with the terms hereof shall not be a cause of dissolution of the Company.
Additional Managing Members shall be admitted to the Company only with the
written consent of, and on the terms approved by, the Capital Member and a
Majority of the Managing Members.
ARTICLE SIX
OTHER ACTIVITIES OF MEMBERS; CONFLICTS OF INTEREST
Section 6.1 Commitment of Members.
---------------------
Each of the Managing Members hereby agrees to use its best efforts in
connection with the purposes and objectives of the Company and to devote to such
purposes and objectives such of their time and resources as shall be necessary
for the management of the affairs of the Company. Subject to the other
provisions of this Agreement, the Members and any of their respective Affiliates
may act as a director, officer, employee or advisor of any corporation, a
trustee of any trust, or a partner of any partnership; may receive compensation
for its services as an advisor with respect to, or participation in profits
derived from, the investments of any such corporation, trust or partnership; and
may acquire, invest in, hold and sell securities of any entity. Neither the
Company nor the Capital Member or any Managing Member shall have by virtue of
this Agreement, any right, title or interest in or to such other corporation,
trust, partnership, investment or security.
Section 6.2 Agreements with Portfolio Companies.
-----------------------------------
The Managing Members, the Parent of the Capital Member and its or their
Affiliates may enter into contracts, commitments and agreements with Portfolio
Companies consistent with Section 6.4 for the benefit of said Managing Member,
the Parent of the Capital Member and/or its or their Affiliates.
Section 6.3 Obligations and Opportunities for Members.
-----------------------------------------
The Managing Members shall be obligated to refer investment opportunities,
consistent with the purposes and objectives of the Company, to the Company. Any
determination as to the appropriateness of an investment opportunity for the
Company or for an Affiliate of the Company or for the Parent of the Capital
Member shall be made by the Capital Member.
-25-
Section 6.4 Conflicts of Interest.
---------------------
No contract or transaction between any Capital Member or the Company and
one or more of its Members or Affiliates, or between any Capital Member or the
Company and any other corporation, partnership association or other organization
in which one or more of its Members or affiliates are directors, officers or
partners or have a financial interest, shall be void or voidable solely for this
reason, or solely because the Members or affiliate is present at or participates
in any meeting of directors or partners which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if:
(a) the material facts as to his, her or their interest as to the
contract or transaction are disclosed or are known to the directors or the
partners and the directors or the partners authorize in good faith the contract
or transaction by a vote sufficient for such purpose without counting the vote
of the interested director or partner even though the disinterested directors or
the disinterested partners be less than a quorum; or
(b) the material facts as to his, her or their interest and as to the
contract or transaction are disclosed or are known to the partners or directors
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by a vote of the partners or directors; or
(c) the contract or transaction is fair to the Capital Member or the
Company or its or their Affiliates as of the time it is authorized, approved or
ratified by the directors or the partners.
ARTICLE SEVEN
TRANSFERABILITY
Section 7.1 Assignment of Member Interest.
-----------------------------
(a) Either Capital Member may transfer or assign all or any part of
its interest in the Company as set forth in this Section, and provided that the
restrictions set forth in Section 7.2 do not apply, to a substitute Member
("Substitute Member"). A transferee or assignee of the Capital Member's interest
in the Company that does not comply with the provisions of this Section 7.1 or
is subject to the restrictions set forth in Section 7.2 shall not be admitted to
the Company as a Substitute Member and shall have none of the rights of the
Capital Member and the assigning or transferring Capital Member in such case
shall remain fully liable for all obligations hereunder as if such assignment or
transfer had not occurred. The assignee or transferee of the Capital Member's
Interest in the Company (an "Assignee") shall have the right to become a
Substitute Member only if the following conditions are satisfied:
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(1) A duly executed and acknowledged written instrument of assignment
shall have been delivered to the Company.
(2) The Capital Member and the Assignee shall have executed and
acknowledged such other instruments and taken such other action as the Managing
Members shall reasonably deem necessary or desirable to effect such
substitution, including, without limitation, the execution by the Assignee of a
transfer document and an appropriate amendment to this Agreement.
(3) The restrictions on transfer contained in Section 7.2 shall be
inapplicable, and, if requested by the Managing Members, the Capital Member or
the Assignee shall have obtained an opinion of counsel reasonably satisfactory
to the Managing Members as to the legal matters set forth in that Section.
(4) The Capital Member or the Assignee shall have paid to the Company
such amount of money as is sufficient to cover all expenses incurred by or on
behalf of the Company in connection with such substitution.
(5) A Majority of the Managing Members shall have Consented, in their
sole and absolute discretion, to such substitution.
Any assignment or transfer not in compliance with this Article Seven shall
have no force or effect, and the assigning or transferring Member shall continue
for all purposes under the Act and this Agreement to be a Member of the Company.
(b) No Managing Member may sell, assign or otherwise transfer all or
any part of his or her interest as a Managing Member of the Company in any
respect whatsoever except that (i) the interest of a Managing Member may be
transferred to such Managing Member's spouse, children, grandchildren, parents
or siblings or a trust or any other entity for the benefit of any of such
persons or the Managing Member, and (ii) the interest of a Managing Member may
be transferred by will or by the laws of descent and distribution to such
Managing Member's estate or to his or her beneficiaries or heirs following the
death of such Managing Member, provided that each and every such transferee
agrees to be bound by all the terms and conditions of this Agreement applicable
to Managing Members and Former Managing Members including, without limitation,
those set forth in Article Three and Article Five.
Section 7.2 Restrictions on Transfer.
------------------------
Notwithstanding any other provision of this Agreement, except as otherwise
provided in Section 7.1(b), no Member may assign or otherwise transfer all or
any part of its interest in the Company, and no attempted or purported
assignment or transfer of such interest shall be effective, unless (i) after
giving effect thereto, the aggregate of all the assignments or transfers by the
Members of Interests in the Company within the 12 month period ending on the
proposed
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date of such assignment or transfer would not equal or exceed 50% of the total
Interests of the Member in the capital or profits of the Company, and such
assignment or transfer would not otherwise terminate the Partnership for the
purposes of section 708 of the Code, (ii) such assignment or transfer would not
result in a violation of applicable law, including the federal and state
securities laws, or any term or condition of this Agreement and, as a result of
such assignment or transfer, the Company would not be required to register as an
investment company under the Investment Company Act and (iii) if requested by
the Managing Member, such Member shall deliver a favorable opinion of counsel
satisfactory to the Managing Member that such transfer would not result in (x) a
violation of the Securities Act of 1933 or any blue sky laws or other securities
laws of any state of the United States applicable to the Company or the Interest
to be transferred, (y) the Company being required to register, or seek an
exemption from registration, under the Investment Company Act of 1940, and (z)
the Company being deemed to be a "publicly traded partnership" within the
meaning of Section 7704 of the Code.
ARTICLE EIGHT
LIABILITY OF MEMBERS; INDEMNIFICATION
Section 8.1 Liability of Managing Members.
-----------------------------
8.1.1. The Managing Members shall not be liable to the Company or any
Member for any act or omission taken by any Managing Member in good faith and in
the belief that such act or omission is in the best interests of the Company;
provided that such act or omission is not in violation of this Agreement and
does not constitute negligence, misconduct, fraud or a willful violation of law
by such Managing Member. The Managing Members shall not be liable to the
Company or any other Member for any action taken by any other Member, nor shall
any Managing Member (in the absence of negligence, misconduct, fraud or a
willful violation of law by such Managing Member) be liable to the Company or
any other Member for any action of any employee or agent of the Company provided
that such Managing Member shall have exercised appropriate care in the selection
and supervision of such employee or agent.
8.1.2 Whenever in this Agreement the Managing Members are permitted or
required to make a decision (i) in their "discretion" or "sole discretion" or
under a grant of similar authority or latitude, the Managing Members shall be
entitled to consider only such interests and factors as they desire, including
their own interests, and shall have no duty or obligation to give any
consideration to any interests of or factors affecting the Company or any other
Person, or (ii) in their "good faith" or under another express standard, the
Managing Members shall act under such express standard and shall not be subject
to any other or different standard imposed by this Agreement or other applicable
law.
8.1.3 Notwithstanding Section 8.3 below, the Managing Members shall not
be indemnified for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws unless (i) there has been
a successful adjudication on the merits of
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each count involving alleged securities law violations as to the particular
indemnitee, or (ii) such claims have been dismissed with prejudice on the merits
by a court of competent jurisdiction as to the particular indemnitee or (iii) a
court of competent jurisdiction approves a settlement of the claims against a
particular indemnitee. In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall place before
the court the position of the Securities and Exchange Commission and the
Massachusetts Securities Division with respect to the issue of indemnification
for securities law violations. The Company shall not incur the cost of that
portion of any insurance, other than public liability insurance, which insures
any party against any liability the indemnification of which is herein
prohibited.
Section 8.2 Liability of Capital Members.
----------------------------
The liability of the Capital Members shall be limited to its uncalled
Capital Commitment of such Capital Member, provided, that the Capital Members
shall be liable for the return of any part of a distribution in respect of its
Capital Contribution to the extent required by law.
Section 8.3 Indemnification of the Managing Members and the Capital
-------------------------------------------------------
Member.
------
The Managing Members and their respective partners, agents, employees and
Affiliates and the Capital Members (the "Indemnitees") shall be and hereby are
(i) indemnified and held harmless by the Company and (ii) released by the other
Members from and against any and all claims, demands, liabilities, costs,
expenses, damages, losses, suits, proceedings and actions for which such
Indemnitee has not otherwise been reimbursed (collectively, "Liabilities"),
whether judicial, administrative, investigative or otherwise, of any nature
whatsoever, known or unknown, liquidated or unliquidated, that may accrue to the
Company or any other Member or in which any of the Indemnitees may become
involved, as a party or otherwise, arising out of the conduct of the business or
affairs of the Company by the respective Indemnitee or otherwise relating to
this Agreement, provided that an Indemnitee shall not be entitled to
indemnification or release hereunder if it shall have been determined by a court
of competent jurisdiction, or in the case of an Indemnitee that is a Managing
Member, its partners, agents, employees and Affiliates, it has been determined
by the Capital Member, that (x) such person did not act in good faith and in a
manner such person reasonably believed to be in the best interests of the
Company and, in the case of a criminal proceeding, did not have reasonable cause
to believe that his conduct was lawful, or (y) such Liabilities shall have
arisen from a violation of this Agreement or the negligence, misconduct, fraud
or willful violation of law by such Indemnitee, or actions of such Indemnitee
outside the scope of and unauthorized by this Agreement, and provided further
that an Indemnitee shall not be entitled to indemnification or release hereunder
with respect to any liability arising in connection with its activities
performed for or on behalf of any Portfolio Company, the securities of which
have been sold or have been distributed to the Members pursuant to Section 3.9,
if such activities were performed after the date on which such securities were
sold or distributed. The termination of any proceeding by settlement shall not,
of itself, create a presumption that the Indemnitee did not act in good faith
and in a manner that such person reasonably believed to be in the best interests
of the Company or that the Indemnitee did
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not have reasonable cause to believe that its conduct was lawful. Any
indemnification right provided for in this Section 8.3 shall be retained by any
removed Managing Member and its partners, agents, employees and Affiliates. The
indemnification rights provided for in this Section shall survive the
termination of the Company or this Agreement.
Section 8.4 Payment of Expenses.
-------------------
Expenses incurred by an Indemnitee in defense or settlement of any claim
that may be subject to a right of indemnification hereunder may be advanced by
the Company prior to the final disposition thereof provided that the following
conditions are satisfied: (i) the claim relates to the performance of duties or
services by the Indemnitee on behalf of the Company and (ii) the Indemnitee
undertakes to repay the advanced funds to the Company if it is ultimately
determined that the Indemnitee is not entitled to be indemnified hereunder or
under applicable law. The right of any Indemnitee to the indemnification
provided herein shall be cumulative of, and in addition to, any and all rights
to which such Indemnitee may otherwise be entitled by contract or as a matter of
law or equity and shall extend to such Indemnitee's successors, assigns and
legal representatives. All judgments against the Company and any Managing
Member, in respect of which such Managing Member is entitled to indemnification,
must first be satisfied from Company assets before the Managing Member is
responsible therefor. The obligations of the Members under this Article VIII
shall be satisfied only after any applicable insurance proceeds have been
exhausted and then only out of Company assets and, to the extent required by
law, distributions made by the Company to the Members, and the Members shall
have no liability to fund indemnification payment hereunder.
ARTICLE NINE
DISSOLUTION, LIQUIDATION AND TERMINATION OF THE COMPANY
Section 9.1 Events Causing Dissolution.
--------------------------
The Company shall dissolve upon and its affairs shall be wound up after the
happening of any of the following events:
9.1.1 December 31, 2007; provided that the duration of the Company may
be extended by the Managing Members for not more than three additional one year
periods;
9.1.2 the Consent of the Capital Members and a Majority of the Managing
Members;
9.1.3 the sale or other disposition by the Company of all or substantially
all of its assets; or
9.1.3 the entry of a decree of judicial dissolution under Section 44 of
the Act.
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Section 9.2 Wind Up and Liquidation.
-----------------------
9.2.1 The Managing Members, or an authorized liquidating trustee for the
Company if one is appointed, shall be responsible for the winding up and
liquidation of the Company. Subject to Section 3.8, the Managing Members or such
liquidating trustee shall have full right and unlimited discretion to determine
the time, manner and terms of any sale or sales of Company assets pursuant to
such liquidation for the purpose of obtaining fair value for such assets, having
due regard to the activity and condition of the relevant markets and general
financial and economic conditions. Prior to the distribution of all of the
assets of the Company, the business of the Company and the affairs of the
Members, as such, shall continue to be governed by this Agreement.
9.2.2 Profit or Loss and other items arising from sales upon liquidation
shall be allocated, and the proceeds of such liquidation shall be applied, as
provided in Article Three.
9.2.3 In connection with the dissolution and liquidation of the Company,
the Managing Members or authorized liquidating trustee shall file an instrument
evidencing the cancellation of the Certificate in accordance with the Act.
ARTICLE TEN
CONSENTS, VOTING AND MEETINGS
Section 10.1 Method of Giving Consent.
------------------------
Any Consent required by this Agreement may be given by:
10.1.1 a written consent given by the consenting Member and received by
the Managing Members at or prior to the doing of the act or thing for which the
Consent is solicited; or
10.1.2 the affirmative vote by the consenting Member to the doing of the
act or thing for which the Consent is solicited at any meeting called and held
pursuant to Section 10.2 to consider the doing of such act or thing.
Section 10.2 Meetings.
--------
Any matter requiring the Consent of the Members pursuant to this Agreement
may be considered at a meeting held not less than 2 nor more than 10 days after
Notification thereof shall have been given by the Managing Members to such
Members or appointees, as the case may be. Any such Notification shall state
briefly the purpose, time and place of the meeting. All such meetings shall be
held at such reasonable times and places as the Managing Member shall designate.
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Section 10.3 Submissions to Members.
----------------------
The Managing Members shall give the Members Notification of any proposal or
other matter required by any provision of this Agreement or by law to be
submitted for the consideration and approval of the Members. Such Notification
shall include any information required by the relevant provision of this
Agreement or by law.
ARTICLE ELEVEN
BOOKS AND RECORDS; ACCOUNTING; TAX ELECTIONS
Section 11.1 Accounting for the Company.
--------------------------
The Company shall use the accrual method of accounting and its financial
statements shall be prepared in accordance with generally accepted accounting
principles. The Company's tax return shall be prepared on an accrual basis.
The fiscal year of the Company shall end on July 31.
Section 11.2 Books and Records.
-----------------
The Managing Members shall keep or cause to be kept complete and
appropriate records and books of account. Except as otherwise expressly provided
herein, such books and records shall be maintained on the basis used in
preparing the Company's Federal income tax returns. Such information as is
necessary to reconcile such books and records with generally accepted accounting
principles shall also be maintained. The books and records shall be maintained
at the principal office of the Company and shall be available for inspection and
copying by any Member at its expense during ordinary business hours following
reasonable notice.
Section 11.3 Reports to Members.
------------------
Promptly after consummation of each investment in a Portfolio Company, the
Managing Members shall prepare and deliver to each Member a description of such
investment and the Portfolio Company in which it was made. Within forty-five
(45) days after the end of each calendar quarter, the Managing Members will
prepare and deliver to each Member (i) an unaudited balance sheet and income
statement of the Company for such quarter, accompanied by a report on any
material developments in existing investments which occurred during such quarter
and (ii) a statement showing the balance in such Member's Capital Account and a
reconciliation of such balance. After the end of each fiscal year, the Managing
Members shall cause an audit of the Company to be made by an independent public
accountant of nationally recognized status of the financial statements of the
Company for that year. Such audit shall be certified and a copy thereof shall
be delivered to each Member within ninety (90) days after the end of each of the
Company's fiscal years. Such certified financial statements shall also be
accompanied by a report on the Company's activities during the year prepared by
the
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Managing Members. Within ninety (90) days after the end of each fiscal year, the
Company will deliver to each Member the Managing Members' good faith estimate of
the fair value of the Company's investments as of the end of such year, a
statement showing the balances in each Member's Capital Account as of the end of
such year, and such other information, reports and forms as are necessary to
assist each Member in the preparation of his federal, state and local tax
returns. The Managing Members shall give prompt notice to the Members if at any
time the Company's general counsel or accountants withdraw or are replaced.
Section 11.4 Elections.
---------
The Managing Members shall cause the Company to make such elections under
the Code and the Regulations, including those permitted by Sections 709(b) and
754 of the Code, and state tax or similar laws as it shall determine to be in
the Members' best interests.
ARTICLE TWELVE
DEFINITIONS
The defined terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this Article Twelve. The
singular shall include the plural and the masculine gender shall include the
feminine, the neuter and vice versa, as the context requires:
"@Ventures, Inc." means CMG@Ventures, Inc., a Delaware corporation.
"@Ventures, Inc. Loss" means, as of the end of any Fiscal Year, the excess
of any Net Realized Capital Losses and/or Net Operating Losses allocated to
@Ventures, Inc. pursuant to Section 3.1(b)(ii) and Section 3.2(b)(ii).
"Act" means the Delaware Limited Liability Company Act as amended from time
to time, and any successor to such Act.
"Adjusted Capital Account Deficit" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
relevant Fiscal Year or other accounting period determined after (i) crediting
to such Capital Account any amounts which such Member is obligated to restore
thereto hereunder or is deemed to be obligated to restore thereto pursuant to
the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(h)(5) of the
Regulations and (ii) debiting to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-
1(b)(2)(ii)(d)(6) of the Regulations. The foregoing definition of Adjusted
Capital Account Deficit is intended to comply with the provisions of Section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently
therewith.
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"Affiliate" means with respect to any Person, any officer, director,
member, employee or partner of, or any Person that directly or indirectly
through one or more intermediaries, controls, is controlled by or is under
common control with such Person.
"Agreement" means this Operating Agreement, as originally executed and as
amended, modified, supplemented or restated from time to time, as the context
requires.
"Assignee" is as defined in Section 7.1.
"Available Cash" means amounts received by the Company from all sources
including with respect to (including payments and distributions on and proceeds
of dispositions of) interests in and assets of Portfolio Companies, net of (i)
amounts necessary to pay all expenses, debts and obligations of the Company or
to establish reserves therefor, and (ii) amounts deemed necessary by the
Managing Members, in their sole discretion, to make Follow-on Investments
pursuant to Section 4.2(11). Available Cash shall include the amount of any
fees paid to the Company.
"Business Day" means any day, including Saturday, Sunday and any other day
on which commercial banks in Boston, Massachusetts are required by law not to be
open for business.
"Capital Account" means, with respect to any Member, the capital account
established and maintained for such Member pursuant to Section 2.3.
"Capital Commitment" is as defined in Section 2.1.
"Capital Contribution" is as defined in Section 2.1.
"Capital Member Loss" means Net Operating Losses and Net Realized Capital
Losses allocated to the Capital Members' Capital Accounts as provided in
Sections 3.1 and 3.2.
"Carried Interest Percentage" is as defined in Section 5.2(a).
"Certificate" means the Certificate of Formation filed on behalf of the
Company with the Secretary of State of the State of Delaware, as such
certificate may be amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended, and, where
applicable, any predecessor or successor thereto.
"Company" means CMG @ VENTURES II LLC.
"Consent" is as defined in Section 10.1.
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"Financial Institution" means a bank, savings institutions, trust company,
insurance company, pension or profit sharing trust, or similar entity which is a
member of any group of such persons, having assets of at least $100 million, or
other entity (other than an individual) a substantial part of whose business
consists of investing in, purchasing or selling the securities of others.
"Fiscal Year" means the fiscal year ending on the last day of July in any
year. In the case of the first and last fiscal years, the fraction thereof
commencing on the date on which the Company is formed or ending on the date on
which the winding up of the Company is completed, as the case may be.
"Follow-on Investment" means any investment, other than a Committed
Investment, in Portfolio Securities of a Portfolio Company in which the Company
holds, immediately prior thereto, Portfolio Securities.
"Investments" is as defined in Section 1.2.
"Loss" means for any fiscal year or other accounting period of the
Company, the amount, if any, by which the Company's gross taxable deductions and
losses exceed the Company's gross taxable income and gains. Calculations of
Loss shall be consistent with calculations made for Federal income tax purposes
and with the calculation of Profit.
"Managing Member Loss" means Net Operating Losses and Net Realized Capital
Losses allocated to the Managing Members' Capital Accounts as provided in
Sections 3.1 and 3.2.
"Majority of the Managing Members" means those Managing Members who then
constitute in excess of 50% by number of all Managing Members.
"Marketable Securities" Securities (i) that are freely tradeable pursuant
to a registration under the Securities Act of 1933, as amended, or an exemption
therefrom, (ii) that immediately after giving effect to their distribution will
not be subject to any contractual restriction on transfer, (iii) that will be
traded on a national securities exchange or reported through the National
Association of Securities Dealers Automated Quotation System, and (iv) that may
be sold without regard to volume limitations.
"Net Operating Losses", with respect to any period, shall mean the excess
of aggregate expenses incurred during (or attributable to) such period by the
Company (other than expenses directly relating or attributable to the sale,
purchase, exchange or distribution of Portfolio Securities) over the aggregate
income earned during such period by the Company from all sources whatsoever
(other than net gain from the sale, purchase, exchange or distribution of
Portfolio Securities), such Net Operating Losses to be computed in accordance
with applicable U.S. federal income tax accounting principles and (to the extent
possible) with generally accepted accounting principles.
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"Net Operating Profits", with respect to any period, shall mean the excess
of aggregate income earned during such period by the Company from all sources
whatsoever (other than net gain from the sale, purchase, exchange or
distribution of Portfolio Securities) over all expenses incurred during (or
attributable to) such period by the Company (other than expenses directly
relating or attributable to the sale, purchase, exchange or distribution of
Portfolio Securities), such Net Operating Profits to be computed in accordance
with applicable U.S. federal income tax accounting principles and (to the extent
possible) with generally accepted accounting principles.
"Net Realized Capital Gains", with respect to any period, shall mean the
excess of gains, determined in accordance with U.S. federal income tax
principles, on any sales or other dispositions of Portfolio Securities for such
Fiscal Year over the losses, determined in accordance with federal income tax
principles, on any sales or other dispositions of Portfolio Securities for such
Fiscal Year.
"Net Realized Capital Losses", with respect to any period, shall mean the
excess of losses, determined in accordance with U.S. federal income tax
principles, on any sales or other dispositions of Portfolio Securities for such
Fiscal Year over the gains, determined in accordance with federal income tax
principles, on any sales or other dispositions of Portfolio Securities for such
Fiscal Year.
"Notification" means a writing, containing the information required by this
Agreement to be communicated to any Person, sent as provided in Section 13.2.
"Parent" means CMG Information Services, Inc., a Delaware corporation.
"Person" means any individual, corporation, Company, trust, unincorporated
organization or association, or other entity.
"Portfolio Companies" means companies in which the Company makes
investments in accordance with the provisions of this Agreement.
"Portfolio Securities" is as defined in Section 1.2.
"Profit" means for any period, the amount, if any, by which the Company's
gross taxable income and gains and the amount of any fees earned by the Company,
exceed the Company's gross taxable deductions and losses. The following amounts
shall be included in determining Profit: any interest, dividend or similar
distribution with respect to Portfolio Securities, and any and all payments
arising out of the disposition of Portfolio Securities, including without
limitation any option payment, lump sum payment, principal or interest paid or
imputed under any promissory note, and any payment made pursuant to a royalty or
earn-out arrangement or similar form of contingent payment. Calculations of
Profit shall be consistent with calculations made for Federal income tax
purposes, except that Profit shall be determined (i) by taking into account
unrealized gains and losses with respect to Portfolio Securities that are
revalued pursuant
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to the penultimate sentence of Section 3.3 or distributed in kind hereunder,
(ii) with reference to the book value rather than the adjusted tax basis of any
Portfolio Security that has been revalued pursuant to the penultimate sentence
of Section 3.3, (iii) without regard to any amounts that are specially allocated
pursuant to Article Three, (iv) without giving effect to any adjustments made
pursuant to Sections 743 or 734 of the Code, (v) income of the Company that is
exempt from Federal income tax and that is not otherwise taken into account in
computing income or loss shall be added to Operating Income (Loss) and (vi)
expenditures of the Company that are neither deductible for Federal income tax
purposes nor allowable as additions to the basis of Company property (or that
are so treated pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations)
shall be subtracted from such taxable income or loss.
"Regulations" means the Income Tax Regulations promulgated from time to
time under the Code. References to specific sections of the Regulations shall be
to such sections as amended, supplemented or superseded by Regulations currently
in effect.
"Substitute Member" is as defined in Section 6.1.
"Temporary Investments" means
(i) Investments in direct obligations of the United States of
America, or obligations of any instrumentality or agency thereof, payment
of principal and interest of which is unconditionally guaranteed by the
United States of America, having a final maturity or not more than 180 days
from the date of issue thereof.
(ii) Investments in certificates of deposit or repurchase agreements
having a final maturity not more than 180 days from the date of acquisition
thereof issued by any bank or trust company organized under the laws of the
United States of America or any state thereof having capital and surplus of
at least $100,000,000;
(iii) Investments in money market funds; and
(iv) Commercial paper payable on demand or having a final maturity not
more than 180 days from the date of acquisition thereof which has the
highest credit rating of either Standard & Poor's Corporation or Moody's
Investors Service, Inc.
"Unrecovered Capital" means amounts in the capital account of the Capital
Account of the Capital Members up to the amount of its Capital Contribution,
less any distributions of any amounts in the Capital Account of the Capital
Members attributable to the Capital Contribution of the Capital Members
previously made to the Capital Members pursuant to Article Three.
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ARTICLE THIRTEEN
MISCELLANEOUS PROVISIONS
Section 13.1 Appointment of Tax Matters Partner.
----------------------------------
If the Company is subject to the rules set forth in Sections 6221 through
6233 of the Code, Andrew Hajducky shall be the "Tax Matters Partner" for the
Company as defined in Section 6231(a)(7) of the Code. As Tax Matters Partner,
Andrew Hajducky shall have all of the rights, duties, obligations and powers of
a Tax Matters Partner, as so defined, set forth in Sections 6221 through 6233 of
the Code.
Section 13.2 Notification.
------------
13.2.1 Any Notification to a Member shall be at the address of such
Member or appointee set forth in the books and records of the Company or such
other mailing address of which such Member shall advise the Managing Member in
writing. Any Notification to the Company or the Managing Member shall be at the
principal office of the Company or the address of the Managing Member, as the
case may be, as set forth in the books and records of the Company. The Managing
Member may at any time change the location of its principal office.
Notification of any such change shall be given to the Members on or before the
date of any such change.
13.2.2 Any Notification shall be deemed to have been duly given if
personally delivered or sent by United States mail or express mail service or by
telegram confirmed by letter and will be deemed given, unless earlier received,
(1) if sent by certified or registered mail, return receipt requested, or by
first-class mail, five calendar days after being deposited in the United States
mails, postage prepaid, (2) if sent by United States Express Mail or other
express mail service, two calendar days (other than Sundays and Federal
holidays) after being deposited therein, (3) if sent by telegram or telecopy, on
the date sent provided confirmatory notice is sent by first-class mail, postage
prepaid, and (4) if delivered by hand, on the date of receipt.
Section 13.3 Amendments.
----------
This Agreement may be amended from time to time with the consent of a
Majority of the Managing Members and the Capital Member. The Managing Member
shall, within a reasonable time after the adoption of any amendment to this
Agreement (but not longer than the period required by the Act), make any filings
or publications if required by the Act or desirable to make such amendments.
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Section 13.4 Binding Provisions.
------------------
The covenants and agreements contained herein shall be binding upon and
inure to the benefit of the heirs, executors, administrators, successors and
assigns of the respective parties hereto.
Section 13.5 No Waiver.
---------
The failure of any Member to seek redress for violation, or to insist
on strict performance, of any covenant or condition of this Agreement shall not
prevent a subsequent act which would have constituted a violation from having
the effect of an original violation.
Section 13.6 Certification of Interests.
--------------------------
In the sole discretion of the Managing Member, the Members' Interests may
be evidenced by certificates. In such case, the sale, assignment on other
transfer of any Interest hereunder shall be accompanied by the surrender for
cancellation and re-issuance of the certificate evidencing such Interest.
Section 13.7 Legends.
-------
If certificates are issued evidencing the Members' Interests, each such
certificate shall bear such legends as may be required by applicable federal and
state laws, or as may be deemed necessary or appropriate by the Managing Member,
to reflect restrictions upon transfer contemplated herein.
Section 13.8 Applicable Law.
--------------
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Delaware.
Section 13.9 Separability of Provisions.
--------------------------
Each provision of this Agreement shall be considered separable, and if for
any reason any provision or provisions of this Agreement, or the application of
such provision to any Person or circumstance, shall be held invalid or
unenforceable in any jurisdiction, such provision or provisions shall, as to
such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without invalidating the remaining provisions hereof, or the
application of the affected provision to Persons or circumstances other than
those to which it was held invalid or unenforceable, and any such invalidity or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
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Section 13.10 Entire Agreement.
----------------
This Agreement constitutes the entire agreement among the parties governing
the relationship established hereby. This Agreement supersedes any prior
agreement or understanding among the parties and may not be modified or amended
in any manner other than as set forth herein or therein.
Section 13.11 Section Titles.
--------------
Section titles are for descriptive purposes only and shall not control or
alter the meaning of this Agreement as set forth in the text.
Section 13.12 Counterparts.
------------
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto
notwithstanding that all the parties have not signed the same counterpart.
Section 13.13 Variation of Pronouns.
---------------------
When used herein, pronouns and variations thereof shall be deemed to refer
to the masculine, feminine or neuter or to the singular or plural as the
identity of the Person or Persons referenced or the context may require.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-40-
EXECUTION PAGE
--------------
This Agreement is executed as of the date first above written by the
Managing Members and by the Capital Members.
MANAGING MEMBERS: CAPITAL MEMBERS:
CMG@VENTURES CAPITAL CORP.
__________________________________ By:________________________________
David S. Wetherell Name:
Title:
__________________________________ CMG@VENTURES, INC.
Guy A. Bradley
By:________________________________
__________________________________ Name:
Jonathan Callaghan Title:
__________________________________
Andrew Hajducky
__________________________________
Peter H. Mills
-41-
SCHEDULE 1
----------
Percentages in Interest
-----------------------
- - - --------------------------------------------------
Name Percentage
---- ----------
- - - --------------------------------------------------
CMG@Ventures Capital Corp. 99%
- - - -------------------------------------------------
CMG@Ventures, Inc. 1%
- - - -------------------------------------------------
-42-
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA - The following table sets forth selected
consolidated financial information of the company for the five years in the
period ended July 31, 1998. This selected financial information should be read
in conjunction with the company's Consolidated Financial Statements and related
Notes.
(in thousands, except per share data)
Years ended July 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Consolidated Statement of Operations Data:
Net revenues $ 91,484 $ 70,607 $ 28,485 $22,293 $19,388
Cost of revenues 78,831 42,152 17,909 13,014 11,329
Research and development expenses 19,709 25,058 6,971 -- --
In-process research and development expenses 19,135 1,312 2,691 -- --
Selling, general and administrative expenses 52,820 55,194 21,488 6,387 4,792
-------- -------- -------- ------- -------
Operating income (loss) (79,011) (53,109) (20,574) 2,892 3,267
Interest income (expense), net (870) 1,749 2,691 225 (96)
Gain on sale of data warehouse product rights 8,437 -- -- -- --
Gain on sale of Lycos, Inc. common stock 97,158 -- -- -- --
Gain on stock issuance by Lycos, Inc. 28,301 -- 19,575 -- --
Gain on sale of available-for-sale securities 4,174 -- 30,049 4,781 --
Gain on sale of investment in TeleT Communications -- 3,616 -- -- --
Gain on sale of NetCarta Corporation -- 15,111 -- -- --
Gain on dividend distribution of Lycos, Inc. common stock -- 8,413 -- -- --
Other income (expense), net (11,849) (769) (746) (292) --
Income tax benefit (expense) (29,787) 2,962 (16,673) (2,844) (1,211)
-------- -------- -------- ------- -------
Income (loss) from continuing operations 16,553 (22,027) 14,322 4,762 1,960
Gain (loss) from discontinued operations -- -- -- 23,453 (159)
-------- -------- -------- ------- -------
Net income (loss) $ 16,553 $(22,027) $ 14,322 $28,215 $ 1,801
======== ======== ======== ======= =======
Diluted earnings (loss) per share:
Income (loss) from continuing operations $0.74 $(1.17) $0.74 $ 0.25 $ 0.13
Discontinued operations -- -- -- 1.25 (0.01)
-------- -------- -------- ------- -------
Net income (loss) $0.74 $(1.17) $0.74 $ 1.50 $ 0.12
======== ======== ======== ======= =======
Weighted average shares outstanding - diluted 22,515 18,858 19,364 18,782 15,584
======== ======== ======== ======= =======
Consolidated Balance Sheet Data:
Working capital $ 12,784 $ 38,554 $ 72,009 $47,729 $ 5,925
Total assets 237,460 148,354 109,503 80,486 12,740
Long-term obligations 5,801 16,769 555 508 165
Stockholders' equity 117,785 29,448 53,992 55,490 8,867
Exhibit 13.2
MANAGEMENT'S DISCUSSION &
ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below in "Factors
that May Affect Future Results", as well as those discussed in this section and
elsewhere in this report.
OVERVIEW
CMG Information Services, Inc. (CMG or the Company) develops and operates
Internet and direct marketing companies and venture funds focused on the
Internet.
CMG's Internet strategy includes the internal development and operation of
majority owned subsidiaries within the "CMG Internet Group" as well as the
investment in Internet companies though venture capital fund arrangements. The
Company's strategy also envisions and promotes opportunities for synergistic
business relationships among the Internet companies within its portfolio. At
July 31, 1998, the CMG Internet Group included majority-owned subsidiaries
ADSmart Corporation (ADSmart), Engage Technologies, Inc. (Engage), Accipiter,
Inc. (Accipiter), InfoMation Publishing Corporation (InfoMation), NaviSite
Internet Services Corporation (NaviSite), Planet Direct Corporation (Planet
Direct) and Password Internet Publishing Corporation (The Password), along with
a minority investment in Magnitude Network, LLC (Magnitude Network). ADSmart
develops and markets online ad sales and ad serving solutions; Engage develops
and markets precision online marketing solutions; Accipiter specializes in
Internet advertising management solutions; InfoMation develops and markets a
Web-based solution for corporate knowledge management; Password provides tools
for the creation of a personalized "mini-Web;" and Planet Direct is a
personalized Web service with over 400 Internet Service Provider (ISP) partners
which tailors members' online experience to their interests and local community.
Subsequent to July 31, 1998, the Company announced that InfoMation would become
a division of Planet Direct and that NaviSite would be split into two separate
companies NaviSite will continue to provide high-end server management and
applications solutions, providing high-availability Internet outsourcing, and
NaviNet will provide low cost, high-availability dial-up network connection
through competitive local exchange carriers (CLECs).
The Company's first Internet venture fund, its limited liability company
subsidiary, CMG@Ventures I, LLC (ERROR! BOOKMARK NOT DEFINED.I, formerly
CMG@Ventures L.P.), was formed in February, 1996. CMG completed its $35 million
commitment to this fund during fiscal year 1997. The Company owns 100% of the
capital and is entitled to 77.5% of the net capital gains of ERROR! BOOKMARK NOT
DEFINED.I. At July 31, 1998, CMG@Ventures I held equity investments in five
companies, including Blaxxun Interactive, Inc. (Blaxxun, 81% legal ownership),
GeoCities (32%), Lycos, Inc. (Lycos, 25%), Parable LLC (Parable, 31%), and
Vicinity Corporation (Vicinity, 50%). Lycos and GeoCities shares are publicly
traded on the NASDAQ system under the symbols LCOS and GCTY, respectively. The
Company's second Internet venture fund, its limited liability company
subsidiary, CMG@Ventures II, LLC (CMG@Ventures II), was formed during fiscal
year 1997. The Company owns 100% of the capital and is entitled to 80% of the
net capital gains of CMG@Ventures II. At July 31, 1998, CMG@Ventures II held
equity investments in fourteen companies, including Chemdex Corporation (Chemdex
16%), Critical Path (7%), GeoCities (2%), KOZ, inc. (KOZ, 14%), Mother Nature's
General Store, Inc. (Mother Nature, 24%), Parable (11%), Reel.com Inc.
(Reel.com, 36%), Sage Enterprises, Inc. (Sage Enterprises, 29%), Silknet
Software, Inc. (Silknet, 24%), Softway Systems, Inc. (Softway Systems, 9%),
Speech Machines plc (Speech Machines, 29%), TicketsLive Corporation
(TicketsLive, 14%), Universal Learning Technology (12%), and Visto Corporation
(Visto, 6%). CMG@Ventures II's investments in Sage Enterprises and Reel.com were
converted into shares of Amazon.com, Inc. and Hollywood Entertainment
Corporation, respectively, pursuant to mergers of the respective companies
subsequent to July 31, 1998. (See note 19 of Notes to Consolidated Financial
Statements.)
CMG recently formed its third venture capital fund, CMG@Ventures III, LLC
(CMG@Ventures III), and has begun raising capital from outside investors for a
corresponding outside investment fund, @Ventures III, L.P. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures III, and will be entitled to 2% of the net capital gains of
@Ventures III, L.P. These two funds will co-invest in all investment candidates
based on a predetermined ratio. CMG has committed to funding CMG@Ventures III
up to the greater of $30 million or 19.9% of amounts committed to @Ventures III,
L.P.
The Company provides fulfillment services through three wholly-owned
subsidiaries, SalesLink Corporation (SalesLink, acquired in 1989), InSolutions
Incorporated, (InSolutions, acquired June, 1998), and On-Demand Solutions, Inc.
(acquired July, 1998). SalesLink's services are also provided through its
subsidiary, Pacific Direct Marketing Corporation (Pacific Link), which was
acquired in October, 1996. The Company's fullfilment services offerings include
product and literature fulfillment, turnkey outsourcing, telemarketing, and
sales/ lead inquiry management. Traditional mailing list services are provided
by the Company's subsidiary, CMG
Direct Corporation (CMG Direct). Recently, CMG Direct has embarked on a
strategy to also provide solutions for integrating traditional direct marketing
with Internet marketing.
The Company has adopted a strategy of seeking opportunities to realize
significant gains through the selective sale of investments or having separate
subsidiaries or affiliates sell minority interests to outside investors. The
Company believes that this strategy provides the ability to significantly
increase shareholder value as well as provide capital to support the growth in
the Company's subsidiaries and investments. Additionally, in fiscal year 1999,
the Company will continue to develop and refine the products and services of its
businesses, with the goal of significantly increasing revenue as new products
are commercially introduced, and will continue to pursue a strong pace of
investing in new Internet opportunities.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items from the
Company's Consolidated Statements of Operations expressed as a percentage of net
revenues.
Fiscal Year Ended July 31,
1998 1997 1996
---- ---- -----
Net revenues 100% 100% 100%
Cost of revenues 86 60 63
Research and development expenses 21 35 24
In-process research and development expenses 21 2 9
Selling, general and administrative expenses 58 78 76
---- --- ---
Operating loss (86) (75) (72)
Other income, net 137 40 181
Income tax benefit (expense) (33) 4 (59)
---- --- ---
Net income (loss) 18% (31%) 50%
==== === ===
The Company's operations have been classified into three business segments (i)
investment and development, (ii) fulfillment services, and (iii) lists and
database services. (See note 3 of Notes to Consolidated Financial Statements.)
Operating income in the fulfillment services segment was adjusted during the
fourth quarter of fiscal year 1998 to correct prior quarters' understatements of
costs of sales by SalesLink's subsidiary company, Pacific Link. The cost of
sales understatement was caused by estimates used in determining the material
content in cost of sales. As a result, previous quarterly results had
understated cost of sales and overstated inventory. Had such adjustments been
recorded in the period in which they occurred, quarterly fulfillment services
segment operating income (loss) would have been as follows:
Three Months Ended
October 31, January 31, April 30, July 31,
---------- ---------- -------- -------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
As Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated As $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
DECONSOLIDATION OF LYCOS, INC, BEGINNING NOVEMBER, 1997
During the second fiscal quarter ended January 31, 1998, the Company sold
340,000 shares of Lycos stock on the open market and distributed 216,034 Lycos
shares to the profit members of CMG@Ventures I. Through the sale and
distribution of Lycos shares, the Company's ownership percentage in Lycos was
reduced from just in excess of 50% at October 31, 1997, to below 50% beginning
in November, 1997. As such, starting in November, 1997, the Company began
accounting for its remaining investment in Lycos under the equity method of
accounting, rather than the consolidation method. Prior to these events, the
operating results of Lycos were consolidated within the operating results of the
Company's investment and development segment, and the assets and liabilities of
Lycos were consolidated with those of CMG's other majority owned subsidiaries in
the Company's Consolidated Balance Sheets. The Company's historical consolidated
operating results for the fiscal years ended July 31, 1997 and 1996 included
Lycos net revenues of $22,253,000 and $5,257,000, respectively, and Lycos
operating losses of ($8,759,000) and ($5,802,000), respectively. The
Company's consolidated operating results for the fiscal quarter ended October
31, 1997 included Lycos net revenues and operating loss of $9,303,000 and
($433,000), respectively. The Company's historical Consolidated Balance Sheets
as of July 31, 1997 and October 31, 1997 included Lycos current assets and
liabilities and total assets and liabilities as follows:
Jul. 31, 1997 Oct. 31, 1997
------------- -------------
Current assets $ 60,745,000 $ 63,935,000
============ ============
Total assets $ 65,419,000 $ 67,694,000
============ ============
Current liabilities $ 22,615,000 $ 25,822,000
============ ============
Total liabilities $ 27,772,000 $ 29,259,000
============ ============
SALE OF ENGAGE DATA WAREHOUSE PRODUCTS AND RESTRUCTURING OF ENGAGE TECHNOLOGIES
From its inception in August, 1995, through July 31, 1997, the Company's wholly-
owned subsidiary, Engage Technologies, Inc. (Engage) focused on providing
traditional mailing list maintenance and database services (through its ListLab
division), and on developing data mining, querying, analysis and targeting
software products for use in large database applications. As such, the results
of Engage's operations were classified in the Company's list and database
services segment. During the first quarter of fiscal 1998, Engage sold certain
rights to its Engage.Fusion(TM) and Engage.Discover(TM) data warehouse products
to Red Brick Systems, Inc. (Red Brick) for $9.5 million and 238,160 shares of
Red Brick common stock. These products had been developed to accelerate the
design and creation of very large data warehouses and perform high-end data
query and analysis. Engage retained certain rights to sell Engage.Fusion and
Engage.Discover to interactive media markets as part of its Engage Product
Suite. Additionally, during the first quarter of fiscal year 1998, Engage
transferred its ListLab division to the Company's recently formed subsidiary,
CMG Direct. With the sale of these rights and transfer of its ListLab division,
Engage narrowed its focus to the Internet software solutions market, where it
seeks to help companies individually distinguish, understand and interact with
anonymous prospects and customers in personalized marketing, sales, and service
relationships via the Internet. As a result of this repositioning, beginning in
fiscal year 1998, the operating results of Engage are now classified in the
Company's investment and development segment.
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenues increased $20,877,000, or 30%, to $91,484,000 in 1998 from
$70,607,000 in 1997. The net increase reflects an increase of $27,068,000 in the
Company's fulfillment services segment, partially offset by decreases of
$5,208,000 and $983,000 for the Company's investment and development and lists
and database services segments, respectively. The increase in fulfillment
services segment revenues reflects the acquisition of Pacific Link in October,
1996, the acquisition of InSolutions in June, 1998, and the subsequent addition
of new customers and new turnkey business from existing customers. The
investment and development segment results include $12,950,000 less consolidated
revenues from the three months Lycos was consolidated in fiscal 1998 compared
with the twelve months for which Lycos revenues were included in the prior year.
Largely offsetting such decreases was the impact of consolidating Vicinity's
results beginning in the fourth quarter of fiscal year 1997, the impact of the
acquisition of Accipiter, Inc. (Accipiter) in April, 1998, and commencement of
operations at the Company's NaviSite, Engage, Planet Direct and ADSmart
subsidiaries. The net revenue decrease in the Company's lists and database
services segment primarily reflects reduced sales from a significant customer.
The Company believes that its portfolio of companies will continue to develop
and introduce their products commercially, actively pursue increased revenues
from new and existing customers, and look to expand into new market
opportunities. Therefore, absent the impact of the change in accounting for
Lycos, the Company expects to report future revenue growth.
Cost of revenues increased $36,679,000, or 87%, to $78,831,000 in 1998 from
$42,152,000 in 1997, reflecting increases of $26,488,000 and $11,489,000 in the
fulfillment services and investment and development segments, respectively,
somewhat offset by a $1,298,000 decrease in the lists and database services
segment. In the fulfillment services segment, cost of revenues increased as a
result of revenue increases, and increased as a percentage of net revenues to
84% in fiscal 1998 from 74% in fiscal 1997. This percentage increase was due to
a shift in mix of services from literature fulfillment towards lower margin
turnkey business, as well as an increase in the material content percentage of
turnkey sales, and operating inefficiencies experienced during a period of high
volume growth. The increase in the investment and development segment primarily
resulted from the commencement of operations at the Company's NaviSite, Engage,
Planet Direct and ADSmart subsidiaries, and the impact of consolidating Vicinity
beginning in fourth quarter fiscal 1997, partially offset by $2,843,000 lower
cost of sales resulting from deconsolidating Lycos beginning in the second
quarter of fiscal year 1998. The start-up of Internet operations at NaviSite,
Engage, Planet Direct and ADSmart, with minimal revenues during early stages,
and the deconsolidation of Lycos are the primary reasons cost of revenues as a
percentage of revenues in the investment and development segment increased from
35% in fiscal 1997 to 106% in fiscal 1998. Lists and database services segment
cost of revenues decreased $1,298,000 as a result of the combined impact of
sales decreases and operating cost reductions.
Research and development expenses decreased $5,349,000, or 21%, to $19,709,000
in fiscal 1998 from $25,058,000 in fiscal 1997, primarily reflecting a decrease
of $6,805,000 in the Company's lists and database services segment, partially
offset by an increase of $1,488,000 in the investment and development segment.
The lists and database services segment decrease primarily reflects the removal
of Engage from the segment. Investment and development segment results include
increases associated with the inclusion of Engage, expenditures for the
development of NaviSite's NaviNet technology platform, the impact of
consolidating Vicinity's results beginning in the fourth quarter of fiscal year
1997, the impact of the acquisition of Accipiter in April, 1998, and increased
development costs for The Password. Partially offsetting such increases,
investment and development segment results include a $2,868,000 reduction from
deconsolidating Lycos, reduced development costs associated with the progression
of Planet Direct, ADSmart and Blaxxun from initial development stages towards
commercial operations, and reductions associated with NetCarta Corporation
(NetCarta), whose results were included during the first half of fiscal year
1997, but have been excluded since the sale of NetCarta to Microsoft in January,
1997. In addition, the Company recorded $19,135,000 of in-process research and
development expense during fiscal 1998 related to the Company's acquisition of
Accipiter and investments in Speech Machines, Chemdex and Silknet compared to
$1,312,000 in fiscal 1997 related to investments in Parable and Silknet. The
Company anticipates it will continue to devote substantial resources to product
development and that, absent the impact of the Company's change in accounting
for Lycos, these costs may substantially increase in future periods.
Selling expenses decreased $6,512,000, or 17% to $31,071,000 in 1998 from
$37,583,000 in 1997. The net decrease reflects decreases of $5,470,000 and
$2,166,000 in the Company's investment and development, and lists and database
services segments, respectively, partially offset by an increase of $1,124,000
for the Company's fulfillment services segment. Investment and development
segment results include a $13,651,000 reduction from deconsolidating Lycos,
reduced marketing expenses at Blaxxun, and reductions associated with NetCarta,
FreeMark Communications, Inc. (FreeMark), and GeoCities, whose results were
included during part of fiscal year 1997, but have not been included in fiscal
1998. These decreases were partially offset by increased sales and marketing
expenses related to several product launches, continued growth of sales and
marketing infrastructures, the addition of Engage to this segment, the
acquisition of Accipiter, and the impact of consolidating Vicinity's results
beginning in the fourth quarter of fiscal year 1997. The lists and database
services segment decrease primarily reflects the removal of Engage from the
segment, and the fulfillment services segment increase primarily reflects the
acquisitions of Pacific Link in October, 1996 and InSolutions in June, 1998.
Selling expenses decreased as a percentage of net revenues to 34% in fiscal 1998
from 53% in fiscal 1997, primarily reflecting the impacts of the deconsolidation
of Lycos and of increased revenues in the Company's fulfillment services
segment. As the Company's subsidiaries continue to introduce new products and
expand sales, the Company expects to incur significant promotional expenses, as
well as expenses related to the hiring of additional sales and marketing
personnel and increased advertising expenses, and anticipates that, absent the
impact of the Company's change in accounting for Lycos, these costs will
substantially increase in future periods.
General and administrative expenses increased $4,138,000, or 24%, to $21,749,000
in 1998 from $17,611,000 in 1997. The net increase reflects increases of
$4,110,000 and $2,374,000 in the Company's investment and development, and
fulfillment services segments, respectively, partially offset by a decrease of
$2,346,000 for the Company's lists and database services segment. Investment
and development segment results include increases due to the building of
management infrastructures in several of the Company's Internet investments and
at the CMG corporate level, the addition of Engage and Accipiter to this
segment, and the impact of consolidating Vicinity's results beginning in the
fourth quarter of fiscal year 1997. Such increases were partially offset by a
$1,913,000 reduction from deconsolidating Lycos, cost reductions at Blaxxun, and
reductions associated with NetCarta, FreeMark, and GeoCities, whose results were
included during part of fiscal year 1997, but have not been included in fiscal
1998. The fulfillment services segment increase reflects the acquisitions of
Pacific Link in October, 1996 and InSolutions in June, 1998 and the addition of
management and infrastructure in support of growth in the segment. The lists and
database services segment decrease primarily reflects the removal of Engage from
the segment. General and administrative expenses decreased as a percentage of
net revenues to 24% in fiscal 1998 from 25% in fiscal 1997, primarily reflecting
the impact of increased revenues in the Company's fulfillment services segment.
Absent the impact of the Company's change in accounting for Lycos, the Company
anticipates that its general and administrative expenses will continue to
increase significantly as the Company's subsidiaries, particularly in the
investment and development segment, continue to grow and expand their
administrative staffs and infrastructures.
Interest income decreased $942,000 to $2,426,000 in 1998 from $3,368,000 in
1997, reflecting a $1,590,000 decrease from the deconsolidation of Lycos,
partially offset by increased income associated with higher average corporate
cash equivalent balances compared with prior year. Interest expense increased
$1,677,000 compared with fiscal 1997, primarily due to borrowings incurred to
finance the Company's acquisitions of Pacific Link in October, 1996, and
InSolutions in June, 1998, and the impact of higher average corporate borrowings
related to the Company's $10 million collateralized corporate note payable which
was issued in January, 1997 and increased to $20 million in January, 1998.
Gain on sale of data warehouse product rights occurred in fiscal 1998 when the
Company's subsidiary, Engage, sold certain rights to its Engage.Fusion(TM) and
Engage.Discover(TM) data warehouse products to Red Brick for $9.5 million and
238,160 shares of Red Brick common stock. Gain on sale of Lycos, Inc. common
stock reflects the Company's net gain realized on the sale of 1,955,015 shares
of
Lycos stock during fiscal 1998. Gain on stock issuance by Lycos, Inc. resulted
primarily from the issuance of stock by Lycos in a secondary offering in June,
1998, and from the issuance of stock by Lycos for the fiscal 1998 acquisitions
of Tripod and Wise Wire. Gain on sale of available-for-sale securities in fiscal
1998 reflects the Company's net gain realized on the sale of 224,795 shares of
Premiere Technologies, Inc. (Premiere) stock. Gain on sale of investment in
TeleT Communications in fiscal 1997 resulted when the Company sold its equity
interest in TeleT to Premiere in exchange for $550,000 and 320,833 shares of
Premiere stock in September 1996. Gain on sale of NetCarta Corporation in fiscal
year 1997 reflects the Company's pretax gain on sale of CMG @Ventures' NetCarta
subsidiary to Microsoft Corporation on January 31, 1997. Gain on distribution of
Lycos stock in fiscal 1997 resulted from the dividend distribution of 603,000
shares of Lycos common stock to CMG shareholders on July 31, 1997.
Equity in losses of affiliates resulted from the Company's ownership in certain
investments that are accounted for under the equity method. Under the equity
method of accounting, the Company's proportionate share of each affiliate's
operating losses and amortization of the Company's net excess investment over
its equity in each affiliate's net assets is included in equity in losses of
affiliates. Equity in losses of affiliates for fiscal 1998 include the results
from the Company's minority ownership in Ikonic Interactive, Inc. (Ikonic),
Parable, Silknet, GeoCities, Reel.com, Speech Machines, Chemdex, Sage
Enterprises, and Mother Nature, and the results from Lycos beginning in
November, 1997. Equity in losses of affiliates for fiscal 1997 included the
results from the Company's minority ownership in TeleT, Vicinity, Ikonic,
Parable, Silknet, GeoCities, and Reel.com. The Company expects its portfolio
companies to continue to invest in development of their products and services,
and to recognize operating losses, which will result in future charges recorded
by the Company to reflect its proportionate share of such losses.
Minority interest decreased to ($28,000) in 1998 from $4,787,000 in 1997,
primarily reflecting the deconsolidation of Lycos results beginning in the
second quarter of fiscal year 1998, and the impact associated with FreeMark and
GeoCities, whose results were included within the Company's consolidated
statements of operations during a portion of fiscal year 1997, but excluded in
fiscal year 1998.
The Company's effective tax rates for fiscal 1998 and 1997 were 64% and 12%,
respectively. The Company's effective tax rate differs materially from the
federal statutory rate primarily due to valuation allowances provided on certain
deferred tax assets, the provision for state income taxes, and non-deductible
goodwill amortization and in-process research and development charges.
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues increased $42,122,000, or 148%, to $70,607,000 in 1997 from
$28,485,000 in 1996. The increase was attributable to increases of $24,069,000
and $18,252,000 in net revenues for the Company's fulfillment services and
investment and development segments, respectively. The fulfillment services
segment increase was primarily due to the acquisition of Pacific Link on October
24, 1996 as well as the addition of several new SalesLink accounts closed in the
second half of fiscal year 1996. The increase in net revenues for the
investment and development segment primarily reflects increased revenues by
Lycos, (which was a consolidated subsidiary in both fiscal 1997 and 1996), whose
net revenues for the 1997 fiscal year increased by $16,996,000 in comparison
with 1996. Net revenues in the lists and database services segment decreased by
$199,000 during 1997 due to consolidation in the educational publishing industry
and competitive pricing pressure.
Cost of revenues increased $24,243,000, or 135%, to $42,152,000 in 1997 from
$17,909,000 in 1996, primarily due to increases of $18,740,000 and $4,911,000 in
the fulfillment services and investment and development segments, respectively,
resulting from higher revenues. In the fulfillment services segment, cost of
revenues as a percentage of net revenues increased to 74% in 1997 from 65% in
1996 due to the mix of services associated with the acquisition of Pacific Link
at the end of the first quarter of fiscal 1997. In the investment and
development segment, cost of revenues as a percentage of net revenues decreased
to 35% in 1997 from 60% in 1996 due to the ability to spread fixed costs, such
as facilities and equipment costs, over a larger revenue base.
Research and development expenses increased $18,087,000, or 260%, to $25,058,000
in fiscal 1997 from $6,971,000 in fiscal 1996. The increase consists primarily
of an increase of $12,516,000 in research and development expenses for the
investment and development segment as product development activities continued
at all of the Company's consolidated Internet investments. Also, research and
development expenses increased $5,732,000 in the lists and database services
segment reflecting the continued development of Engage's data mining, querying,
analysis and targeting products and services. The Company recorded $1,312,000 of
in-process research and development expenses related to investments in Parable
and Silknet during 1997, compared with $2,691,000 of in-process research and
development expenses recorded in 1996 related to the acquisition of several
Internet investments during 1996.
Selling expenses increased $25,917,000, or 222% to $37,583,000 in 1997 from
$11,666,000 in 1996. This increase was primarily attributable to a $22,609,000
selling expense increase in the Company's investment and development segment,
reflecting the sales and marketing efforts related to several product launches
and continued growth of sales and marketing infrastructures by the subsidiaries
of
this segment. Also, during 1997, Lycos launched a national television
advertising campaign which contributed to the increased selling expenses in the
investment and development segment. Selling expenses in the lists and database
services segment increased by $1,982,000 versus 1996 due to product launch
expenses and the continued building of sales and marketing infrastructure for
Engage. Selling expenses in the fulfillment services segment increased by
$1,326,000 in comparison with 1996 due to the acquisition of Pacific Link.
Selling expenses increased as a percentage of net revenues to 53% in 1997 from
41% in 1996.
General and administrative expenses increased $7,789,000, or 79%, to $17,611,000
in 1997 from $9,822,000 in 1996. The investment and development segment and
lists and database services segment experienced increases of $4,884,000 and
$1,505,000, respectively, due to the addition of management personnel and
administrative infrastructure in several of the Company's Internet investments
and Engage. General and administrative expenses in the fulfillment services
segment increased by $1,400,000 in comparison with fiscal 1996 due to the
acquisition of Pacific Link, including approximately $804,000 of goodwill
amortization charges. General and administrative expenses decreased as a
percentage of net revenues to 25% in 1997 from 35% in 1996 due to the
significant increase in net revenues in fiscal year 1997.
Gain on sale of NetCarta Corporation in fiscal 1997 reflects the Company's pre-
tax gain on the sale of this subsidiary to Microsoft Corporation on January 31,
1997. Gain on distribution of Lycos stock in fiscal 1997 resulted from the
dividend distribution of 603,000 shares of Lycos common stock to CMG
shareholders on July 31, 1997. Gain on sale of investment in TeleT
Communications in fiscal 1997 resulted when the Company sold its equity interest
in TeleT to Premiere in exchange for $550,000 and 320,833 shares of Premiere
stock in September, 1996. Gain on sale of available-for-sale securities in
fiscal 1996 occurred when the Company sold its remaining 1,020,000 shares of
America Online, Inc. common stock in October, 1995. Gain on stock issuance by
Lycos, Inc. in fiscal 1996 arose as a result of the sale of stock by Lycos in an
initial public offering in April, 1996.
Interest income increased $618,000 to $3,368,000 in 1997 from $2,750,000 in
1996. The increase in interest income primarily reflects income earned by Lycos
from the investment of the proceeds of their initial public offering, which
occurred in April 1996, partially offset by the impact of lower corporate cash
balances in fiscal 1997 as compared with fiscal 1996. Interest expense
increased $1,560,000 to $1,619,000 in 1997 from $59,000 in 1996. The increase
in interest expense was primarily due to borrowings incurred to finance the
Company's acquisition of Pacific Link and interest expense related to the
Company's $10,000,000 collateralized corporate note payable to a bank which was
issued in January, 1997.
Equity in losses of affiliates resulted from the Company's minority ownership in
certain investments that are accounted for under the equity method. The results
for fiscal 1996 reflect five minority investments: FreeMark, Ikonic, GeoCities,
Vicinity and TeleT. During the fourth quarter of fiscal 1996, the Company
increased its ownership in FreeMark and GeoCities above 50% and, accordingly,
began including their operating results in the Company's consolidated operating
results. FreeMark was consolidated through December 1996 when it suspended
operations. Equity in losses of affiliates for fiscal 1997 include the results
from the Company's minority ownership in Ikonic, Vicinity, Parable, Silknet,
Reel.com and TeleT (through the date of the sale of TeleT in September 1996).
Also, in January 1997, when GeoCities successfully completed an equity financing
round, CMG@Ventures I's ownership in GeoCities decreased from approximately 61%
to approximately 41%, and the Company began accounting for its investment in
GeoCities under the equity method of accounting, rather than the consolidation
method. In the fourth quarter of fiscal 1997, the Company began consolidating
the operating results of Vicinity when the Company's ownership in Vicinity was
increased to above 50%.
Minority interest increased to $4,787,000 in 1997 from $2,169,000 in 1996
reflecting minority interest in net losses of consolidated subsidiaries within
the Company's investment and development segment.
The Company's effective tax rates for fiscal 1997 and 1996 were 12% and 54%,
respectively. The Company's effective tax rate differed from the federal
statutory rates in fiscal years 1997 and 1996 primarily due to valuation
allowances provided on certain deferred tax assets, the provision for state
income taxes, and non-deductible goodwill amortization charges.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1998 decreased to $12.8 million compared to $38.6
million at July 31, 1997, predominately as a result of the expenditure of cash
for operations and the impact of deconsolidating Lycos, offset in large part by
proceeds from sales of Lycos stock. The Company's July 31, 1997 consolidated
working capital included Lycos working capital of $38.1 million. The Company's
principal uses of capital during fiscal 1998 were $71.7 million for funding of
operations, primarily those of start-up activities in the Company's investment
and development segment, $34.5 million for investments in affiliates and
acquisitions, largely by CMG@Ventures II in several Internet companies, and $8.2
million for purchases of property and equipment. The Company's principal
sources of capital during fiscal 1998 were $108.9 million received from the sale
of 1,955,015 shares of Lycos stock, $10.9 million received from the sale of
1,006,004 CMG common shares to Intel Corporation (Intel), $10 million received
from the sale of 625,000 CMG common shares to Sumitomo Corporation (Sumitomo),
$9.5 million from the sale of Engage's data warehouse product rights, and $7.6
million received from the sale of 224,795 shares of Premiere stock. The
Company intends to continue to fund existing and future Internet and interactive
media investment and development efforts. Additionally, at July 31, 1998, the
Company had approximately $68 million of remaining future noncancelable minimum
payments under operating leases for its facilities and certain other equipment.
During fiscal year 1998, the Company completed the acquisition of four companies
for purchase prices valued at a combined total of $53.8 million, including
Accipiter ($30.2 million purchase price in April, 1998), InSolutions ($15.2
million in June, 1998), Servercast ($1million in July, 1998), and On-Demand
Solutions ($7.4 million on July 31, 1998). The combined consideration for these
acquisitions consisted of 1,574,094 shares of the Company's common stock valued
at a total of $44.6 million, $6.7 million in cash, and $2.5 million financed
through sellers' notes. The shares issued by the Company were not registered
under the Securities Act of 1933 and were subject to restrictions on
transferability for periods ranging from six to twenty-four months. The values
of the Company's shares included in the purchase prices of these acquisitions
were recorded net of market value discounts ranging from 12% to 22%, based on
independent appraisal, to reflect the restrictions on transferability.
Additional consideration of up to $2.8 million could be paid related to the
acquisition of InSolutions if certain future performance goals are met. Of the
combined purchase prices of Accipiter and Servercast, $12.5 million was
allocated to goodwill, which will be amortized on a straight-line basis over
five years. Of the combined purchase prices of InSolutions and On-Demand
Solutions, $22.3 million was allocated to goodwill, which will be amortized on a
straight-line basis over fifteen years. Additionally, $18.0 million of the
purchase price of Accipiter was allocated to in-process research and development
which was charged to operations during fiscal 1998.
CMG @Ventures II invested a total of $27.6 million in fifteen companies during
fiscal year 1998, including $100,000 in Blaxxun, $1.8 million in GeoCities,
$200,000 in Vicinity, $3 million in Silknet, $2.1 million in Parable, $150,000
in KOZ, $3.5 million in Sage Enterprises, $4.6 million in Reel.com, $1.8 million
in Speech Machines, $2.6 million in Chemdex, $2 million in Tickets Live, $1
million in Critical Path, $2 million in Mother Nature, $1.5 million in Visto,
and $1.25 million in Universal Learning Technology. At July 31, 1998,
CMG@Ventures I held equity investments in five companies, including Blaxxun (81%
legal ownership), GeoCities (32%), Lycos (25%), Parable (31%), and Vicinity
(50%). At July 31, 1998, CMG@Ventures II held equity investments in fourteen
companies, including Chemdex (16%), Critical Path (7%), GeoCities (2%), KOZ
(14%), Mother Nature (24%), Parable (11%), Reel.com (36%), Sage Enterprises
(29%), Silknet (24%), Softway Systems (9%), Speech Machines (29%), TicketsLive
(14%), Universal Learning Technology (12%), and Visto (6%). The Company owns
100% of the capital interest and has all voting rights with respect to
CMG@Ventures I and CMG@Ventures II investments. The Company is entitled to
77.5% and 80% of the net capital gains, as defined, on investments made by
CMG@Ventures I and CMG@Ventures II, respectively. The remaining interest in the
net capital gains on these investments are attributed to profit partners,
including the President and Chief Executive Officer and the Chief Financial
Officer of the Company. The Company is responsible for all operating expenses
of CMG @Ventures I and CMG @Ventures II. CMG @Ventures I's interest in Lycos is
subject to further reduction because CMG @Ventures I is obligated to sell to
Lycos a portion of its shares of common stock of Lycos, as necessary, to provide
for shares issuable upon exercise of options granted by Lycos under its 1995
stock option plan. As of July 31, 1998, (retroactively adjusted to reflect
Lycos' two-for-one stock split affected in August, 1998), CMG@Ventures I was
obligated to sell up to 391,296 shares to Lycos at a price of $0.01 per share
and up to 458,048 shares at prices ranging from $0.14 to $4.80 per share.
After accounting for Lycos shares subject to option funding and shares
attributable to profit partners, approximately 6.5 million Lycos shares, (also
on a post-split basis), were attributable to CMG as of July 31, 1998.
CMG@Ventures II's investments in Sage Enterprises and Reel.com were converted
into shares of Amazon.com, Inc. and Hollywood Entertainment Corporation,
respectively, pursuant to mergers of the respective companies subsequent to July
31, 1998. (See note 19 of Notes to Consolidated Financial Statements.)
On January 20, 1998, the Company renewed its collateralized corporate borrowing
for an additional term of one year and increased the outstanding principal
amount under this facility from $10 million to $20 million. This borrowing is
secured by 2,511,578 of the Company's shares of Lycos common stock and is
payable in full on January 20, 1999. Under this agreement, the Company could
become subject to additional collateral requirements under certain
circumstances. The Company is considering either seeking the renewal of this
note, or repaying it using future proceeds from the sale of stock of certain
investee companies. SalesLink had an
outstanding balance of $6.2 million at July 31, 1998 and an additional $800,000
reserved in support of outstanding letters of credit for operating leases.
SalesLink also has a $15.5 million bank term note outstanding as of July 31,
1998, which provides for repayment in quarterly installments beginning January,
1999 through November, 2002. The Company's bank borrowing arrangements are
subject to normal banking terms and conditions, including financial covenants
requiring the Company or SalesLink to maintain certain levels of net worth and
income, certain financial position ratios, as well as limitations on
indebtedness and capital expenditures. As of July 31, 1998, SalesLink did not
comply with certain covenants of their borrowing arrangements. SalesLink is
working with the bank to cure the non-compliance, as of July 31, 1998 and
prospectively, through waivers or amendments to the covenant terms. SalesLink
has not yet received such waivers or amendments and, accordingly, all of
SalesLink's bank borrowings have been classified as current liabilities in the
July 31, 1998 Consolidated Balance Sheet.
The Company's consolidated capital expenditures were $8.2 million in fiscal
1998. Concurrent with its growth and the commencement of start-up operations,
the Company has experienced a substantial increase in its capital expenditures
and operating lease arrangements in fiscal year 1998 and anticipates that this
will continue in the future. The Company's accounts receivable, current
deferred revenues, long-term deferred revenues, and minority interest decreased
$5 million, $8.7 million, $5.1 million, and $14.5 million, respectively,
primarily as a result of the change in the Company's method of accounting for
Lycos. Investments in affiliates increased $57 million, primarily as a result
of the change in the Company's method of accounting for Lycos, the impact of
gains recorded on stock issuances by Lycos, and the investment in new affiliates
during fiscal 1998, partially offset by the impact of the sales of Lycos stock
and the recording of equity in losses of affiliates during the year. Costs in
excess of net assets of subsidiaries acquired, net of accumulated amortization,
in the Company's July 31, 1998 Consolidated Balance Sheet increased $32.6
million in comparison with July 31, 1997, primarily due to $34.8 million of
goodwill recorded relating to the acquisitions of Accipiter, InSolutions,
Servercast and On-Demand Solutions during fiscal 1998, offset by amounts
amortized during fiscal 1998. Accrued income tax liabilities of $10.1 million
at July 31, 1998 reflect current tax payments due, largely as a result of income
earned in fiscal year 1998. Additional paid-in capital increased $74.5 million,
primarily as a result of the issuance of stock for acquisitions and the sales of
stock to Intel and Sumitomo.
Subsequent to fiscal 1998 year-end, in August, 1998, CMG@Ventures II's holdings
in Sage Enterprises were converted into 225,558 shares of restricted Amazon.com,
Inc. common stock as part of a merger wherein Amazon.com, Inc. acquired Sage
Enterprises. CMG@Ventures II had invested $4.5 million in Sage Enterprises
beginning in June, 1997. In October, 1998, CMG@Ventures II's holdings in
Reel.com were converted into 1,943,783 restricted common and 485,946 restricted,
convertible preferred shares of Hollywood Entertainment Corporation (Hollywood
Entertainment) as part of a merger wherein Hollywood Entertainment acquired
Reel.com. The Hollywood Entertainment preferred shares are convertible into
common shares on a 1-for-1 basis, subject to approval by Hollywood Entertainment
shareholders. CMG@Ventures II had invested $6.9 million in Reel.com beginning
in July, 1997. Also in October, 1998, in a separate transaction, the Company
purchased 1,524,644 restricted common and 803,290 restricted, convertible
preferred shares of Hollywood Entertainment for a total purchase price of $31.1
million. The preferred shares are convertible into common shares on a 1-for-1
basis, subject to approval by Hollywood Entertainment shareholders.
In August, 1998, the Company's affiliate, GeoCities, completed its initial
public offering of common stock, issuing approximately 5 million shares at a
price of $17.00 per share. The Company, through its subsidiaries, CMG@Ventures
I and II, has invested a total of $5.9 million in GeoCities beginning in
January, 1996. CMG@Ventures I and II own a combined 8.8 million shares of
GeoCities common stock and options to purchase an additional 1 million shares at
a price of $0.89 per share. The Company expects to record a gain on the
issuance of stock by GeoCities during its fiscal quarter ended October 31, 1998,
representing the increase in the book value of the Company's net equity in
GeoCities as a result of the initial public offering. The gain will be recorded
net of the interests attributable to CMG@Ventures I's and II's profit members.
The Company recently formed its third venture capital fund, CMG@Ventures III,
LLC (CMG@Ventures III), and has begun raising capital from outside investors for
a corresponding outside investment fund, @Ventures III, L.P. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures III, and will be entitled to 2% of the net capital gains of
@Ventures III, L.P. These two funds will invest side by side in all investment
candidates. CMG has committed to fund CMG@Ventures III the greater of $30
million or 19.9% of amounts committed to @Ventures III, L.P.
The Company intends to continue to fund existing and future Internet and
interactive media investment and development efforts, and to actively seek new
CMG@Ventures investment opportunities. The Company believes that existing
working capital and the availability of additional Lycos, GeoCities, Amazon.com
and Hollywood Entertainment shares which could be sold or posted as collateral
for additional loans, will be sufficient to fund its operations, investments and
capital expenditures for the foreseeable future. Additionally, the Company is
currently attempting to raise additional equity capital through a private
placements. Should further capital be needed to fund future investment and
acquisition activity, the Company may seek to raise capital through additional
public or private offerings of the Company's or its subsidiaries' stock, or
through debt financings.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. CMG is in the process of evaluating and correcting the Year 2000
compliance of its proprietary products and services and third party equipment
and software that it uses, as well as its non-information technology systems,
such as building security, voice mail and other systems. The Company's Year
2000 compliance efforts will consist of the following phases: (i) identification
of all software products, information technology systems and non-information
technology systems; (ii) assessment of repair or replacement requirements; (iii)
repair or replacement; (iv) testing; (v) implementation; and (vi) creation of
contingency plans in the event of Year 2000 failures. The Company has
substantially completed phase (i) and has begun phases (ii) and (iii) of its
Year 2000 efforts. The Company expects to complete its Year 2000 compliance
efforts by the end of June, 1999.
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. Preliminary
estimates regarding expected costs to CMG for evaluating and correcting Year
2000 issues are in the range of $3 million to $5 million, but there can be no
assurance that the costs will not exceed such amounts. The Company's
expectations regarding Year 2000 remediation efforts will evolve as it continues
to analyze and correct its systems. The Company has not yet developed a formal
Year 2000-specific contingency plan. The Company expects that a formal Year
2000 contingency plan will evolve as it completes its Year 2000 compliance
efforts. Failure by the Company to resolve Year 2000 issues with respect to its
proprietary products and services could have a material adverse effect on the
Company's business, results of operations and financial condition. Furthermore,
failure of third-party equipment or software to operate properly with regard to
the year 2000 and thereafter could require CMG to incur significant
unanticipated expenses to remedy any problems.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. Forward-looking
statements in this document and those made from time to time by the Company
through its senior management are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking
statements concerning the expected future revenues or earnings or concerning
projected plans, performance, product development, product release or product
shipment, as well as other estimates related to future operations are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations. The Company
undertakes no obligation to publicly release the results of any revisions to
forward-looking statements which may be made to reflect events or circumstances
occurring after the date such statements were made or to reflect the occurrence
of unanticipated events.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to the
following:
FUTURE CAPITAL NEEDS - In recent years CMG has generated significant operating
losses which have been partially funded by gains on sales of its interests in
other companies. In the future, CMG may need to access outside sources of
financing. There can be no assurance that any such financing will be available.
If such financing is available, furthermore, it may involve issuing securities
senior to the Common Stock or equity financings which are dilutive to holders of
the Common Stock.
DEPENDENCE ON A SINGLE CUSTOMER - During fiscal year 1998 a significant portion
of the Company's revenues were derived from a limited number of customers,
including Cisco Systems, Inc. (Cisco), which accounted for 42% of total revenues
and 61% of fulfillment services segment fiscal year 1998 revenues. While the
Company is actively pursuing increasing the number of fulfillment services
customers, the Company believes that its dependence on Cisco will continue.
This concentration of customers may cause net sales and operating results to
fluctuate from quarter to quarter based on Cisco's requirements and the timing
of their orders and shipments. The Company does not have agreements in place
with Cisco to ensure minimum purchase commitments or exclusivity for purchase of
a particular product or service. The Company's operating results could be
materially affected if Cisco were to choose to reduce its level of orders, were
to change to another vendor, were to experience financial, operational, or other
difficulties, or were to delay paying or fail to pay amounts due to the Company.
DEPENDENCE ON CONTINUED GROWTH OF THE INTERNET AND INTERNET INFRASTRUCTURE -
CMG's future success is highly dependent upon continued growth in the use of the
Internet generally and, in particular, as a medium for advertising, marketing,
services and commerce. Commercial use of the Internet is at an early stage of
development, and market acceptance of the Internet as a medium for advertising,
information services and commerce is subject to a high level of uncertainty.
The relative effectiveness of the Internet as an advertising medium as compared
to traditional advertising media, for example, has not been determined.
Further, there can be no assurance that the required infrastructure to support
future Internet user and traffic growth or complementary products or services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if they are developed, that the Internet will become a viable
commercial marketplace for products and services such as those offered by CMG.
If commercial use of the Internet fails to continue to expand, CMG's business,
results of operations and financial condition would be adversely affected.
DEPENDENCE ON KEY PERSONNEL - CMG's performance is substantially dependent on
the performance of its executive officers and other key employees and its
ability to attract, train, retain and motivate high quality personnel,
especially highly qualified technical and managerial personnel. The loss of the
services of any of its executive officers or key employees could have a material
adverse effect on its business, results of operations or financial condition.
Competition for talented personnel is intense, and there can be no assurance
that CMG will be able to continue to attract, train, retain or motivate other
highly qualified technical and managerial personnel in the future.
PRIVACY ISSUES WITH COOKIES - CMG's Internet services use "cookies" to deliver
targeted advertising and marketing initiatives, help compile demographic
information about users and limit the frequency with which an ad is shown to a
user. Cookies are bits of information keyed to a specific computer hard drive
and passed to an Internet site server automatically without the user's knowledge
or consent, but can be removed by the user at any time through the modification
of the user's browser settings. Due to privacy concerns, Germany has imposed
laws restricting the use of cookies, and several Internet commentators,
advocates and governmental bodies have suggested that the use of cookies be
restricted or eliminated. In addition, certain currently available Internet
browsers readily allow a user to delete cookies or prevent cookies from being
stored on the user's drive. Any reduction or limitation in the use of cookies
could limit the effectiveness of CMG's ad targeting and marketing initiatives
which could result not only in reduced marketplace demand for products and
services offered by CMG to operators of Web sites, but also in CMG experiencing
lower rates for its advertisements which could have a material adverse effect on
CMG's business, results of operations and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES - CMG is not currently subject to
direct regulation by any government agency, other than regulations applicable to
businesses generally. However, governmental regulators may apply such
regulations to Internet activities. There are currently few laws or regulations
directly applicable to access to or commerce on the Internet. Due to increasing
popularity and use of the Internet, however, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing, characteristics and quality of products
and services. The adoption of any additional laws or regulations may also
decrease the growth of the Internet, which could in turn decrease the demand for
CMG's products and services or could increase CMG's cost of doing business.
Moreover, the applicability to the Internet of a range of existing laws in
domestic and international jurisdictions governing issues such as commerce,
taxation, property ownership, defamation and personal privacy is uncertain and
will likely evolve over the course of many years. Any such new legislation or
regulation or application or interpretation of existing laws, including tax
laws, could have an adverse effect on CMG's business, results of operations and
financial condition.
RAPID CHANGE IN TECHNOLOGY AND DISTRIBUTION CHANNELS - Because the use of the
Internet as a commercial medium is relatively recent and continues to evolve,
the market for CMG's products and services is characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
introductions, shifting distribution channels, and changing customer demands.
Accordingly, CMG's future success will depend on its ability to adapt to this
rapidly evolving marketplace. There can be no assurance that CMG will be able
to adequately adapt its products and services or to acquire new products and
services that can compete successfully or that CMG will be able to establish and
maintain effective distribution channels. Failure to maintain competitive
product and service offerings and distribution channels would have an adverse
affect on CMG's business, results of operations and financial condition. In
addition, responding to these rapid technological changes could require
substantial expenditures by CMG, and there can be no assurance that such
expenditures will yield a positive investment return.
INTENSE COMPETITION - The market for Internet products and services is highly
competitive and lacks significant barriers to entry. CMG expects competition to
intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with CMG's products and
services. There can be no assurance that CMG will be able to compete
successfully or that competitive pressures, including possible downward pressure
on the prices it charges for its products and services, will not adversely
affect its business, results of operations and financial condition.
RISKS INHERENT TO CMG'S ACQUISITION STRATEGY - CMG has in the past, and intends
in the future, to expand though the acquisition of businesses, technologies,
products and services, such as the recent acquisitions of Accipiter, InSolutions
and On-Demand Solutions. Acquisitions may result in the potentially dilutive
issuance of equity securities, the incurrence of additional debt, the write-off
of in-process research and development of software acquisition and development
costs, and the amortization of goodwill and other intangible assets. For
example, for the year ended July 31, 1998, the Company recorded in-process
research and development expense of approximately $19.1 million, primarily in
connection with the acquisition of Accipiter. In September, 1998, a
representative of the Securities and Exchange Commission (the SEC) advised the
American Institute of Certified Public Accountants with respect to factors to be
considered in the valuation of in-process research and development. Although the
release of this new guidance presents the potential risk of adjustments to
reported amounts, if the Company's valuation methodology were to be challenged
by the SEC, the Company believes that its recorded in-process research and
development expenses were determined in compliance with such guidance. Any such
adjustment could result in an increase in the amount of goodwill recorded, which
would result in higher amortization expenses and, therefore, adversely affect
the Company's operating results. Further, acquisitions involve a number of
special problems, including difficulty integrating technologies, operations and
personnel and diversion of management attention in connection with both
negotiating the acquisitions and integrating the assets. There can be no
assurance that CMG will be successful in addressing such problems. In addition,
growth associated with numerous acquisitions places significant strain on CMG's
managerial and operational resources. CMG's future operating results will depend
to a significant degree on its ability to successfully manage growth and
integrate acquisitions. Furthermore, many of CMG's investments are in early-
stage companies, with limited operating histories and limited or no revenues;
there can be no assurance that CMG will be successful in developing such
companies.
UNCERTAINTIES ASSOCIATED WITH SELLING ASSETS - A significant element of CMG's
business plan involves selling, in public or private offerings, portions of the
companies it has acquired and developed. CMG's ability to engage in any such
transactions, the timing of such transactions and the amount of proceeds from
such transactions are dependant on market and other conditions largely beyond
CMG's control. Accordingly, there can be no assurance that CMG will be able to
engage in such transactions in the future or that when CMG is able to engage in
such transactions they will be at favorable prices. If CMG were unable to
liquidate portions of its portfolio companies at favorable prices, CMG's
business, financial condition and results of operations would be adversely
affected.
FLUCTUATING VALUE OF CERTAIN STOCK ASSETS - A portion of the Company's assets
includes the equity securities of both publicly traded and non-publicly traded
companies. Such assets include a large number of shares of common stock of
Lycos and GeoCities, both publicly traded companies. Fluctuations in the market
price and valuations of the Company's holdings in such other companies, which
are partially dependent on market and other conditions that are beyond the
Company's control, may result in fluctuations of the market price of the
Company's Common Stock.
MANAGEMENT OF GROWTH - CMG's growth has placed, and is expected to continue to
place, a significant strain on CMG's managerial, operational and financial
resources. Further, as the number of CMG's users, advertisers and other
business partners grows, CMG is required to manage multiple relationships with
various customers, strategic partners and other third parties. These
requirements will be exacerbated in the event of further growth of CMG or in the
number of its strategic relationships or sponsorship arrangements. There can be
no assurance that CMG's systems, procedures or controls will be adequate to
support CMG's operations or that CMG management will be able to achieve the
rapid execution necessary to successfully offer its services and implement its
business plan. CMG's future operating results will also depend on its ability
to expand its sales and marketing organization and expand its support
organization commensurate with the growth of its business and the Internet. If
CMG is unable to manage growth effectively, CMG's business, results of
operations and financial condition will be adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT - The Company believes that establishing
and maintaining its brand names is a crucial aspect of its effort to continue to
expand and attract Internet business and that the importance of brand
recognition will increase in the future due to the growing number of Internet
companies. Promotion and enhancement of the Company's brand names will depend
largely on the Company's ability to provide consistently high-quality products
and services, which cannot be assured. If consumers do not perceive the
Company's existing products and services to be of high quality, or if the
Company introduces new products and services or enters into new business
ventures that are not favorably received by consumers, the value of the
Company's brand names could be diminished.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS - CMG is currently, and expects to be in
the future, dependent on a number of third-party relationships. These
relationships include arrangements relating to the creation of traffic on CMG-
affiliated Web sites and resulting generation of advertising and commerce-
related revenue. The termination of, or the failure of such CMG-affiliated Web
sites to renew on reasonable terms, such relationships could have an adverse
effect on CMG's business, results of operations and financial condition. CMG
also is generally dependent on other third-party relationships with advertisers,
sponsors and partners. Most of these arrangements do not require future minimum
commitments to use CMG's services, are often not exclusive and are often short-
term or may be terminated at the convenience of the other party. There can be
no assurance that these third parties will not reassess their commitment to CMG
at any time in the future, or that they will not develop their own competitive
services or products. Further, there can be no assurance that the services of
these companies will achieve market acceptance or commercial success and
therefore there can be no assurance that CMG's existing relationships will
result in sustained or successful business partnerships or significant revenues
for CMG.
FLUCTUATIONS IN QUARTERLY RESULTS - CMG's operating results have fluctuated
widely on a quarterly basis during the last several years, and the Company
expects to experience significant fluctuations in future quarterly operating
results. Such fluctuations have been, and may in the future be, caused by
numerous factors, many of which are outside CMG's control, including demand for
CMG's products and services, incurrence of costs associated with acquisitions,
divestitures and investments, the timing of divestitures, market acceptance of
new products and services, specific economic conditions in the Internet and
direct marketing industries, and general economic conditions. The emerging
nature of commercial use of the Internet makes predictions concerning future
revenues difficult. CMG believes that period-to-period comparisons of its
results of operations will not necessarily be meaningful and should not be
relied upon as indicative of future performance.
COMPUTER OPERATIONS - The Company's operations are dependent in part upon its
ability to protect its computer operating systems against physical damage from
fire, floods, earthquakes, power loss, telecommunications failures, break-ins
and similar events. The Company's data centers are equipped with generator back
up equipment, multiple fiber lines and other liquid and fire protection systems
for protection in case of disaster. Despite the implementation of physical and
network security measures by the Company, its
servers are also vulnerable to computer viruses, break-ins and similar
disruptive problems. The occurrence of any of these events could result in
interruptions, delays or cessations in service to users of the Company's
products and services which could have a material adverse effect on the
Company's business, results of operations and financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT - CMG's success depends
in part on its proprietary technology and its ability to protect such technology
under applicable patent, trademark, copyright and trade secret laws.
Accordingly, CMG seeks to protect the intellectual property rights underlying
its products and services by filing applications and registrations, as
appropriate, and through its agreements with employees, suppliers, customers and
partners. However, there can be no assurance that measures adopted by CMG to
protect its proprietary technology will prevent infringement or misappropriation
of such technology. Further, legal standards relating to the validity,
enforceability and scope of protection of certain proprietary rights in the
context of the Internet industry currently are not resolved. CMG licenses
certain components of its products and services from third parties. The failure
by CMG to maintain such licenses, or to find replacement components in a timely
and cost effective manner, could have a material adverse effect on CMG's
business, results of operation and financial condition. From time to time CMG
has been, and expects to continue to be, subject to claims in the ordinary
course of its business, including claims of alleged infringement of intellectual
property rights of third parties by CMG. Any such claim could subject CMG to
significant liability for damages and could result in invalidation of CMG's
proprietary rights and, even if not meritorious, could be time-consuming and
expensive to defend, and could result in the diversion of management time and
attention, any of which could have an adverse effect on CMG's business, results
of operations or financial condition.
Exhibit 13.3
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
July 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 61,537 $ 59,762
Available-for-sale securities 5,764 5,945
Accounts receivable, trade, less allowance for doubtful accounts of $1,055 and $1,083 in 1998 and 1997 23,960 28,935
Inventories 8,250 3,077
Prepaid expenses 3,210 6,174
Other current assets 2,364 2,798
-------- --------
Total current assets 105,085 106,691
-------- --------
Property and equipment 24,397 20,091
Less accumulated depreciation and amortization 10,424 8,947
-------- --------
Net property and equipment 13,973 11,144
-------- --------
Investments in affiliates 66,187 9,160
Costs in excess of net assets of subsidiaries acquired, net of accumulated
amortization of $3,508 in 1998 and $1,420 in 1997 49,682 17,109
Other assets 2,533 4,250
-------- --------
$237,460 $148,354
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 27,656 $ 22,494
Current installments of long-term debt 16,594 3,221
Accounts payable 11,261 9,959
Accrued income taxes 10,085 --
Accrued expenses 20,534 18,341
Deferred revenues 4,932 13,680
Other current liabilities 1,239 442
-------- --------
Total current liabilities 92,301 68,137
-------- --------
Long-term debt, less current installments 1,373 9,550
Long-term deferred revenues -- 5,100
Deferred income taxes 10,528 8,481
Other long-term liabilities 4,428 2,119
Minority interest 11,045 25,519
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share. Authorized 5,000,000 shares; none issued -- --
Common stock, $0.01 par value per share. Authorized 40,000,000 shares; issued and
outstanding 23,033,943 shares at July 31, 1998 and 19,319,086 shares at July 31, 1997 230 193
Additional paid-in capital 91,260 16,783
Net unrealized gain (loss) on available-for-sale securities (436) 852
Deferred compensation (1,442) --
Retained earnings 28,173 11,620
-------- --------
Total stockholders' equity 117,785 29,448
-------- --------
$237,460 $148,354
======== ========
see accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended July 31,
1998 1997 1996
--------- ---------- ---------
Net revenues $ 91,484 $ 70,607 $ 28,485
Operating expenses:
Cost of revenues 78,831 42,152 17,909
Research and development 19,709 25,058 6,971
In-process research and development 19,135 1,312 2,691
Selling 31,071 37,583 11,666
General and administrative 21,749 17,611 9,822
-------- -------- --------
Total operating expenses 170,495 123,716 49,059
-------- -------- --------
Operating loss (79,011) (53,109) (20,574)
-------- -------- --------
Other income (deductions):
Interest income 2,426 3,368 2,750
Interest expense (3,296) (1,619) (59)
Gain on sale of data warehouse product rights 8,437 -- --
Gain on sale of Lycos, Inc. common stock 97,158 -- --
Gain on stock issuance by Lycos, Inc. 28,301 -- 19,575
Gain on sale of available-for-sale securities 4,174 -- 30,049
Gain on sale of investment in TeleT Communications -- 3,616 --
Gain on sale of NetCarta Corporation -- 15,111 --
Gain on dividend distribution of Lycos, Inc. common stock -- 8,413 --
Equity in losses of affiliates (11,821) (5,556) (2,915)
Minority interest (28) 4,787 2,169
-------- -------- --------
125,351 28,120 51,569
Income (loss) before income taxes 46,340 (24,989) 30,995
Income tax expense (benefit) 29,787 (2,962) 16,673
-------- -------- --------
Net income (loss) $ 16,553 $(22,027) $ 14,322
======== ======== ========
Earnings (loss) per share:
Basic $ 0.79 $ (1.17) $ 0.80
======== ======== ========
Diluted $ 0.74 $ (1.17) $ 0.74
======== ======== ========
Weighted average shares outstanding:
Basic 20,833 18,858 18,008
======== ======== ========
Diluted 22,515 18,858 19,364
======== ======== ========
see accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON TOTAL
COMMON PAID-IN AVAILABLE-FOR- DEFERRED RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL SALE SECURITY COMPENSATION EARNINGS STOCK EQUITY
----- ------- ------------- ------------ -------- ----- ------
Balance at July 31, 1995
(17,677,440 shares) $177 $ 6,973 $ 18,005 $ -- $ 30,335 $ -- $ 55,490
Net income -- -- -- -- 14,322 -- 14,322
Issuance of common stock
(656,054 shares) 6 365 -- -- -- -- 371
Tax benefit of stock option exercises -- 695 -- -- -- -- 695
Effect of subsidiaries' equity
transactions -- 1,119 -- -- -- -- 1,119
Sale of available-for-sale securities -- -- (18,005) -- -- -- (18,005)
------ ------- --------- --------- -------- ----- --------
Balance at July 31, 1996
(18,333,494 shares) 183 9,152 -- -- 44,657 -- 53,992
Net loss -- -- -- -- (22,027) -- (22,027)
Dividend of Lycos, Inc. common
stock -- -- -- -- (11,010) -- (11,010)
Net unrealized gain on
available-for-sale securities -- -- 852 -- -- -- 852
Purchase of treasury stock
(200,000 shares) -- -- -- -- -- (984) (984)
Issuance of common stock
(1,185,592 shares) 10 7,176 -- -- -- 984 8,170
Tax benefit of stock option exercises -- 277 -- -- -- -- 277
Effect of subsidiaries' equity
transactions -- 178 -- -- -- -- 178
------ ------- --------- --------- -------- ----- --------
Balance at July 31, 1997
(19,319,086 shares) 193 16,783 852 -- 11,620 -- 29,448
Net income -- -- -- -- 16,553 -- 16,553
Issuance of common stock
(3,714,857 shares) 37 67,763 -- -- -- -- 67,800
Deferred compensation related to
acquisition of Accipiter, Inc. -- 1,731 -- (1,731) -- -- --
Amortization of deferred compensation -- -- -- 289 -- -- 289
Sale of available-for-sale securities -- -- (852) -- -- -- (852)
Net unrealized loss on
available-for-sale securities -- -- (436) -- -- -- (436)
Tax benefit of stock option exercises -- 3,114 -- -- -- -- 3,114
Effect of subsidiaries' equity
transactions -- 1,869 -- -- -- -- 1,869
------ ------- --------- --------- -------- ----- --------
Balance at July 31, 1998
(23,033,943 shares) $230 $91,260 $ (436) $(1,442) $ 28,173 $ -- $117,785
====== ======= ========= ========= ======== ===== ========
see accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended July 31,
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $ 16,553 $(22,027) $ 14,322
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization 6,793 5,307 2,823
Deferred income taxes (802) (871) 8,283
Non-operating gains (138,070) (27,140) (49,624)
Equity in losses of affiliates 11,821 5,556 2,915
Minority interest 28 (4,787) (2,169)
In-process research and development 19,135 1,312 2,691
Changes in operating assets and liabilities, excluding effects from acquisitions and
divestitures of subsidiaries:
Trade accounts receivable (8,656) (11,963) (7,269)
Inventories (3,873) (2,390) --
Prepaid expenses (1,269) (4,046) (1,762)
Accounts payable and accrued expenses 8,600 10,039 8,232
Deferred revenues 3,618 12,866 4,595
Refundable and accrued income taxes, net 15,031 (3,157) (7,678)
Other assets and liabilities (634) (352) (685)
--------- -------- --------
Net cash used for operating activities (71,725) (41,653) (25,326)
--------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (8,189) (6,939) (7,068)
Investments in affiliates and acquisitions of subsidiaries, net of cash acquired (34,512) (23,566) (6,010)
Proceeds from sale of data warehouse product rights 9,543 -- --
Proceeds from sales of Lycos, Inc. common stock 108,876 -- --
Proceeds from sale or maturities of available-for-sale securities 7,555 13,069 69,918
Purchases of available-for-sale securities (5,000) -- (25,526)
Proceeds from sales of NetCarta Corporation and investment in TeleT Communications -- 19,018 --
Reduction in cash due to deconsolidation of Lycos, Inc. (41,017) -- --
Other, net (338) (734) (67)
--------- -------- --------
Net cash provided by investing activities 36,918 848 31,247
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable, net of repayments 4,456 22,630 --
Proceeds from issuance of long-term debt 10,250 6,500 --
Repayments of long-term debt (7,521) (1,230) --
Sale of common and treasury stock 23,206 8,170 371
Purchase of treasury stock -- (984) --
Net proceeds from issuance of stock by subsidiaries 3,526 -- 48,058
Other 2,665 2,094 (386)
--------- -------- --------
Net cash provided by financing activities 36,582 37,180 48,043
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,775 (3,625) 53,964
Cash and cash equivalents at beginning of year 59,762 63,387 9,423
--------- -------- --------
Cash and cash equivalents at end of year $ 61,537 $ 59,762 $ 63,387
========= ======== ========
see accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) Nature of Operations
CMG Information Services, Inc. (the Company) is a direct marketing service
provider that invests in, develops and integrates advanced, Internet,
interactive, and database management technologies. CMG and its subsidiaries
offer their clients a wide variety of direct marketing opportunities to choose
from, including: Internet and interactive media direct marketing software
technologies, product and literature fulfillment and turnkey outsourcing, sales
lead/inquiry management, business-to-business telemarketing services, highly
segmented and accurate mailing lists, database management, design and
development capabilities, consultative list management and brokerage services.
The Company is advancing products and services that will both create and profit
from direct marketing opportunities on the Internet.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Presentation
The consolidated financial statements of the Company include its wholly-owned
and majority-owned subsidiaries which at July 31, 1998 include, Engage
Technologies, Inc. (Engage), Accipiter, Inc. (Accipiter), CMG Direct Corporation
(CMG Direct), SalesLink Corporation (SalesLink), InSolutions, Inc.
(InSolutions), On-Demand Solutions, Inc. (On-Demand Solutions), CMG@Ventures,
Inc., CMG@Ventures I, LLC (CMG@Ventures I, formerly CMG@Ventures, L.P.),
CMG@Ventures Capital Corporation, CMG Securities Corporation, CMG@Ventures II,
LLC (CMG@Ventures II), Blaxxun Interactive, Inc. (Blaxxun), ADSmart Corporation
(ADSmart), InfoMation Publishing Corporation (Infomation), Planet Direct
Corporation (Planet Direct), Navisite Internet Services Corporation (NaviSite),
Password Internet Publishing Corporation (Password) and Vicinity Corporation
(Vicinity). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for investments in businesses
in which it owns between 20% and 50% using the equity method and accounts for
investments in which it owns less than 20% at original cost. Certain amounts
for prior periods have been reclassified to conform with current year
presentations.
(b) Revenue Recognition
Revenue from the sale of mailing lists is recognized when the mailing labels are
shipped. Revenue for services is recognized upon completion of the service.
The Company's advertising revenues are derived principally from short-term
Internet advertising contracts in which the Company guarantees a minimum number
of impressions for a fixed fee or on a per-impression basis with an established
minimum fee. Revenues from advertising are recognized as the services are
performed.
The Company's license and product revenues are derived principally from product
licensing fees and fees from maintenance and support of its products. License
and product revenues are generally recognized upon delivery provided that no
significant Company obligations remain and collection of the receivable is
probable. In cases where there are significant remaining obligations, the
Company defers such revenue until those obligations are satisfied. Fees from
maintenance and support of the Company's products, including those fees bundled
with the initial licensing fees, are deferred and recognized ratably over the
service period.
(c) Gain on Issuances of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time, the subsidiary is an operating entity and not
engaged principally in research and development, the Company records the
increase as a gain in its Consolidated Statements of Operations. Otherwise, the
increase is reflected in "effect of subsidiaries' equity transactions" in the
Company's Consolidated Statements of Stockholders' Equity.
If gains have been recognized on issuances of a subsidiary's stock and shares of
the subsidiary are subsequently repurchased by the subsidiary or by the Company,
gain recognition does not occur on issuances subsequent to the date of a
repurchase until such time as shares have been issued in an amount equivalent to
the number of repurchased shares. Such transactions are reflected as equity
transactions, and the net effect of these transactions is reflected in the
Consolidated Statements of Stockholders' Equity.
(d) Cash Equivalents and Statement of Cash Flows Supplemental Information
Highly liquid investments with maturities of three months or less at the time of
acquisition are considered cash equivalents.
Net cash used for operating activities reflect cash payments for interest and
income taxes, net of income tax refunds received, as follows:
Year ended July 31,
1998 1997 1986
----- ----- -----
Interest $ 2,856,00 $1,429,000 $ 26,000
=========== =========== ===========
Income taxes $15,720,000 $1,856,000 $16,069,000
=========== =========== ===========
During fiscal year 1998, significant non-cash investing activities included the
sale of data warehouse product rights by the Company's subsidiary, Engage, in
exchange for available-for-sale securities in addition to $9.5 million in cash
(see note 3). Also, portions of the consideration for acquisitions of
businesses by the Company, or its subsidiary, during fiscal 1998 included the
issuance of shares of the Company's common stock and the issuance of seller's
notes (see note 7).
During fiscal year 1997, significant non-cash investing activities included the
sale of the Company's equity interest in TeleT Communications, LLC (TeleT) in
exchange for available-for-sale securities in addition to $550,000 in cash (see
note 10) and the acquisition of one subsidiary, Pacific Direct
Marketing Corporation (Pacific Link), for consideration which included $7.5
million financed through a seller's note (see note 7). Significant non-cash
financing activities in fiscal 1997 consisted of the dividend distribution of
603,000 shares of Lycos stock to CMG shareholders (see note 14).
During fiscal year 1996, in a non-cash investing transaction, the Company's then
consolidated subsidiary, Lycos, Inc. (Lycos), acquired Point Communications
Corporation in exchange for 526,316 shares of Lycos stock.
(e) Fair Value of Financial Instruments
The carrying value for cash and cash equivalents, accounts receivable, accounts
payable and notes payable, approximates fair value because of the short maturity
of these instruments. The carrying value of long-term debt approximates its fair
value, as estimated by using discounted future cash flows based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
(f) Marketable Securities
The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designation at each balance sheet
date. Marketable securities have been classified as available-for-sale and are
carried at fair value, based on quoted market prices, net of market value
discount to reflect any restrictions on transferability, with unrealized gains
and losses reported as a separate component of stockholders' equity.
(g) Inventories
Inventories consist primarily of raw materials used in the Company's fulfillment
services segment and are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
(h) Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived assets
used in operations when indicators of impairment are present. On an on-going
basis, management reviews the value and period of amortization or depreciation
of long-lived assets, including costs in excess of net assets of subsidiaries
acquired. During this review, the Company reevaluates the significant
assumptions used in determining the original cost of long-lived assets. Although
the assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets based upon events or circumstances which have
occurred since acquisition.
(i) Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization is
provided on the straight-line basis over the estimated useful lives of the
respective assets (three to seven years). Leasehold improvements are amortized
on a straight-line basis over the lesser of the estimated useful life of the
asset or the lease term.
Maintenance and repairs are charged to operating expenses as incurred. Major
renewals and betterments are added to property and equipment accounts at cost.
(j) Investments in Affiliates
The Company's investments in affiliated companies for which its ownership
exceeds 20%, but which are not majority-owned or controlled, are accounted for
using the equity method. Under the equity method, the Company's proportionate
share of each affiliate's net income or loss and amortization of the Company's
net excess investment over its equity in each affiliate's net assets is included
in "equity in losses of affiliates". Amortization is recorded on a straight-line
basis over periods ranging from five to ten years.
At the time an affiliate sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that affiliate
increases. If at that time, the affiliate is an operating entity and not
engaged principally in research and development, the Company records the
increase as a gain in its Consolidated Statements of Operations.
(k) Costs in Excess of Net Assets of Subsidiaries Acquired
The costs in excess of net assets of subsidiaries acquired (goodwill) are
principally being amortized over periods expected to be benefited, ranging from
five to twenty years.
(l) Deferred Revenues
Deferred revenues are comprised of license fees to be earned in the future on
license agreements existing at the balance sheet date and billings in excess of
earnings on both license and advertising contracts.
(m) Research and Development Costs and Software Costs
Expenditures related to the development of new products and processes, including
significant improvements and refinements to existing products and the
development of software, are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
detailed program design or working model of the product, and ending when a
product is available for general release to customers. To date, the
establishment of technological feasibility and general release have
substantially coincided. As a result, capitalized software development costs
have not been significant. Additionally, at the date of acquisition or
investment, the Company evaluates the components of the purchase price of each
acquisition or investment to identify amounts allocated to in-process research
and development. Upon completion of acquisition accounting and valuation, such
amounts are charged to expense if technological feasibility had not been reached
at the acquisition date. In September, 1998, a representative of the Securities
and Exchange Commission (the SEC) advised the American Institute of Certified
Public Accountants with respect to factors to be considered in the valuation of
in-process research and development. Based on a review of the valuation
methodologies applied, the Company believes it has taken these factors into
consideration in determining amounts recorded in the current fiscal year ended
July 31, 1998.
(n) Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(o) Earnings (Loss) Per Share
During the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No.
128 required the Company to change the method formerly used to compute earnings
per share and to restate all prior periods presented. Basic earnings per share
is computed based on the weighted average number of common shares outstanding
during the period. Weighted average common equivalent shares outstanding during
the period, using the "treasury stock method", are included in the calculation
of diluted earnings per share only when the effect of their inclusion would be
dilutive. Accordingly, since the Company reported a net loss for the year ended
July 31, 1997, common equivalent shares have not been included in the
calculation of diluted earnings per share for that period.
If a subsidiary has dilutive stock options or warrants outstanding, diluted
earnings per share is computed by first deducting from net income (loss), the
income attributable to the potential exercise of the dilutive stock options or
warrants of the subsidiary. The effect of income attributable to dilutive
subsidiary stock equivalents was immaterial during the years ended July 31,
1998, 1997 and 1996.
The reconciliation of the denominators of the basic and diluted earnings (loss)
per share computations for the Company's reported net income (loss) is as
follows:
Years Ended July 31,
1998 1997 1996
---------- ---------- ----------
Weighted average number of common shares outstanding -- basic 20,833,000 18,858,000 18,008,000
Weighted average number of dilutive common stock equivalents outstanding 1,682,000 -- 1,356,000
---------- ---------- ----------
Weighted average number of common shares outstanding -- diluted 22,515,000 18,858,000 19,364,000
========== ========== ==========
(p) Stock-Based Compensation Plans
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
As permitted by SFAS No. 123, the Company measures compensation cost in
accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity. Therefore, the adoption of SFAS No. 123 was
not material to the Company's financial condition or results of operations;
however, the pro forma impact on earnings per share has been disclosed in the
Notes to Consolidated Financial Statements as required by SFAS No. 123 (see note
15).
(q) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(r) Diversification of Risk
Sales to one customer, Cisco Systems, Inc. (Cisco), accounted for 42% and 24% of
net revenues and 61% and 47% of fulfillment services segment net revenues for
fiscal year 1998 and 1997, respectively. Accounts receivable from this customer
amounted to approximately 26% and 14% of total trade accounts receivable at July
31, 1998 and July 31, 1997, respectively. The Company's products and services
are provided to customers primarily in North America.
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash equivalents, available-for-sale securities, and accounts
receivable. The Company's cash equivalent investment portfolio is diversified
and consists primarily of short-term investment grade securities. To reduce
risk, the Company performs ongoing credit evaluations of its customers'
financial conditions and generally does not require collateral on accounts
receivable. The Company has not incurred any material write-offs related to its
accounts receivable.
The Company enters into interest rate swap and cap agreements to reduce the
impact of changes in interest rates on its floating rate debt. The swap
agreements are contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without the exchange of the
underlying notional amounts. The notional amounts of interest rate agreements
are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The differential paid or
received on interest rate agreements is recognized as an adjustment to interest
expense.
(s) New Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is a measure
of all changes in stockholders' equity that result from recognized transactions
and other economic events of a period, other than transactions with owners in
their capacity as owners. SFAS No. 131 establishes standards for the way that
public business enterprises report selected information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 requires the use of the "management approach" in
disclosing segment information, based largely on how senior management generally
analyzes the business operations. SFAS No. 130 and 131 become effective for the
Company in fiscal 1999. The Company is in the process of determining the impact
of these standards, if any, on its consolidated financial statements and related
disclosures.
In December, 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP 97-2
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2 is effective for transactions entered into beginning in the
Company's fiscal year 1999 and may require the Company to modify certain aspects
of its revenue recognition policies. The Company does not expect the adoption
of SOP 97-2 to have a material impact on the Company's consolidated results of
operations.
In March, 1998, the Accounting Standards Executive Committee of the American
institute of Certified Public Accountants, issued SOP 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use," which
requires the capitalization of certain internal costs related to the
implementation of computer software obtained for internal use. The Company is
required to adopt this standard in the first quarter of fiscal year 2000. The
Company expects that the adoption of SOP 98-1 will not have a material impact on
the Company's financial position or its results of operations.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2000. The Company expects that the adoption of SFAS No.
133 will not have a material impact on the Company's financial position or its
results of operations.
(3) Segment Information
The Company's continuing operations have been classified in three primary
business segments, (i) investment and development, (ii) fulfillment services,
and (iii) lists and database services. Investment and development is a business
segment formed during the third quarter of fiscal year 1995 to focus on
strategic investment and development opportunities afforded by the Internet and
interactive media markets. Fulfillment services include product and literature
fulfillment and turnkey outsourcing, telemarketing, and sales/lead inquiry
management. Lists and database services consists of marketing of traditional
customer and prospect list databases and services as well as providing solutions
for integrating traditional direct marketing with Internet marketing. Corporate
and other includes available-for-sale securities, certain cash equivalents and
certain other assets which are not identifiable to the operations of the
Company's primary business segments.
From its inception in August, 1995, through July 31, 1997, the Company's
subsidiary, Engage, focused on providing traditional mailing list maintenance
and database services (through its ListLab division), and on developing data
mining, querying, analysis and targeting software products for use in large
database applications. As such, the results of Engage's operations were
classified in the Company's list and database services segment through July 31,
1997. During the first quarter of fiscal 1998, Engage sold certain rights to
its Engage.Fusion(TM) and Engage.Discover(TM) data warehouse products to Red
Brick Systems, Inc. (Red Brick) for $9.5 million and 238,160 shares of Red Brick
common stock, and recorded a pretax gain of $8,437,000 on the sale. These
products had been developed to accelerate the design and creation of very large
data warehouses and perform high-end data query and analysis. Engage retained
certain rights to sell Engage.Fusion and Engage.Discover to interactive media
markets as part of its Engage Product Suite. Additionally, during the first
quarter of fiscal year 1998, Engage transferred its ListLab division to the
Company's recently formed subsidiary, CMG Direct. With the sale of these rights
and transfer of its ListLab division, Engage has narrowed its focus to the
Internet software solutions market, where it seeks to help companies
individually distinguish, understand and interact with anonymous prospects and
customers in personalized marketing, sales, and service relationships via the
Internet. As a result of this repositioning, beginning in fiscal year 1998, the
operating results of Engage are now classified in the Company's investment and
development segment.
During fiscal 1998, Cisco accounted for approximately 61% of net revenues in the
fulfillment services segment. Previously, Cisco accounted for 47% of fulfillment
services segment net revenues in fiscal 1997 and three customers individually
accounted for 15%, 15% and 13% of segment net revenues in fiscal 1996. During
the fiscal years ended July 31, 1997 and 1996, one significant customer
accounted for approximately 12% and 13%, respectively, of net revenues in the
lists and database services segment. Summarized financial information by
business segment for the fiscal years ended July 31, 1998, 1997 and 1996 is as
follows:
Years Ended July 31,
1998 1997 1996
---- ---- ----
Net revenues:
Investment and development $ 18,709,000 $ 23,917,000 $ 5,665,000
Fulfillment services 63,207,000 36,139,000 12,070,000
Lists and database services 9,568,000 10,551,000 10,750,000
------------ ------------ ------------
$ 91,484,000 $ 70,607,000 $ 28,485,000
============ ============ ============
Operating income (loss):
Investment and development $(79,898,000) $(45,250,000) $(19,961,000)
Fulfillment services 1,444,000 4,330,000 1,566,000
Lists and database services (557,000) (12,189,000) (2,179,000)
------------ ------------ ------------
$(79,011,000) $(53,109,000) $(20,574,000)
============ ============ ============
Total assets:
Investment and development $ 96,135,000 $ 87,626,000 $ 68,256,000
Fulfillment services 67,356,000 32,734,000 6,366,000
Lists and database services 4,005,000 10,317,000 8,338,000
Corporate and other 69,964,000 17,677,000 26,543,000
------------ ------------ ------------
$237,460,000 $148,354,000 $109,503,000
============ ============ ============
Capital expenditures:
Investment and development $ 3,710,000 $ 3,745,000 $ 3,128,000
Fulfillment services 4,333,000 1,064,000 800,000
Lists and database services 146,000 2,130,000 3,140,000
------------ ------------ ------------
$ 8,189,000 $ 6,939,000 $ 7,068,000
============ ============ ============
Depreciation and amortization:
Investment and development $ 3,782,000 $ 2,410,000 $ 1,546,000
Fulfillment services 2,556,000 1,634,000 460,000
Lists and database services 455,000 1,263,000 817,000
------------ ------------ ------------
$ 6,793,000 $ 5,307,000 $ 2,823,000
============ ============ ============
The fulfillment services segment operating income was adjusted during the fourth
quarter of fiscal year 1998 to correct prior quarters' understatements of cost
of sales by SalesLink's subsidiary company, Pacific Link. The cost of sales
understatement was caused by estimates used in determining the material content
in cost of sales. As a result, previous quarterly results had understated cost
of sales and overstated inventory. Had such adjustments been recorded in the
period in which they occurred, quarterly fulfillment services segment operating
income would have been as follows:
Three Months Ended
October 31, January 31, April 30, July 31,
----------- ----------- --------- --------
1997 1998 1998 1998 Total
---- ---- ---- ---- -----
As Previously Reported $1,061,000 $1,149,000 $1,547,000 $(2,313,000) $1,444,000
========== ========== ========== =========== ==========
As Restated $ 279,000 $ 335,000 $ 656,000 $ 174,000 $1,444,000
========== ========== ========== =========== ==========
(4) Deconsolidation of Lycos, Inc.
During the second fiscal quarter ended January 31, 1998, the Company sold
340,000 shares of Lycos stock on the open market and distributed 216,034 Lycos
shares to the profit members of CMG@Ventures I. Through the sale and
distribution of Lycos shares, the Company's ownership percentage in Lycos was
reduced from just in excess of 50% at October 31, 1997, to below 50% beginning
in November, 1997. As such, starting in November, 1997, the Company began
accounting for its remaining investment in Lycos under the equity method of
accounting, rather than the consolidation method. Prior to these events, the
operating results of Lycos were consolidated within the operating results of the
Company's investment and development segment, and the assets and liabilities of
Lycos were consolidated with those of CMG's other majority owned subsidiaries in
the Company's Consolidated Balance Sheets. The Company's historical
consolidated operating results for the fiscal years ended July 31, 1997 and 1996
included Lycos net revenues of $22,253,000 and $5,257,000, respectively, and
Lycos operating losses of ($8,759,000) and ($5,802,000), respectively. The
Company's consolidated operating results for the fiscal quarter ended October
31, 1997 included Lycos net revenues and operating loss of $9,303,000 and
($433,000), respectively. The Company's historical Consolidated Balance Sheets
as of July 31, 1997 and October 31, 1997 included Lycos amounts as follows:
Jul. 31, 1997 Oct. 31, 1997
------------- -------------
Current assets $60,745,000 $63,935,000
=========== ===========
Total assets $65,419,000 $67,694,000
=========== ===========
Current liabilities $22,615,000 $25,822,000
=========== ===========
Total liabilities $27,772,000 $29,259,000
=========== ===========
The following table contains the summarized financial information for Lycos
subsequent to deconsolidation in November, 1997:
Condensed Statement of Operations:
Nine Months Ended
July 31, 1998
-------------
Net revenues $ 46,757,000
============
Operating loss $(99,536,000)
============
Net loss $(97,024,000)
============
Note: Lycos' operating and net loss for the nine months ended July 31, 1998
includes in-process research and development and other one-time merger
related charges of $92,479,000.
Condensed Balance Sheet:
July 31, 1998
-------------
Current assets $209,671,000
Noncurrent assets 39,087,000
------------
Total assets $248,758,000
============
Current liabilities $ 53,734,000
Noncurrent liabilities 26,337,000
Stockholders' equity 168,687,000
------------
Total liabilities and stockholders' equity $248,758,000
============
(5) Available-for-Sale Securities
At July 31, 1998, available-for-sale securities consist of 334,728 shares of
Open Market, Inc. common stock and 238,160 shares of Red Brick common stock,
carried at fair value and based on quoted market prices, net of a market value
discount to reflect the remaining restriction on transferability for the Red
Brick common shares. A $314,000 unrealized holding gain and a $750,000
unrealized holding loss was recorded on the Open Market, Inc. and Red Brick
shares, respectively, based on the change in market value of the respective
stocks from dates of acquisition to July 31, 1998. The net $436,000 unrealized
holding loss is presented in the equity section of the July 31, 1998
Consolidated Balance Sheet.
During the first quarter of fiscal year 1998, CMG@Ventures I distributed 224,795
of its shares of Premiere Technologies, Inc. (Premiere) common stock to the
Company, and allocated 58,538 Premiere shares to CMG@Ventures I's profit
members. The Company sold its 224,795 shares during fiscal 1998 for proceeds of
$7,555,000, realizing a net gain of $4,174,000 on the sale.
At July 31, 1997, available-for-sale securities consist of 283,333 shares of
Premiere common stock carried at fair value, based on quoted market price, net
of a market value discount to reflect restrictions on transferability through
September 19, 1997. An $852,000 unrealized gain, based on the change in market
value of the stock from date of acquisition to July 31, 1997, is presented in
the equity section of the July 31, 1997 Consolidated Balance Sheet, net of
deferred income taxes.
(6) Property and Equipment
Property and equipment consists of the following:
July 31,
1998 1997
---- ----
Machinery and equipment $13,873,000 $10,609,000
Software 4,188,000 3,693,000
Leasehold improvements 2,928,000 2,646,000
Office furniture and equipment 2,750,000 2,485,000
Other equipment 658,000 658,000
----------- -----------
$24,397,000 $20,091,000
=========== ===========
(7) Business Combinations
On October 24, 1996, the Company's subsidiary, SalesLink, acquired Pacific Link,
a company specializing in high technology product and literature fulfillment and
turnkey outsourcing. The consideration for the acquisition was $17,000,000,
$8,500,000 of which was paid in cash at the date of acquisition, $1,000,000 of
which SalesLink paid (along with interest at the annual rate of 7%) in February
1997, and the remaining $7,500,000 of which was financed through a seller's note
(see note 12). The sources of the cash portion of the purchase price were
$3,000,000 from corporate funds provided by the Company to SalesLink for the
acquisition and $5,500,000 from a bank loan.
On April 9, 1998, the Company acquired Accipiter, a company specializing in
Internet advertising management solutions, in exchange for 1,263,692 shares of
the Company's common stock. The shares issued by the Company in the acquisition
of Accipiter are not registered under the Securities Act of 1933 and are subject
to restrictions on transferability for periods ranging from six to twenty-four
months from the date of issuance. The total purchase price for Accipiter was
valued at $30,178,000, including costs of acquisition of $198,000. The value of
the Company's shares included in the purchase price was recorded net of a
weighted average 15% market value discount to reflect the restrictions on
transferability. Of the purchase price, $18,010,000 was allocated to in-process
research and development which has been charged to operations during fiscal
1998.
Approximately $1.7 million of deferred compensation was recorded during fiscal
1998 relating to approximately 43,000 of the Company's common shares issued to
employee stockholders of Accipiter which are being held in escrow. These shares
are subject to forfeiture upon termination of employment over a two-year period.
Deferred compensation expense will be recognized over the two-year service
period.
Also during fiscal 1998, the Company, or its subsidiaries, completed the
acquisition of three other companies for purchase prices valued at a combined
total of $23,630,000, including InSolutions ($15,218,000 purchase price in June,
1998), Servercast Communications, LLC (Servercast, $1,020,000 in July, 1998) and
On-Demand Solutions ($7,392,000 on July 31, 1998). The combined consideration
for these acquisitions consisted of 310,402 shares of the Company's common stock
valued at $14,585,000, $6,578,000 in cash and $2,467,000 financed through
seller's notes. The shares issued by the Company were not registered under the
Securities Act of 1933 and were subject to restrictions on transferability for
periods ranging from twelve to twenty-four months. The value of the Company's
shares included in the purchase prices of these acquisitions were recorded net
of market value discounts ranging from 12% to 22% to reflect the restrictions on
transferability. $5,000,000 of the cash consideration was provided through
additional bank borrowings by the Company's subsidiary, SalesLink. Additional
consideration of up to $2,783,000 could be paid related to the acquisition of
InSolutions if certain future performance goals are met.
The acquisitions during fiscal 1997 and 1998 have been accounted for using the
purchase method, and, accordingly, the purchase prices have been allocated to
the assets purchased and liabilities assumed based upon their fair values at the
dates of acquisition. The portion of the purchase prices allocated to goodwill
will be amortized on a straight line basis over five years for Accipiter and
Servercast and over 15 years for Pacific Link, InSolutions and On-Demand
Solutions. The acquired companies are included in the Company's consolidated
financial statements from the dates of acquisition.
The purchase prices of the acquisitions during fiscal 1998 and 1997 were
allocated as follows:
1998 1997
------------------------------ ------------------
Accipiter All Others Pacific Link
--------- ---------- ------------
Working capital, including cash acquired $ 441,000 $ (989,000) $(1,204,000)
Property, plant and equipment 262,000 1,484,000 713,000
Other assets 2,000 173,000 385,000
In-process research and development 18,010,000 -- --
Goodwill 11,463,000 23,357,000 17,229,000
Other long-term liabilities -- (395,000) (123,000)
----------- ----------- -----------
Purchase price $30,178,000 $23,630,000 $17,000,000
=========== =========== ===========
The following unaudited pro forma financial information presents the
consolidated operations of the Company and the acquired companies as if the
acquisitions had occurred as of the beginning of fiscal 1997, after giving
effect to certain adjustments including increased amortization of goodwill
related to the acquisitions, increased interest expense related to long-term
debt issued in conjunction with the acquisitions and decreased compensation for
certain officers to reflect contractual post-acquisition compensation. The one-
time in-process research and development charge of $18,010,000 which was
recorded in fiscal 1998 related to the acquisition of Accipiter is not included
in the proforma results as it is unusual and not indicative of normal operating
results. The unaudited proforma information excludes the impact of the
acquisition of Servercast since it is not material to the Company's consolidated
financial statements. The unaudited pro forma financial information is provided
for informational purposes only and should not be construed to be indicative of
the Company's consolidated results of operations had the acquisitions been
consummated on the dates assumed and do not project the Company's results of
operations for any future period:
Year ended July 31,
1998 1997
---- ----
Net revenues $117,384,000 $ 98,209,000
============ ============
Net income (loss) $ 29,101,000 $(27,775,000)
============ ============
Basic earnings (loss) per share $ 1.32 $ (1.39)
============ ============
Diluted earnings (loss) per share $ 1.23 $ (1.39)
============ ============
(8) CMG @Ventures Investments
During fiscal year 1996, the Company, through CMG@Ventures I, invested $19.2
million in eight companies, including $2 million in Vicinity, $750,000 in TeleT,
$2 million in GeoCities, $4 million in Blaxxun, $4.5 million in NetCarta
Corporation (NetCarta), $1 million in Lycos, $1.75 million in Ikonic
Interactive, Inc., and $3.2 million in FreeMark Communications, Inc. (FreeMark).
CMG@Ventures I invested a total of $10.8 million in five companies during fiscal
year 1997, including $2 million in Parable LLC (Parable), $1.2 million in Lycos,
$3.8 million in NetCarta, $1.8 million in Vicinity and $2 million in GeoCities.
During fiscal 1997, the Company completed its minimum funding commitment of $35
million to CMG@Ventures I, and formed a new limited liability company
subsidiary, CMG@Ventures II, to continue the Company's Internet venture capital
investment model. CMG@Ventures II invested a total of $8.3 million in five
companies during fiscal year 1997, including $2 million in Silknet Software,
Inc. (Silknet), $2 million in KOZ, inc. (KOZ) $1 million in Softway Systems,
Inc. (Softway Systems), $1 million in Sage Enterprises, Inc. (Sage Enterprises),
and $2.3 million in Reel.com LLC (Reel.com). CMG@Ventures II invested a total
of $27.6 million in fifteen companies during fiscal year 1998, including
$100,000 in Blaxxun, $1.8 million in GeoCities, $200,000 in Vicinity, $3 million
in Silknet, $2.1 million in Parable, $150,000 in KOZ, $3.5 million in Sage
Enterprises, $4.6 million in Reel.com, $1.8 million in Speech Machines plc
(Speech Machines), $2.6 million in Chemdex Corporation (Chemdex), $2 million in
TicketsLive Corporation (TicketsLive), $1 million in Critical Path, $2 million
in Mother Nature's General Store, Inc. (Mother Nature), $1.5 million in Visto
Corporation (Visto), and $1.25 million in Universal Learning Technology.
At July 31, 1998, CMG@Ventures I held equity investments in five companies,
including Blaxxun (81% legal ownership), GeoCities (32%), Lycos (25%), Parable
(31%), and Vicinity (50%). At July 31, 1998, CMG@Ventures II held equity
investments in fourteen companies, including Chemdex (16%), Critical Path (7%),
GeoCities (2%), KOZ (14%), Mother Nature (24%), Parable (11%), Reel.com (36%),
Sage Enterprises (29%), Silknet (24%), Softway Systems (9%), Speech Machines
(29%), TicketsLive (14%), Universal Learning Technology (12%), and Visto (6%).
The Company owns 100% of the capital interest and has all voting rights with
respect to CMG@Ventures I and CMG@Ventures II investments. The Company is
entitled to 77.5% and 80% of the net capital gains, as defined, on investments
made by CMG@Ventures I and CMG@Ventures II, respectively. The remaining
interest in the net capital gains on these investments are attributed to profit
partners, including the President and Chief Executive Officer and the Chief
Financial Officer of the Company. The Company is responsible for all operating
expenses of CMG@Ventures I and CMG@Ventures II. CMG@Ventures I's interest in
Lycos is subject to further reduction because CMG@Ventures I is obligated to
sell to Lycos a portion of its shares of common stock of Lycos, as necessary, to
provide for shares issuable upon exercise of options granted by Lycos under its
1995 stock option plan. As of July 31, 1998, (retroactively adjusted to reflect
Lycos' two-for-one stock split affected in August, 1998), CMG@Ventures I. was
obligated to sell up to 391,296 shares to Lycos at a price of $0.01 per share
and up to 458,048 shares at prices ranging from $0.14 to $4.80 per share.
After accounting for Lycos shares subject to option funding and shares
attributable to profit partners, approximately 6.5 million Lycos shares, (also
on a post-split basis), were attributable to CMG as of July 31, 1998.
CMG@Ventures II's investments in Sage Enterprises and Reel.com were converted
into shares of Amazon.com, Inc. and Hollywood Entertainment Corporation,
respectively, pursuant to mergers of the respective companies subsequent to July
31, 1998 (see note 19).
The acquisition accounting and valuation for the Company's or its subsidiaries'
investments in Speech Machines, Chemdex and Silknet in fiscal 1998, Parable and
Silknet in fiscal year 1997, and FreeMark, NetCarta, GeoCities, Point
Communications Corporation, and Vicinity in fiscal 1996, resulted in totals of
$1,125,000, $1,312,000 and $2,691,000 in fiscal years 1998, 1997 and 1996,
respectively, being identified as in-process research and development, which
were expensed because technological feasibility had not been reached at the
dates the investments were made.
(9) Gain on Stock Issuance by Lycos, Inc. and Effect of Subsidiaries' Equity
Transactions
Gain on stock issuance by Lycos, Inc. represents the net increase in the
Company's proportionate share of the dollar amount of Lycos' equity resulting
from stock issuances by Lycos, a developer and provider of online guides to the
Internet. The Company recorded a pretax gain of $19,575,000 in fiscal 1996
relating to Lycos' initial public offering of 3,135,000 shares of common stock
at $16 per share, which raised $46,021,000 in net proceeds for Lycos. With this
transaction, the Company's ownership in Lycos was reduced from approximately 76%
to approximately 58%. The Company provided $8,026,000 in deferred income taxes
resulting from the gain.
The Company recorded net pretax gains totaling $28,301,000 in fiscal 1998
resulting from stock issuances by Lycos. In June, 1998, the Company recorded a
pre-tax gain of $25,336,000 relating to Lycos' secondary public offering of
2,337,500 shares of common stock at $50 per share, which raised net proceeds of
$111,191,000 for Lycos. With this transaction, the Company's ownership in Lycos
was reduced from approximately 35% to approximately 31%. The Company also
recorded net pretax gains totaling $2,965,000 on other issuances of stock by
Lycos during fiscal 1998, which included stock issued by Lycos in its
acquisitions of Tripod, Inc., WiseWire Corporation and GuestWorld, Inc., net of
the impact of in-process research and development charges recorded by Lycos
related to these acquisitions; stock issued by Lycos for its minority
investments in GlobeComm, Inc. and Sage Enterprises; and shares issued by Lycos
as a result of employee stock option exercises. The Company provided
$11,603,000 in deferred income taxes resulting from the gains on stock issuances
by Lycos during fiscal 1998.
On July 31, 1996, the Company's subsidiary, Blaxxun, a developer of three
dimensional interactive software, successfully completed an equity financing,
issuing 400,000 shares of preferred stock to an outside party in exchange for
$2,000,000. With this transaction, the Company's ownership in Blaxxun was
reduced from 100% to 92% and its net equity in Blaxxun increased by $1,302,000.
During fiscal 1998, Blaxxun issued 166,000 shares of common stock for net
proceeds of $41,000 and 649,000 shares of preferred stock for net proceeds of
$3,478,000. Included in the fiscal 1998 amounts were 93,000 shares of preferred
stock purchased by the Company for $500,000. As a result of the fiscal 1998
transactions, the Company's ownership in Blaxxun was reduced from 92% to 81% and
its net equity in Blaxxun increased by $3,054,000. Since at the time of the
transactions Blaxxun was engaged principally in research and development, the
fiscal 1996 and fiscal 1998 increases in the Company's proportionate share of
the dollar amount of Blaxxun's equity of $768,000 and $1,757,000, net of
$534,000 and $1,297,000 of deferred income taxes, respectively, have been
reflected as an equity transaction included in "Effect of subsidiaries' equity
transactions" in the accompanying Consolidated Statements of Stockholders'
Equity.
The above gains on stock issuances by Lycos and effects of subsidiaries' equity
transactions are reported net of the interest, if any, attributed to
CMG@Ventures I's profit members.
(10) Sale of CMG@Ventures Investments
On September 19, 1996, the Company sold its equity interest in TeleT to Premiere
for $550,000 in cash and 320,833 shares of Premiere stock. The Company, through
CMG@Ventures I, acquired its 46% equity interest in TeleT for $750,000 during
April 1996. As a result of the sale, the Company recognized a pre-tax gain of
$3,616,000, reported net of the 22.5% interest attributed to CMG@Ventures I's
profit members, reflected as "Gain on sale of investment in TeleT
Communications" in the accompanying Consolidated Statements of Operations. Of
the Premiere shares received, 37,500 are to be held in escrow for a six-year
period, subject to certain customary conditions, and have been classified in
other assets with a carrying value of $450,000. The remaining shares received
were subject to an average one-year restriction on transferability, and were
classified in available-for-sale securities, with a carrying value at the time
of acquisition of $4,080,000, net of market value discount to reflect the
restriction on transferability.
On December 9, 1996, Microsoft Corporation (Microsoft) entered into a definitive
agreement to acquire one of the Company's subsidiaries, NetCarta, for
$20,000,000 in cash, subject to certain conditions. On January 31, 1997, the
sale of NetCarta was finalized, with the Company receiving proceeds of
$18,468,000, net of proceeds to former NetCarta employees who exercised employee
stock options. As a result of the sale, the Company recognized a pretax gain of
$15,111,000, reported net of the 22.5% interest attributed to CMG@Ventures I's
profit members, reflected as "Gain on sale of NetCarta Corporation" in the
accompanying Consolidated Statements of Operations.
During fiscal 1998, CMG@Ventures I distributed 3,333,334 of its shares of Lycos
common stock to the Company, and 593,164 shares to CMG@Ventures I's profit
members. The Company sold 1,955,015 of its Lycos shares during fiscal 1998,
including 1,705,015 sold on the open market throughout the year and 250,000
shares sold as part of Lycos' secondary public offering in June, 1998. The
Company received net proceeds of $108,876,000 from its sales of Lycos shares in
fiscal 1998 and recorded pre-tax gains on the sales totaling $97,158,000. The
gains on the Company's sales of Lycos shares are reported net of the associated
interest attributed to CMG@Ventures I's profit members.
(11) Accrued Expenses
Accrued expenses consist of the following:
July 31,
1998 1997
---- ----
Accrued compensation and benefits $ 3,548,000 $ 2,455,000
Accrued professional services 3,219,000 2,121,000
Accrued customer deposits 2,084,000 2,204,000
Accrued list owners' commissions 1,281,000 1,342,000
Accrued promotional expenses 87,000 4,178,000
Other 10,315,000 6,041,000
----------- -----------
$20,534,000 $18,341,000
=========== ===========
(12) Borrowing Arrangements
Notes payable at July 31, 1998 consisted of $20 million in collateralized
corporate borrowings, $6.2 million owed by SalesLink under its revolving line of
credit facility and $1.5 million owed by other subsidiaries of the Company under
line of credit facilities. Notes payable at July 31, 1997 consisted of $10
million in collateralized corporate borrowings, $10 million borrowed under the
Company's corporate line of credit, and $2,494,000 owed by SalesLink under its
line of credit.
The Company's collateralized corporate borrowings were secured by 1,255,789 and
784,314 of the Company's shares of Lycos stock at July 31, 1998 and 1997,
respectively. Under this agreement, the Company could become subject to
additional collateral requirements under certain circumstances. The $10 million
in borrowings outstanding at July 31, 1997 were payable in full in January,
1998. On January 20, 1998, the Company renewed this agreement for an additional
term of one year and increased the outstanding principal amount to $20 million.
Interest under this facility is payable quarterly at the London Interbank
Offered Rate (LIBOR) plus 1.75% (7.44% and 7.52% effective rates at July 31,
1998 and 1997, respectively). The Company has entered into an interest rate
swap agreement with the lender that effectively fixed the interest rate on this
$20 million debt at a rate of 7.40% beginning April 20, 1998 through January 20,
1999. During fiscal 1997, the Company had entered into an interest rate swap
agreement with the lender that had effectively fixed the interest rate on the
$10 million principal at 7.52% through January 17, 1998.
SalesLink's borrowings were made under a revolving credit agreement with a bank.
The revolving credit agreement provided for the option of interest at LIBOR or
the higher of 1) the rate announced by BankBoston, N.A. as its base rate
(Prime), or 2) 0.5% above the Federal Funds Effective Rate plus, in any case, an
applicable margin based on SalesLink's leverage ratio (7.65% and 7.66% effective
rates at July 31, 1998 and 1997, respectively).
The $10 million balance outstanding at July 31, 1997 under the Company's
corporate line of credit agreement with a bank was repaid during fiscal 1998 and
there are no outstanding borrowings under this facility as of July 31, 1998.
Long-term debt consists of the following:
July 31,
1998 1997
---- ----
Term notes payable to a bank issued by SalesLink $15,500,000 $ 5,500,000
Note payable to former shareholder of InSolutions 1,467,000 --
Notes payable to former members of Servercast issued by NaviSite 1,000,000 --
Note payable to former shareholder of Pacific Link issued by SalesLink -- 7,271,000
----------- -----------
17,967,000 12,771,000
Less: Current portion 16,594,000 3,221,000
----------- -----------
$ 1,373,000 $ 9,550,000
=========== ===========
SalesLink's term notes payable to a bank provide for the option of interest at
LIBOR or the higher of 1) Prime, or 2) 0.5% above the Federal Funds Effective
Rate plus, in any case, an applicable margin based on SalesLink's leverage ratio
(7.65% and 7.66% effective rates at July 31, 1998 and 1997, respectively).
During fiscal 1998, SalesLink repaid $250,000 of principal under its $5.5
million bank term note and refinanced the remaining portion into an amended term
note which included an increased principal amount of $10.25 million. Of the
additional principal amounts borrowed, $5 million was used as consideration for
the Company's acquisition of InSolutions and $4.9 million was used to prepay the
remaining balance on SalesLink's note payable to a former shareholder of Pacific
Link. The bank term note outstanding at July 31, 1998 provides for repayment in
quarterly installments beginning January 31, 1999 through October 31, 2002, with
the remaining balance to be repaid on November 11, 2002.
The Company's note payable to a former shareholder of InSolutions was issued in
June, 1998 as consideration for the Company's acquisition of InSolutions. This
note bears interest at 5.71% and is repayable in twelve monthly installments
beginning November 30, 1998. Additional principal amounts totaling $2.8 million
could become due under this note if InSolutions meets certain future performance
goals (see note 7). The contingent principal amounts owed, if any, would bear
interest at 5.71% and would be payable in twenty-four monthly installments
beginning November 30, 1999. The Company's subsidiary, NaviSite, issued $1
million in notes payable to former members of Servercast as consideration for
the acquisition of Servercast in July, 1998. These notes bear interest at 5.50%
and are repayable on January 2, 2000.
Maturities of long-term debt for the next five fiscal years are as follows:
1999, $16,594,000; 2000, $1,373,000; Thereafter, none.
As of February 24, 1997, the Company had entered into an interest rate swap
agreement with the lender providing SalesLink's bank borrowing arrangements.
The agreement effectively set a maximum LIBOR interest rate base on debt for a
notional principal amount of $8 million at a rate of 8.5% through February 26,
2002. This swap was purchased to provide protection to the Company from
exposure to higher interest rates in the future (above 8.5%), and requires
additional payments by the Company should LIBOR fall below 5% or should LIBOR be
above 6%, but below 8.5%. At July 31, 1998, based on prices quoted from the
bank, interest rate hedge agreement values would indicate an obligation of
$78,000 to terminate this contract.
The Company's bank borrowing arrangements are subject to normal banking terms
and conditions, including financial covenants requiring the Company or SalesLink
to maintain certain levels of net worth and income, certain financial position
ratios, as well as limitations on indebtedness and capital expenditures. As of
July 31, 1998, SalesLink did not comply with certain covenants of their
borrowing arrangements. SalesLink is working with the bank to cure the non-
compliance, as of July 31, 1998 and prospectively, through waivers or amendments
to the covenant terms. SalesLink has not yet received such waivers or amendments
and, accordingly, all of SalesLink's bank borrowings have been classified as
current liabilities in the July 31, 1998 Consolidated Balance Sheet. Further, as
a result of such non-compliance, beginning August 1, 1998 until the non-
compliance is cured, SalesLink's $15.5 million bank term note payable and its
outstanding line of credit borrowings are subject to interest at Prime plus 3.5%
and 4.5%, respectively.
(13) Commitments
The Company leases facilities and certain other machinery and equipment under
various noncancelable operating leases expiring through June 2013. Future
minimum lease payments as of July 31, 1998 are as follows:
Year ending July 31:
1999 $16,752,000
2000 11,969,000
2001 7,454,000
2002 5,037,000
2003 4,107,000
Thereafter 22,841,000
-----------
$68,160,000
===========
Total rent and equipment lease expense charged to continuing operations was
$10,745,000, $8,184,000 and $2,112,000 for the years ended July 31, 1998, 1997
and 1996, respectively.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
(14) Stockholders' Equity
On May 11, 1998, February 2, 1996 and March 17, 1995, the Company effected 2-
for-1, 2-for-1 and 3-for-2 common stock splits, respectively, in the form of
stock dividends. Accordingly, all data shown in the accompanying consolidated
financial statements has been retroactively adjusted to reflect these events.
During the first quarter of fiscal 1997, the Company's Board of Directors
authorized the Company to buy back up to 1,000,000 shares of its common stock.
During the first and second quarters of fiscal 1997, 200,000 shares were
repurchased at an average cost of $4.92 per share, for a total of $984,000.
Pursuant to a stock purchase agreement entered into as of December 10, 1996, the
Company sold 940,954 shares of its common stock (the "CMG Shares"), including
the 200,000 treasury shares acquired in fiscal 1997, to Microsoft on January 31,
1997, representing 4.9% of CMG's total outstanding shares of common stock
following the sale. The CMG Shares purchased by Microsoft were priced at $7.25
per share, with proceeds to CMG totaling $6,821,917. The CMG Shares purchased
by Microsoft are not registered under the Securities Act of 1933 and carried a
one year prohibition on transfer or sale. Under the terms of the agreement and
following the one-year period, Microsoft is entitled to two demand registration
rights as well as piggy back registration rights. Additionally, Microsoft is
subject to "stand still" provisions, whereby it is prohibited for a period of
three years, without the consent of CMG, (i) from increasing its ownership in
CMG above ten percent of CMG's outstanding shares, (ii) from exercising any
control or influence over CMG, and (iii) from entering into any voting agreement
with respect to its CMG Shares.
On May 28, 1997, the Company announced a new venture dividend program in
connection with the Company's CMG@Ventures Internet investments. Subject to
restrictions on transfer, the program envisions that it may distribute up to 10%
of the stock held by CMG@Ventures following an initial public offering by any
one of the companies in which it holds an investment. The Company may also
announce from time to time other stock dividends in connection with its Internet
investments. Such dividends are subject to approval of the Company's Board of
Directors and subject to holding requirements by regulatory agencies such as the
Securities and Exchange Commission. The program may be altered or discontinued
at the discretion of the Company. The Company also announced its first dividend
under the new program, distributing 603,000 shares of Lycos common stock, with a
market value of $11,008,000 at the date of distribution, to the Company's
stockholders on July 31, 1997. The distribution resulted in a pre-tax gain of
$8,413,000 in fiscal 1997 reflected as "Gain on dividend distribution of Lycos,
Inc. common stock" in the accompanying Consolidated Statements of Operations.
Pursuant to a stock purchase agreement entered into as of December 19, 1997, the
Company sold 1,006,004 shares of its common stock to Intel Corporation (Intel),
representing 4.9% of CMG's total outstanding shares of common stock following
the sale. The CMG shares sold to Intel were priced at $10.87 per share, with
proceeds to CMG totaling $10,937,000. The CMG shares purchased by Intel are not
registered under the Securities Act of 1933. Under the terms of the agreement,
Intel is entitled to two demand registration rights as well as piggyback
registration rights. Additionally, Intel is subject to "stand still"
provisions, whereby it is prohibited for a period of three years, without the
consent of CMG, (i) from increasing its ownership in CMG above ten percent of
CMG's outstanding shares, (ii) from exercising any control or influence over
CMG, and (iii) from entering into any voting agreement with respect to its CMG
shares.
Pursuant to a stock purchase agreement entered into as of February 15, 1998, the
Company sold 625,000 shares of its common stock to Sumitomo Corporation
("Sumitomo") on February 27, 1998. The CMG shares sold to Sumitomo were priced
at $16.00 per share, with proceeds to CMG totaling $10,000,000. The CMG shares
purchased by Sumitomo are not registered under the Securities Act of 1933 and
carry a one year restriction on transfer or sale. Under the terms of the
agreement and following the one-year period, Sumitomo is entitled to two demand
registration rights as well as piggyback registration rights. Additionally,
Sumitomo is subject to "stand still" provisions, whereby it is prohibited for a
period of three years, without the consent of CMG, from (i) increasing its
ownership in CMG above ten percent of CMG's outstanding shares, (ii) proposing
or soliciting any person to propose a business combination with, or change of
control of, CMG, (iii) making, proposing or soliciting any person to propose a
tender offer for CMG stock, and (iv) entering into any voting agreement with
respect to its CMG shares.
(15) Stock Option Plans
The Company has two stock option plans currently in effect: the 1986 Stock
Option Plan (the "1986 Plan") and the 1995 Stock Option Plan For Non-Employee
Directors (the "Directors' Plan"). Options under both plans are granted at fair
market value on the date of the grant. Options granted under the 1986 Plan are
generally exercisable in equal cumulative installments over a four-to-ten year
period beginning one year after the date of
grant. Options under the Directors' Plan become exercisable in five equal annual
installments beginning immediately after each Annual Stockholders Meeting
following grant. Outstanding options under both Plans at July 31, 1998 expire
through 2008.
Under the 1986 Plan, non-qualified stock options or incentive stock options may
be granted to the Company's or its subsidiaries' employees, as defined. The
Board of Directors administers this plan, selects the individuals to whom
options will be granted, and determines the number of shares and exercise price
of each option. The Company has reserved 4,500,000 shares of common stock for
issuance under the 1986 Plan. The number of shares reserved for issuance
pursuant to the 1986 Plan is reduced by the number of shares issued under the
Company's 1995 Employee Stock Purchase Plan (see note 16).
Pursuant to the Directors' Plan, 564,000 shares of the Company's common stock
were initially reserved. Options for 94,000 shares are to be granted to each
Director who is neither an officer or full time employee of the Company, nor an
affiliate of an institutional investor which owns shares of common stock of the
Company. Options were granted to existing Directors with five years of
continuous service at the date the Plan was adopted, and are granted to
subsequent Directors at the time of election to the Board.
The status of the plans during the three fiscal years ended July 31, 1998, was
as follows:
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Number of average Number of average Number of average
shares exercise price shares exercise price shares exercise price
------ -------------- ------ -------------- ------ --------------
Options outstanding, beginning of year 1,935,380 $ 3.80 2,043,716 $ 3.87 2,406,148 $ 1.64
Granted 881,250 17.35 338,100 7.93 456,912 9.87
Exercised (476,563) 4.87 (217,254) 4.17 (641,684) 0.39
Canceled (112,688) 5.82 (229,182) 10.15 (177,660) 1.66
--------- --------- ---------
Options outstanding, end of year 2,227,379 $ 8.83 1,935,380 $ 3.80 2,043,716 $ 3.87
========= ======== ========= ======== ========= =======
Options exercisable, end of year 646,235 $ 2.48 739,772 $ 2.98 285,792 $ 2.48
========= ======== ========= ======== ========= =======
Options available for grant, end of year 979,522 1,781,280 1,913,236
========= ========= =========
The following table summarizes information about the Company's stock options
outstanding at July 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted average Weighted Weighted
Number of remaining average exercise Number of average exercise
Range of exercise prices shares contractual life price shares price
------------------------ ------ ---------------- ----- ------ -----
$ 0.77 - $ 1.83 920,974 3.8 years $ 1.50 533,259 $ 1.60
$ 3.06 - $ 5.06 137,334 3.7 3.81 51,397 3.49
$ 6.44 - $10.88 875,202 4.6 9.39 49,023 7.10
$12.25 - $17.81 89,119 3.4 14.34 12,556 17.58
$40.00 - $50.88 204,750 9.2 40.34 -- --
--------- -------
$ 0.77 - $50.88 2,227,379 4.6 years $ 8.83 646,235 $ 2.48
================ ========= ========= ====== ======= =======
SFAS No. 123, "Accounting for Stock-Based Compensation", sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards in
fiscal 1998, 1997 and 1996 under the Company's stock-based compensation plans
been determined based on the fair value method set forth under SFAS No. 123, the
pro forma effect on the Company's net income (loss) and earnings (loss) per
share would have been as follows:
Years Ended July 31,
1998 1997 1996
---- ---- ----
Pro forma net income (loss) $13,253,000 $(23,907,000) $13,666,000
=========== ============ ===========
Pro forma net income (loss) per share:
Basic $ 0.64 $ (1.27) $ 0.76
=========== ============ ===========
Diluted $ 0.59 $ (1.27) $ 0.71
=========== ============ ===========
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for fiscal 1998, 1997 and 1996, respectively: volatility of
90.07%, 66.69% and 80.30%; risk-free interest rate of 5.50%, 6.19% and 5.81%;
expected life of options of 4.2, 6.2 and 4.0 years; and 0% dividend yield for
all years. The weighted average fair value per share of options granted during
fiscal 1998, 1997 and 1996 was $11.71, $10.55 and $10.11, respectively.
The effect of applying SFAS No. 123 as shown in the above pro forma disclosure
is not likely to be representative of the pro forma effect on reported income or
loss for future years. SFAS No. 123 does not apply to awards made prior to
fiscal 1996 and additional awards in future years are anticipated.
(16) Employee Stock Purchase Plan
On October 4, 1994, the Board of Directors of the Company adopted the 1995
Employee Stock Purchase Plan (the Plan). The purpose of the Plan is to provide
a method whereby all eligible employees of the Company and its subsidiaries may
acquire a proprietary interest in the Company through the purchase of shares of
common stock. Under the Plan, employees may purchase the Company's common stock
through payroll deductions.
At the beginning of each of the Company's fiscal quarters, commencing with
February 1, 1995, employees are granted an option to purchase shares of the
Company's common stock at an option price equal to 85% of the fair market value
of the Company's common stock on either the first business day or last business
day of the applicable quarterly period, whichever is lower.
Employees purchased 33,196, 23,038 and 16,648 shares of common stock of the
Company under the Plan during fiscal 1998, 1997 and 1996, respectively.
(17) Income Taxes
The provision (benefit) for income taxes from continuing operations for the
years ended July 31, consists of the following:
Current Deferred Total
------- -------- -----
July 31, 1996:
Federal $ 7,758,000 $ 6,448,000 $ 14,206,000
State 632,000 1,835,000 2,467,000
------------ ------------ ------------
$ 8,390,000 $ 8,283,000 $ 16,673,000
============ ============ ============
July 31, 1997:
Federal $ (3,114,000) $ (849,000) $ (3,963,000)
State 1,023,000 (22,000) 1,001,000
------------ ------------ ------------
$ (2,091,000) $ (871,000) $ (2,962,000)
============ ============ ============
July 31, 1998:
Federal $19,720,000 $ 3,571,000 $23,291,000
State 10,869,000 (4,373,000) 6,496,000
----------- ------------ -----------
$30,589,000 $ (802,000) $29,787,000
=========== ============ ===========
Excluded from the tax provision in fiscal 1998 are deferred tax assets and
liabilities of $187,000 (net of valuation allowance of $1,704,000) and $130,000,
respectively, which were acquired through the acquisitions of certain
subsidiaries during fiscal 1998. Also excluded from the tax provision in fiscal
1998, but included in deferred tax liabilities are $1,297,000 provided for the
effect of subsidiaries' equity transactions. In addition, during fiscal 1998,
the Company sold available-for-sale securities for which $593,000 of deferred
taxes were provided in fiscal 1997 relating to the unrealized holding gain
recorded on these securities at July 31, 1997.
Included in deferred tax assets at July 31, 1998 is approximately $950,000,
which has been fully offset by a valuation allowance, related to the acquisition
of net operating loss carryforwards of certain subsidiaries acquired during
fiscal 1998. If utilized, the tax benefit of the acquired net operating loss
carryforwards will result in a reduction of recorded goodwill in lieu of an
income tax benefit in the Consolidated Statement of Operations.
Excluded from the tax benefit in fiscal 1997 but included in deferred income tax
liabilities and assets are $593,000 provided for unrealized holding gains from
the increase in the market value of available-for-sale securities and $260,000
related to deferred tax assets acquired with the acquisition of Pacific Link,
respectively. Excluded from the tax provision in fiscal 1996 but included in
deferred income tax liabilities are $666,000 provided for the effect of
subsidiaries' equity transactions and $78,000 related to the difference in bases
of assets acquired.
Deferred income tax assets and liabilities have been classified on the
accompanying Consolidated Balance Sheets in accordance with the nature of the
item giving rise to the temporary differences. The components of deferred tax
assets and liabilities are as follows:
July 31, 1998 July 31, 1997
------------- -------------
Current Non-current Total Current Non-current Total
------- ----------- ----- ------- ----------- -----
Deferred tax assets:
Accruals and reserves $ 3,322,000 $ -- $ 3,322,000 $1,630,000 $ -- $ 1,630,000
Tax basis in excess of financial basis
of investments in subsidiaries and
affiliates -- 9,731,000 9,731,000 -- 6,990,000 6,990,000
Tax basis in excess of financial basis
of available-for-sale securities 740,000 -- 740,000 -- -- --
Net operating loss carryforward of
acquired subsidiary -- 957,000 957,000 -- -- --
Other 22,000 1,361,000 1,383,000 -- 866,000 866,000
----------- ------------ ------------ ---------- ----------- -----------
Total gross deferred tax assets 4,084,000 12,049,000 16,133,000 1,630,000 7,856,000 9,486,000
Less valuation allowance (1,617,000) (11,253,000) (12,870,000) (985,000) (7,716,000) (8,701,000)
----------- ------------ ------------ ---------- ----------- -----------
Net deferred tax assets 2,467,000 796,000 3,263,000 645,000 140,000 785,000
----------- ------------ ------------ ---------- ----------- -----------
Deferred tax liabilities:
Financial basis in excess of tax basis
of investments in subsidiaries and
affiliates -- (10,889,000) (10,889,000) -- (7,994,000) (7,994,000)
Differences in tax depreciation and
amortization -- (293,000) (293,000) -- (570,000) (570,000)
Financial basis in excess of tax basis of
available-for-sale securities -- -- -- (534,000) -- (534,000)
Other (102,000) (142,000) (244,000) -- (57,000) (57,000)
----------- ------------ ------------ ---------- ----------- -----------
Total gross deferred tax liabilities (102,000) (11,324,000) (11,426,000) (534,000) (8,621,000) (9,155,000)
----------- ------------ ------------ ---------- ----------- -----------
Net deferred tax asset (liability) $ 2,365,000 $(10,528,000) $ (8,163,000) $ 111,000 $(8,481,000) $(8,370,000)
=========== ============ ============ ========== =========== ===========
The net change in the total valuation allowance for the year ended July 31, 1998
was an increase of $2,465,000, net of the impact of acquired valuation
allowances. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences,
net of the existing valuation allowance at July 31, 1998.
The following table reconciles the income tax expense (benefit) based on the
federal statutory income tax rate to the Company's actual income tax expense
(benefit):
Years Ended July 31,
1998 1997 1996
---- ---- ----
Provision (benefit) for income taxes at federal statutory rate $16,219,000 $(8,746,000) $10,848,000
Difference in income tax expense (benefit) resulting from:
Non-deductible goodwill amortization 715,000 311,000 129,000
Valuation allowance, net of impact of acquisitions 2,465,000 4,903,000 3,798,000
Non-deductible in-process research and development charge
related to acquisition of subsidiary 6,304,000 -- --
Utilization of research and development credits (612,000) -- --
State income taxes, net of federal benefit 4,223,000 651,000 1,604,000
Other 473,000 (81,000) 294,000
----------- ----------- -----------
Actual income tax expense (benefit) $29,787,000 $(2,962,000) $16,673,000
=========== =========== ===========
(18) Selected Quarterly Financial Information (unaudited)
The following table sets forth selected quarterly financial and stock price
information for the years ended July 31, 1998 and 1997. The operating results
for any given quarter are not necessarily indicative of results for any future
period. The Company's common stock is traded on the NASDAQ National Market
System ("NASDAQ/NMS") under the symbol CMGI. Included below are the high and
low sales prices (adjusted for a 2-for-1 stock split effected on May 11, 1998)
during each quarterly period for the shares of common stock as reported by
NASDAQ/NMS.
(in thousands, except per share data)
Fiscal 1998 Quarter ended
-------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31
------- ------- ------- -------
Net revenues $ 25,135 $ 17,818 $ 20,428 $ 28,103
Cost of revenues 15,259 15,692 18,704 29,176
Research and development expenses 6,174 4,639 3,968 4,928
In-process research and development expenses -- 875 18,060 200
Selling, general and administrative expenses 15,941 10,076 12,103 14,700
-------- -------- -------- --------
Operating loss (12,239) (13,464) (32,407) (20,901)
Interest income (expense), net 73 (420) (202) (321)
Gain on sale of data warehouse product rights 8,437 -- -- --
Gain on sale of Lycos, Inc. common stock 6,324 10,764 26,092 53,978
Gain on issuance of stock by Lycos, Inc. (94) 8 4,082 24,305
Gain on sale of available-for-sale securities 4,174 -- -- --
Gain on sale of investment in TeleT -- -- -- --
Gain on sale of NetCarta Corporation -- -- -- --
Gain on distribution of Lycos, Inc. common stock -- -- -- --
Equity in losses of affiliates (1,529) (2,987) (3,908) (3,397)
Minority interest (28) -- -- --
Income tax benefit (expense) (2,433) 265 (5,351) (22,268)
-------- -------- -------- --------
Net income (loss) $ 2,685 $ (5,834) $(11,694) $ 31,396
======== ======== ======== ========
Market Price
High $ 14.25 $ 18.50 $ 53.75 $ 91.75
======== ======== ======== ========
Low $ 7.38 $ 9.56 $ 18.28 $ 33.25
======== ======== ======== ========
Fiscal 1997 Quarter ended
-------------------------
Oct. 31 Jan. 31 Apr. 30 Jul. 31
------- ------- ------- -------
Net revenues $ 10,640 $ 18,897 $ 19,010 $ 22,060
Cost of revenues 5,366 11,286 11,551 13,949
Research and development expenses 4,965 6,732 6,466 6,895
In-process research and development expenses 1,312 -- -- --
Selling, general and administrative expenses 13,446 13,688 12,749 15,311
-------- -------- -------- --------
Operating loss (14,449) (12,809) (11,756) (14,095)
Interest income (expense), net 924 260 328 237
Gain on sale of data warehouse product rights -- -- -- --
Gain on sale of Lycos, Inc. common stock -- -- -- --
Gain on issuance of stock by Lycos, Inc. -- -- -- --
Gain on sale of available-for-sale securities -- -- -- --
Gain on sale of investment in TeleT 3,616 -- -- --
Gain on sale of NetCarta Corporation -- 15,111 -- --
Gain on distribution of Lycos, Inc. common stock -- -- -- 8,413
Equity in losses of affiliates (1,008) (1,081) (1,924) (1,543)
Minority interest 2,422 1,025 492 848
Income tax benefit (expense) 1,098 (1,840) 2,584 1,120
-------- -------- -------- --------
Net income (loss) $ (7,397) $ 666 $(10,276) $ (5,020)
======== ======== ======== ========
Market Price
High $ 9.13 $ 10.19 $ 8.81 $ 9.31
======== ======== ======== ========
Low $ 4.56 $ 4.78 $ 5.50 $ 6.19
======== ======== ======== ========
(19) Subsequent Events
In August, 1998, CMG@Ventures II's holdings in Sage Enterprises were converted
into 225,558 shares of restricted Amazon.com, Inc. common stock as part of a
merger wherein Amazon.com, Inc. acquired Sage Enterprises. CMG@Ventures II had
invested $4.5 million in Sage Enterprises beginning in June, 1997. The Company
expects to record a gain on the conversion of its investment in Sage Enterprises
during its fiscal quarter ended October 31, 1998. Such gain will be recorded net
of the 20% interest attributable to CMG@Ventures II's profit members.
In August, 1998, the Company's affiliate, GeoCities, completed its initial
public offering of common stock, issuing approximately 5 million shares at a
price of $17.00 per share. The Company, through its subsidiaries, CMG@Ventures I
and II, has invested a total of $5.9 million in GeoCities beginning in January,
1996. CMG@Ventures I and II own a combined 8.8 million shares of GeoCities
common stock and options to purchase an additional 1 million shares at a price
of $0.89 per share. The Company expects to record a gain on the issuance of
stock by GeoCities during its fiscal quarter ended October 31, 1998,
representing the increase in the book value of the Company's net equity in
GeoCities as a result of the initial public offering. The gain will be recorded
net of the interests attributable to CMG@Ventures I's and II's profit members.
In October, 1998, CMG@Ventures II's holdings in Reel.com were converted into
1,943,783 restricted common and 485,946 restricted, convertible preferred shares
of Hollywood Entertainment Corporation (Hollywood Entertainment) as part of a
merger wherein Hollywood Entertainment acquired Reel.com. The preferred shares
are convertible into common shares on a 1-for-1 basis, subject to approval by
Hollywood Entertainment shareholders. CMG@Ventures II had invested $6.9 million
in Reel.com beginning in July, 1997. The Company expects to record a gain on the
conversion of its investment in Reel.com during its fiscal quarter ended October
31, 1998. The gain will be reported net of the 20% interest attributable to
CMG@Ventures II's profit members.
Also in October, 1998, in a separate transaction, the Company purchased
1,524,644 restricted common and 803,290 restricted, convertible preferred shares
of Hollywood Entertainment for a total purchase price of $31.1 million. The
preferred shares are convertible into common shares on a 1-for-1 basis, subject
to approval by Hollywood Entertainment shareholders.
The Company recently formed its third venture capital fund, CMG@Ventures III,
LLC (CMG@Ventures III), and has begun raising capital from outside investors for
a corresponding outside investment fund, @Ventures III, L.P. The Company owns
100% of the capital and is entitled to 80% of the net capital gains of
CMG@Ventures III, and will be entitled to 2% of the net capital gains of
@Ventures III, L.P. These two funds will co-invest in all investment candidates
based on a predetermined ratio. CMG has committed to funding CMG@Ventures III up
to the greater of $30 million or 19.9% of amounts committed to @Ventures III,
L.P.
Independent Auditors' Report
The Board of Directors and Stockholders
CMG Information Services, Inc.:
We have audited the accompanying Consolidated Balance Sheets of CMG Information
Services, Inc. and subsidiaries as of July 31, 1998 and 1997, and the related
Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for
each of the years in the three-year period ended July 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material aspects, the consolidated financial position of CMG
Information Services, Inc. and subsidiaries as of July 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended July 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 22, 1998, except for Note 19 which is as of October 27, 1998.
EXHIBIT 21
CMG INFORMATION SERVICES, INC.
Subsidiaries of the Registrant
1. CMG @Ventures, Inc., a Delaware corporation.
2. CMG Securities Corporation, a Massachusetts corporation.
3. CMG @Ventures Capital Corporation, a Delaware corporation.
4. CMG @Ventures I, L.L.C., a Delaware limited liability company (formerly CMG
@Ventures, L.P.)
5. CMG @Ventures II, L.L.C., a Delaware limited liability company.
6. CMG Direct Corporation, a Delaware corporation.
7. SalesLink Corporation, a Massachusetts corporation.
8. Pacific Direct Marketing Corporation, a California corporation.
9. InSolutions Inc., a Delaware corporation.
10. On-Demand Solutions, Inc., a Massachusetts corporation.
11. Engage Technologies, Inc., a Delaware corporation.
12. Accipiter, Inc., a Delaware corporation.
13. Blaxxun Interactive, Inc., a Delaware corporation.
14. Planet Direct Corporation, a Delaware corporation.
15. ADSmart Corporation, a Delaware corporation.
16. InfoMation Publishing Corporation, a Delaware corporation.
17. NaviSite Internet Services Corporation, a Delaware corporation.
18. Servercast Communications, L.L.C., a Delaware limited liability company.
19. Password Internet Publishing Corporation, a Delaware corporation.
20. Vicinity Corporation, a California corporation.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CMG Information Services, Inc.:
We consent to the incorporation by reference in the registration statements of
CMG Information Services, Inc. on Form S-8 (File No. 33-86742 and File No. 33-
06745) and on Form S-3 (File No. 333-62391) of our reports dated September 22,
1998, except for Note 19 which is as of October 27, 1998, relating to the
Consolidated Balance Sheets of CMG Information Services, Inc. and subsidiaries
as of July 31, 1998 and 1997, and the related Consolidated Statements of
Operations, Stockholders' Equity and Cash Flows and related schedule for each of
the years of the three-year period ended July 31, 1998, which reports appear in
the July 31, 1998 annual report on Form 10-K of CMG Information Services, Inc.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 29, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Lycos, Inc.:
We consent to the incorporation by reference on Form 10-K of CMG Information
Services, Inc. of our report dated August 18, 1998, with respect to the
consolidated balance sheets of Lycos, Inc. as of July 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1998, which
report appears in the July 31, 1998 annual report on Form 10-K of Lycos, Inc.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 29, 1998
5
1,000
12-MOS
JUL-31-1997
AUG-01-1996
JUL-31-1997
59,762
5,945
28,935
1,083
3,077
106,691
20,091
8,947
148,354
68,137
0
0
0
193
29,255
148,354
70,607
70,607
42,152
42,152
81,564
0
(1,749)
(24,989)
(2,962)
(22,027)
0
0
0
(22,027)
(1.17)
(1.17)
RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RECLASSIFICATION TO PRIOR
PERIOD'S FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
5
1,000
12-MOS
JUL-31-1998
AUG-01-1997
JUL-31-1998
61,537
5,764
23,960
1,055
8,250
105,085
24,397
10,424
237,460
92,301
0
0
0
230
117,555
237,460
91,484
91,484
78,831
78,831
91,664
0
870
46,340
29,787
16,553
0
0
0
16,553
0.79
0.74
Exhibit 99.1
Lycos, Inc.
----
Item 1 Consolidated Financial Statements:
Independent Auditors' Report ...............................................................
Consolidated Balance Sheets at July 31, 1998 and 1997.......................................
Consolidated Statements of Operations for the years ended July 31, 1998, 1997, and 1996.....
Consolidated Statements of Stockholders' Equity for the years ended July 31, 1998, 1997, and
1996........................................................................................
Consolidated Statements of Cash Flows for the years ended July 31, 1998, 1997 and 1996......
Notes to Consolidated Financial Statements..................................................
PART II. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since they are either not applicable, not
required, or the information is included elsewhere herein.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lycos, Inc.:
We have audited the accompanying consolidated balance sheets of Lycos, Inc.
as of July 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three year period ended July 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lycos, Inc. at July 31, 1998 and 1997, and the results of its operations and
cash flows for each of the years in the three year period ended July 31, 1998,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
August 18, 1998
LYCOS, INC.
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 JULY 31, 1997
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 153,728,200 $ 40,766,258
Accounts receivable, less allowance for doubtful accounts of
$1,208,000 and $554,000 at July 31, 1998 and 1997, respectively.... 10,958,470 6,634,262
Electronic commerce and license fees receivable...................... 30,223,986 9,065,806
Prepaid expenses..................................................... 5,559,842 4,278,418
Other current assets................................................. 326,292 --
------------- -------------
Total current assets............................................. 200,796,790 60,744,744
------------- -------------
Property and equipment, less accumulated depreciation and amortization... 3,960,059 2,397,600
Electronic commerce and license fees receivable.......................... 21,537,371 650,000
Investments.............................................................. 8,874,568 --
Intangible assets, less accumulated amortization......................... 10,310,475 1,243,050
Other assets............................................................. 3,278,994 383,615
------------- -------------
Total assets..................................................... $ 248,758,257 $ 65,419,009
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 4,873,302 $ 3,289,513
Accrued expenses..................................................... 17,589,700 7,387,707
Deferred revenues.................................................... 30,730,390 9,541,566
Billings in excess of revenues....................................... 681,849 2,387,424
Due to related parties............................................... -- 9,105
------------- -------------
Total current liabilities........................................ 53,875,241 22,615,315
Deferred revenues........................................................ 26,159,754 5,100,000
Deferred income taxes.................................................... 36,667 56,667
------------- -------------
26,196,421 5,156,667
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued or outstanding.............................................. -- --
Common stock, $.01 par value; 80,000,000 shares authorized,
38,991,436 shares at July 31, 1998 and 27,593,240 at July 31, 1997
issued and outstanding............................................. 389,916 275,932
Additional paid-in capital......................................... 278,126,582 49,368,940
Deferred compensation.............................................. (116,338) (185,436)
Accumulated deficit................................................ (108,728,972) (11,812,409)
Treasury stock, at cost, 708,674 shares at July 31, 1998........... (984,593) --
------------- -------------
Total stockholders' equity....................................... 168,686,595 37,647,027
------------- -------------
Total liabilities and stockholders' equity....................... $ 248,758,257 $ 65,419,009
============= =============
See accompanying notes to consolidated financial statements.
LYCOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
-----------------------------------------------------
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------- ------------- -------------
Revenues:
Advertising....................................... $ 41,768,607 $ 17,417,388 $ 4,478,474
Electronic commerce, license and other............ 14,291,698 4,855,654 778,753
------------- ------------- -------------
Total revenues................................ 56,060,305 22,273,042 5,257,227
Cost of revenues................................... 12,513,259 4,335,941 2,900,808
------------- ------------- -------------
Gross profit.................................. 43,547,046 17,937,101 2,356,419
Operating expenses:
Research and development.......................... 9,477,708 4,301,267 906,591
In process research and development............... 91,239,055 -- 452,000
Sales and marketing............................... 35,035,754 19,126,317 4,747,805
General and administrative........................ 5,631,104 2,718,763 1,692,362
Amortization of intangible assets................. 2,131,735 540,416 359,868
------------- ------------- -------------
Total operating expenses...................... 143,515,356 26,686,763 8,158,626
------------- ------------- -------------
Operating loss..................................... (99,968,310) (8,749,662) (5,802,207)
Interest income.................................... 3,051,747 2,130,472 714,369
------------- ------------- -------------
Net loss........................................... $ (96,916,563) $ (6,619,190) $ (5,087,838)
============= ============= =============
Basic net loss per share........................... $ (3.13) $ (0.24) $ (0.21)
============= ============= =============
Shares used in computing basic net loss per share.. 30,932,982 27,589,486 23,984,830
============= ============= =============
See accompanying notes to consolidated financial statements.
LYCOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED ACCUMULATED TREASURY STOCK
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT SHARES AMOUNT
------------------------------------------------------------------------------------------------
Balances at July 31, 1995... 20,000,000 $ 200,000 $ 1,137,000 $ (87,000) $ (105,381) -- --
Capital contribution........ -- -- 1,000,000 -- -- -- --
Capital contribution
related to License
Agreement.............. -- -- 250,000 -- -- -- --
Issuance of common stock
in connection with
acquisitions........... 1,052,632 10,526 531,474 -- -- -- --
Issuance of common stock
pursuant to certain
preemptive rights...... 263,160 2,632 326,318 -- -- -- --
Issuance of common stock
in connection with Initial
Public Offering, net of
offering costs........ 6,270,000 62,700 45,631,382 -- -- -- --
Deferred compensation
related to grant of stock
options................ -- -- 523,505 (523,505) -- -- --
Amortization of deferred
compensation............... -- -- -- 234,344 -- -- --
Net loss.................... -- -- -- -- (5,087,838) -- --
------------------------------------------------------------------------------------------------
Balances at July 31, 1996... 27,585,792 $ 275,858 $ 49,399,679 $(376,161) $ (5,193,219) -- --
Issuance of common stock
in connection with
Employee Stock Purchase
Plan....................... 7,448 74 18,328 -- -- -- --
Cancellation of options..... -- -- (49,067) 49,067 -- -- --
Amortization of deferred
compensation............... -- -- -- 141,658 -- -- --
Net loss.................... -- -- -- -- (6,619,190) -- --
------------------------------------------------------------------------------------------------
Balances at July 31, 1997... 27,593,240 $ 275,932 $ 49,368,940 $(185,436) $ (11,812,409) -- --
Issuance of common stock
in connection with
Employee Stock
Purchase Plan......... 8,588 86 65,956 -- -- -- --
Cancellation of options..... -- -- (22,562) 22,562 -- -- --
Issuance of common stock
in connection with
exercise of stock options.. 2,047,020 20,470 3,221,724 -- -- 61,556 (307)
Treasury stock in
connection with exercise
of stock options....... -- -- -- -- -- 608,184 (467,589)
Issuance of common stock
in connection with
exercise of warrants....... 207,228 2,072 1,361,516 -- -- 18,836 (113,581)
Issuance of common stock
in connection with
strategic investments,
net of offering costs...... 301,028 3,012 7,879,431 -- -- -- --
Issuance of common stock
and warrants
in connection with
acquisitions.......... 4,149,142 41,492 104,807,563 -- -- 20,098 (403,116)
Issuance of common stock
in connection with
Secondary Public Offering,
net of offering
costs.................. 4,675,000 46,750 111,144,116 -- -- -- --
Issuance of common stock
in connection with
services rendered...... 10,190 102 299,898 -- -- -- --
Amortization of deferred
compensation............... -- -- -- 46,536 -- -- --
Net loss.................... -- -- -- -- (96,916,563) -- --
------------------------------------------------------------------------------------------------
Balances at July 31, 1998... 38,991,436 $ 389,916 $ 278,126,582 $(116,338) $(108,728,972) 708,674 $(984,593)
------------------------------------------------------------------------------------------------
TOTAL
--------------
Balances at July 31, 1995.. $ 1,144,619
Capital contribution....... 1,000,000
Capital contribution
related to License
Agreement............. 250,000
Issuance of common stock
in connection with
acquisitions.......... 542,000
Issuance of common stock
pursuant to certain
preemptive rights..... 328,950
Issuance of common stock
in connection with
Initial Public
Offering, net of
offering costs....... 45,694,082
Deferred compensation
related to grant of stock
options............... --
Amortization of deferred
compensation.............. 234,344
Net loss................... (5,087,838)
--------------
Balances at July 31, 1996.. $ 44,106,157
Issuance of common stock
in connection with
Employee Stock Purchase
Plan....................... 18,402
Cancellation of options..... --
Amortization of deferred
compensation............... 141,658
Net loss.................... (6,619,190)
--------------
Balances at July 31, 1997... $ 37,647,027
Issuance of common stock
in connection with
Employee Stock
Purchase Plan......... 66,042
Cancellation of options..... --
Issuance of common stock
in connection with
exercise of stock options.. 3,241,887
Treasury stock in
connection with exercise
of stock options....... (467,589)
Issuance of common stock
in connection with
exercise of warrants....... 1,250,007
Issuance of common stock
in connection with
strategic investments,
net of offering costs...... 7,882,443
Issuance of common stock
and warrants
in connection with
acquisitions.......... 104,445,939
Issuance of common stock
in connection with
Secondary Public Offering,
net of offering
costs.................. 111,190,866
Issuance of common stock
in connection with
services rendered...... 300,000
Amortization of deferred
compensation............... 46,536
Net loss.................... (96,916,563)
--------------
Balances at July 31, 1998... $168,686,595
--------------
See accompanying notes to consolidated financial statements.
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED
-----------------------------------------------
July 31, 1998 July 31, 1997 July 31, 1996
-------------- -------------- --------------
OPERATING ACTIVITIES
Net loss....................................................... $(96,916,563) $(6,619,190) $(5,087,838)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation....................... 46,536 141,658 234,344
Depreciation and amortization............................... 3,656,867 1,269,064 642,218
Allowance for doubtful accounts............................. 654,000 405,000 200,000
In process research and development expense................. 91,239,055 -- 452,000
Issuance of common stock for services rendered.............. 300,000 -- --
Changes in operating assets and liabilities:
Accounts receivable......................................... (4,768,973) (3,745,337) (3,454,950)
Electronic commerce and license fees receivable............. (42,045,551) (7,731,585) (1,984,221)
Prepaid expenses............................................ (1,258,140) (3,296,707) (981,711)
Other current assets........................................ (326,292) -- --
Other assets................................................ (2,895,379) (216,000) (167,615)
Accounts payable............................................ 774,033 547,634 2,600,071
Accrued expenses............................................ 8,343,512 5,641,289 1,735,693
Deferred revenues........................................... 42,155,798 11,493,144 3,125,285
Billings in excess of revenues.............................. (1,705,575) 984,992 1,402,432
Due to related parties...................................... (9,105) (428,162) 295,660
Deferred income taxes....................................... (20,000) (21,333) 28,000
-------------- -------------- -------------
Net cash used in operating activities.......................... (2,775,777) (1,575,533) (960,632)
-------------- -------------- -------------
INVESTING ACTIVITIES
Purchase of property and equipment............................. (1,091,988) (1,818,798) (1,632,079)
Payments under License Agreement............................... -- -- (750,000)
Cash acquired through acquisitions, net........................ 2,540,619 -- 17,137
Investment in Joint Venture.................................... (992,125) -- --
-------------- -------------- -------------
Net cash provided by (used in) investing activities............ 456,506 (1,818,798) (2,364,942)
-------------- -------------- -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of offering costs.. 111,190,866 18,402 46,021,314
Proceeds from exercise of stock options........................ 3,241,887 -- --
Proceeds from issuance of common stock under Employee
Stock Purchase Plan............................................ 66,042 -- --
Proceeds from exercise of warrants............................. 1,250,007 -- --
Proceeds from capital contribution............................. -- -- 1,000,000
Cash used to repurchase treasury stock......................... (467,589) -- --
-------------- -------------- -------------
Net cash provided by financing activities...................... 115,281,213 18,402 47,021,314
-------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents........... 112,961,942 (3,375,929) 43,695,740
Cash and cash equivalents at beginning of year................. 40,766,258 44,142,187 446,447
-------------- -------------- -------------
Cash and cash equivalents at end of year....................... $153,728,200 $40,766,258 $44,142,187
============== ============== =============
LYCOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEAR ENDED
---------------------------------------------
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
--------------- ------------- -------------
Schedule of non-cash financing and investing activities:
Issuance of common stock for License Agreement.................... $ -- $ -- $300,000
Recognition of deferred tax liability related to License
Agreement........................................................... -- -- 50,000
Assets and liabilities recognized upon acquisition of Point
Communications...................................................... -- -- --
Accounts receivable.............................................. -- -- 33,975
Property and equipment........................................... -- -- 47,496
Goodwill......................................................... -- -- 186,633
Accounts payable................................................. -- -- 97,734
Deferred revenues................................................ -- -- 23,137
Accrued expenses................................................. -- -- 4,370
Due to related parties........................................... -- -- 70,000
Issuance of common stock upon acquisition of Tripod, Inc., -- --
WiseWire, Corp., and GuestWorld, Inc................................ $104,445,939
Assets and liabilities recognized upon acquisition of Tripod, Inc., -- --
WiseWire Corp., and GuestWorld, Inc.
Accounts receivable.............................................. 209,235 -- --
Prepaid expenses................................................. 23,284 -- --
Property and equipment........................................... 1,995,601 -- --
Developed technology............................................. 8,651,195 -- --
Goodwill and other intangible assets............................. 2,547,965 -- --
Accounts payable................................................. 809,756 -- --
Accrued expenses................................................. 1,858,481 -- --
Deferred revenues................................................ 92,780 -- --
Issuance of common stock in connection with strategic
investments........................................................ 7,882,443 -- --
See accompanying notes to consolidated financial statements.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Lycos, Inc. ("Lycos" or the "Company"), which operates in one industry
segment, provides guides for finding information on the Internet's World Wide
Web. The Company was formed in June 1995 by CMG@Ventures, L.P. ("CMG@Ventures")
to license on an exclusive basis (with certain limited exceptions) from Carnegie
Mellon University ("CMU" or the "Licensor") the Lycos Internet search and
indexing technology.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, from their respective dates of acquisition.
All significant intercompany balances and transactions have been eliminated.
Joint Ventures
On May 1, 1997, the Company entered into a joint venture agreement with
Bertelsmann Internet Services to create localized versions of the Lycos search
and navigation service throughout Europe. The new company, named Lycos
Bertelsmann GmbH & Co. KG ("Lycos Bertelsmann"), is owned 50% by Lycos and 50%
by Bertelsmann. Bertelsmann Internet Services, a subsidiary of Bertelsmann AG,
has committed to provide capital, infrastructure and employees for the venture
while Lycos will provide the core technology and brand name. The carrying value
of the Company's investment in Lycos Bertelsmann was not material at July 31,
1998 or 1997. The investment is accounted for under the equity method and
accordingly, the Company will recognize 50% of the net profits of Lycos
Bertelsmann when realized.
On April 13, 1998, the Company entered into a joint venture with Sumitomo
Corporation, a $100 billion dollar company and one of Japan's largest trading
companies, and Internet Initiative Japan (IIJ), the country's largest Internet
Service Provider to create a localized version of the lycos.com Web Site to be
called Lycos Japan which will feature navigation and search capability, and will
soon include news, sports, stocks and other services. Terms of the deal include
a 40% ownership stake by Lycos in exchange for approximately $992,000, with
Sumitomo Corporation owning 50% of the venture and IIJ maintaining a 10% stake
in the entity. Sumitomo Corporation and Lycos will manage the daily operations
of the site, including aggregation of local content, sales, marketing and
administration from the operations' headquarters in Tokyo, Japan. For the year
ending July 31, 1998, Lycos' share of operating costs was not material.
Investments
During 1998 the Company obtained equity interests in two privately held,
internet related companies through the issuance of the Company's common stock
(see Note 2). Both investments resulted in the Company owning less than 20% of
the respective investees. Accordingly, these investments are accounted for under
the cost method. The Company purchased these investments in March and April,
1998, and their carrying values approximate fair values. For these non-quoted
investments, the Company regularly reviews the assumptions underlying the
operating performance and cash flow forecasts in assessing the carrying values.
Public Offerings
On April 2, 1996, the Company completed an initial public offering of its
common stock in which 6,000,000 shares of common stock were issued at a price of
$8.00 per share. On April 12, 1996, pursuant to the exercise of an over-
allotment option granted to the underwriters of the Company's initial public
offering, the Company issued an additional 270,000 shares of its common stock at
a price of $8.00 per share.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On June 4, 1998, the Company completed a secondary offering of its common
stock in which 4,000,000 shares of common stock were issued at a price of $23.82
per share net of underwriting discounts and commissions. On June 10, 1998,
pursuant to the exercise of an over-allotment option granted to the the
underwriters of the Company's secondary offering, the Company issued an
additional 675,000 shares of its common stock at a price of $25.00 per share.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents. At July
31, 1998 and 1997, the Company had no investments with maturities greater than
three months.
Electronic Commerce and License Fees Receivable
Electronic commerce and license fees receivable are comprised of fees to be
received in the future on electronic commerce and licensing agreements existing
at the balance sheet date.
Other assets
Other assets comprise primarily purchased hardware to be sold to joint
venture partners. Purchased hardware will be sold at cost upon completion.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets (three to five years).
Leasehold improvements are amortized on a straight-line basis over the lesser of
the estimated useful life of the asset or the lease term.
Intangible Assets
Intangible assets primarily relate to the Company's acquisitions and
include developed technology, licensed technology, trademarks, trade names,
content copyrights, customer base and goodwill. In connection with acquisitions
accounted for under the purchase method of accounting (see Note 4), the Company
recorded these intangible assets based on the excess of the purchase price over
the identifiable tangible net assets of the acquiree on the date of purchase.
Intangible assets are reported at cost, net of accumulated amortization, and are
being amortized over their estimated useful life of five years.
Accounting for Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No. 121,
the Company records impairment losses on long-lived assets to be held and used
or to be disposed of when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset carrying amount.
Deferred Revenues
Deferred revenues are comprised of license and electronic commerce fees to
be earned in the future on noncancelable agreements existing at the balance
sheet date.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and the tax effect of net operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising contracts in which the Company guarantees a number of impressions
for a fixed fee or on a per impression basis with an established minimum fee.
Revenues from advertising are recognized as the services are performed.
Electronic commerce revenues are derived principally from "slotting fees"
paid for selective positioning and promotion within the Company's suite of
products as well as from royalties from the sale of goods and services from the
Company's websites. The Company's license and product revenues are derived
principally from product licensing fees and fees from maintenance and support of
its products. Eletronic commerce, license and product revenues are generally
recognized upon delivery provided that no significant Company obligations remain
and collection of the receivable is probable. In cases where there are
significant remaining obligations, the Company defers such revenue until those
obligations are satisfied. Fees from maintenance and support of the Company's
products including revenues bundled with the initial licensing fees are deferred
and recognized ratably over the service period.
Cost of Revenues
Cost of revenues specifically attributable to advertising and electronic
commerce, license and product revenues are not separately identifiable and
therefore are not separately disclosed in the consolidated statements of
operations.
Research and Development Costs
Research and development expenditures are expensed as incurred. Software
development costs are required to be capitalized when a product's technological
feasibility has been established either by completion of a detail program design
or a working model of the product and ending when a product is available for
general release to consumers. To date, attainment of technological feasibility
of the Company's products and general release to customers have substantially
coincided. As a result, the Company has not capitalized any software development
costs since such costs have not been significant.
Advertising Costs
The Company expenses advertising production costs as incurred. Advertising
expense was approximately $5,675,000, $4,427,000 and $567,000 for the years
ended July 31, 1998, 1997 and 1996, respectively.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123") requires
that companies either recognize compensation expense for grants of stock, stock
options, and other equity instruments based on fair value, or provide pro forma
disclosure of net income (loss) and earnings (loss) per share in the notes to
the financial statements. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized under SFAS 123 for the Company's stock option plans, and
footnote disclosure is provided in Note 8.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations. Direct write-offs of accounts receivable were
$333,000 for the year ended July 31, 1998 and $51,000 for the year ended July
31, 1997. There were no direct write-offs of accounts receivable for the year
ended July 31, 1996. No single customer accounted for greater than 10% of total
revenues during the years ended July 31, 1998, 1997 and 1996.
The Company's services are provided to customers in several industries
primarily in North America. Sales to foreign customers for the years ended July
31, 1998, 1997 and 1996 were approximately $2,640,000, $1,700,000 and $385,000,
respectively.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
receivables, accounts payable, accrued expenses and deferred revenues,
approximate their fair market values as of July 31, 1998. The Company has no
investments in derivative financial instruments.
Use of Estimates
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
reporting period. Actual results could differ from those estimates.
Per Share Amounts
For the year ended July 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 requires the presentation of basic loss per share and diluted
loss per share for all periods presented. As the Company has been in a net loss
position for the years ended July 31, 1998, 1997 and 1996, common stock
equivalents were excluded from the diluted loss per share calculation as they
would be antidilutive. As a result, diluted loss per share is the same as basic
loss per share, and has not been presented separately.
Stock Split
In July 1998, the Company's Board of Directors approved a two-for-one
common stock split. Shareholders of record on August 14, 1998 (the record date)
were entitled to one additional share for every share held on August 25, 1998.
The Company has presented loss per share and weighted average shares in the
consolidated statement of operations for all periods presented and all footnote
disclosures reflecting the effect of the stock split.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Treasury Stock
In connection with a license agreement with Carnegie Mellon University,
CMG@Ventures, Inc. has agreed to sell to the Company the number of shares of
common stock equal to the shares issuable upon exercise of certain options
granted, as defined, at a price equal to the exercise price of the underlying
options exercised (see Note 8). Under this agreement, the Company issues shares
of Company stock to employees upon exercise of options and subsequently buys an
equivalent number of Company shares at the respective exercise price from
CMG@Ventures, resulting in treasury stock.
Reclassifications
Certain prior years' balances have been reclassified to conform with the
current year's presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS 130") "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
expects to adopt SFAS 130 for the year ending July 31, 1999. The Company
believes that this pronouncement will not have a material adverse affect on its
results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997. The Company expects to adopt SFAS 131 for the
year ending July 31, 1999. Because the Company operates within a single
operating segment, adoption of this statement is currently not expected to have
a material impact on the Company's consolidated financial statements and
footnote disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition",
which provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition". The Company expects to adopt SOP 97-2 for its fiscal year
ending July 31, 1999 and does not anticipate any material impact on its revenue
recognition policies.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. The Company is required to adopt SOP 98-1
effective August 1, 1999. The adoption of SOP 98-1 is not expected to have a
material impact on the Company's consolidated financial statements.
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 effective August 1, 1999. The adoption of SOP 98-5 is not expected to
have a material impact on the Company's consolidated financial statements.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair-value hedge transactions
in which the Company is hedging changes in an asset's, liability's or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. For cash flow hedge transactions, changes in the fair value of the
derivative instrument will be reported in comprehensive income. The gains and
losses on the derivative instrument that are reported in other comprehensive
income will be reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current period earnings.
The Company currently expects to adopt SFAS 133 for the year ending July 31,
1999. Management has determined there will be no impact on its results of
operations or financial position resulting from the adoption of SFAS 133 because
the Company currently does not hold derivative instruments.
2. INVESTMENTS
On March 9, 1998, the Company purchased 1,000,000 shares of Class A
Preferred Stock of GlobeComm, Inc. ("GlobeComm") through the issuance of 200,124
shares of Lycos common stock, valued at $4,577,837. The investment, carried at
cost, represents an approximate 9.85% stake in GlobeComm on a fully diluted
basis. GlobeComm is the owner of iName, a leading provider of lifetime
personalized e-mail addresses and advanced e-mail services. Lycos provides free
e-mail services to users based on iName's advanced products.
On April 13, 1998, the Company purchased 1,915,709 shares of Series B
Convertible Participating Preferred Stock of Sage Enterprises, Inc.
("PlanetAll") through the issuance of 100,904 shares of Lycos common stock,
valued at $3,304,606. The investment, carried at cost, represents an
approximate 14.1% stake in PlanetAll, on a fully diluted basis.
Subsequent to July 31, 1998, all of the outstanding common stock of
PlanetAll was acquired by Amazon.com. See Note 7 "Subsequent Events".
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following:
JULY 31,
---------------------------
1998 1997
------------- -----------
Computers and equipment................ $ 3,623,686 $ 2,234,012
Furniture and fixtures................. 1,091,726 563,756
Leasehold improvements................. 1,356,222 585,912
Purchased software..................... 525,197 141,096
------------- -----------
6,596,831 3,524,776
Less accumulated depreciation and...... (2,636,772) (1,127,176)
amortization.......................... ------------- -----------
$ 3,960,059 $ 2,397,600
============= ===========
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. ACQUISITIONS
Tripod, Inc.
On February 11, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") by and among the Company, Pod Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of the Company ("PAC"),
Tripod, Inc., a Delaware corporation ("Tripod"), William Peabody and Richard
Sabot, providing for the merger of PAC with and into Tripod (the "Merger"). On
February 12, 1998,the Company completed the closing of the Merger and Tripod
became a wholly-owned subsidiary of the Company. In accordance with the terms of
the Agreement, Richard Sabot was elected, effective May 1, 1998, to the
Company's Board of Directors for a term expiring at the first Annual Meeting of
the Company's stockholders held after the Company's fiscal year ending July 31,
2000.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Tripod have been included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock
of Tripod and options and warrants to purchase Common Stock and Preferred Stock
of Tripod were converted into 3,120,826 shares and options and warrants to
purchase Common Stock of the Company. All outstanding options to purchase Common
Stock of Tripod have been assumed by the Company and converted into options to
purchase Common Stock of the Company, and all outstanding warrants to purchase
Preferred Stock of Tripod have been assumed by the Company and converted into
warrants to purchase Common Stock of the Company.
Under the terms of the Agreement and related Escrow Agreement dated
February 11, 1998, an aggregate of 255,682 shares of Common Stock of the Company
and options and warrants to purchase an additional 56,418 shares of Common Stock
of the Company will be held in escrow for the purpose of indemnifying the
Company against certain liabilities of Tripod and its stockholders. The escrow
will expire on February 11, 1999.
The purchase price was allocated as follows:
In process research and development........... $51,600,000
Developed technology.......................... 5,407,138
Goodwill and other intangible assets.......... 2,412,797
Other assets, principally cash and equipment.. 3,633,449
Liabilities assumed .......................... (1,603,731)
-------------
$61,449,653
=============
Accumulated amortization on intangible assets was $627,569 at July 31, 1998.
WiseWire Corporation
On April 30, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, Wise Acquisition Corp., a
Pennsylvania corporation and a wholly-owned subsidiary of the Company ("WAC"),
and WiseWire Corporation, a Pennsylvania corporation ("WiseWire"), pursuant to
which WAC was merged with and into WiseWire (the "Merger"). As a result of the
Merger, WiseWire became a wholly-owned subsidiary of the Company.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WiseWire are included with
those of the Company for periods subsequent to the date of acquisition.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In the Merger, all outstanding shares of Common Stock and Preferred Stock
of WiseWire and options to purchase Common Stock of WiseWire were converted into
1,648,510 shares and options to purchase Common Stock of the Company. All
outstanding options to purchase Common Stock of WiseWire have been assumed by
the Company.
Under the terms of the Agreement and related Escrow Agreement dated April
30, 1998, an aggregate of 164,874 shares of Common Stock of the Company will be
held in escrow for the purpose of indemnifying the Company against certain
liabilities of WiseWire and its stockholders. The escrow will expire on April
30, 1999.
The purchase price was allocated as follows:
In process research and development........... $36,000,000
Developed technology.......................... 3,060,189
Goodwill and other intangible assets.......... 127,509
Other assets, principally cash and equipment.. 1,085,290
Liabilities assumed .......................... (857,286)
--------------
$39,415,702
==============
Accumulated amortization on intangible assets was $256,330 at July 31, 1998.
GuestWorld, Inc.
On June 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, VW Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("VW"), GuestWorld,
Inc., a California corporation ("GuestWorld"), and all of the stockholders of
GuestWorld, acquired all of the outstanding capital stock of GuestWorld through
the merger of VW with and into GuestWorld (the "Merger"). As a result of the
Merger, GuestWorld became a wholly-owned subsidiary of the Company.
In the Merger, all outstanding shares of Common Stock of GuestWorld were
converted into an aggregate of 126,184 shares of Common Stock, par value $.01
per share, of the Company. The acquisition was accounted for as a purchase.
Results of operations for GuestWorld are included with those of the Company for
periods subsequent to the date of acquisition.
Under the terms of the Agreement and related Escrow Agreement dated June
16, 1998, an aggregate of 12,618 shares of Common Stock of the Company will be
held in escrow for the purpose of indemnifying the Company against certain
liabilities of GuestWorld and its stockholders. The escrow will expire on June
16, 1999.
The purchase price was allocated as follows:
In process research and development... $3,639,055
Developed technology.................. 183,868
Goodwill and other intangible assets.. 7,661
Property and equipment................ 50,000
Liabilities assumed .................. (300,000)
-------------
$3,580,584
=============
Accumulated amortization on intangible assets was $4,597 at July 31, 1998.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In-Process Research and Development
In connection with the acquisitions of Tripod, WiseWire and GuestWorld, the
Company recorded an in-process research and development charge of $91,239,055,
representing purchased in-process research and development that has not yet
reached technological feasibility and has no alternative future use. The
Company's management made certain assessments with respect to the determination
of all identifiable assets resulting from, or to be used in, research and
development activities as of the respective acquisition dates. Each of these
activities was evaluated as of the respective acquisition dates so as to
determine their stage of development and related fair value. The Company's
review, as of the acquisition date, indicated that the in-process research and
development had not reached a state of technological feasibility and evidenced
no alternative future use. In the case of in-process projects, the Company made
estimates to quantify the cost-to-complete for each project, identifying the
project date of introduction, the estimated life of the project, the project's
"fit" within the Company's own in-process research projects, the revenues to be
generated in each future period and the corresponding operating expenses and
other charges to apply to this revenue stream. In order to determine the value
of the earnings stream attributable to the in-process research and development,
the excess earnings from the projects were calculated by deducting the earnings
stream attributable to all other assets including working capital and tangible
assets. Based upon these assumptions, after-tax cash flows attributable to the
in-process project(s) were determined, appropriately discounted back to its
respective net present value, taking into account the uncertainty surrounding
the successful development of the purchased in-process technology.
In the case of in-process technology, fair values of the corresponding
technologies were determined by the Income Approach which included both a
discounted future earnings methodology and a relief from royalty methodology.
Under these methodologies, the value of the in-process technology is comprised
of the total present value of the future earnings stream attributable to the
technology throughout its anticipated life. An adjustment to the value of
certain in-process research and development projects has been applied based on a
percentage completion formula. The valuation of the acquired in-process research
and development used by the Company in making its determination as to the amount
of in-process research and development expense was supported by valuation
studies prepared by an independent third party appraiser.
In order to assess the reasonableness of the conclusions reached under the
Excess Earnings (Discounted Future Earnings) method, the value of the
technologies was also estimated using a Relief from Royalty approach. Under this
approach, the value of the technologies is estimated to be the present value of
the after tax amounts that the Company would otherwise be required to pay to
third parties to obtain access to the subject technologies, if it did not
already own them. In applying the method, management estimated a royalty rate
and forecasted an estimated royalty stream for the in-process technologies. The
estimated royalty rate used was based on existing Lycos contracts for the
licensing of similar technologies.
GuestWorld and WiseWire are both development stage companies that had not
generated significant commercial revenue at their respective acquisition dates
and were loss making. Neither company had completed development of
technologically robust or commercially viable products or services. Significant
uncertainty existed in relation to the introduction of such products or
services.
Lycos' management has considered the possible existence or value of other
intangible assets such as patents, copyrights, brand names, customers lists,
etc. However, management at both companies had been focused on completing the
development projects underway and they had not undertaken the development of
other intangible assets. Accordingly, Lycos' management believes that the value
of any other such assets at the respective acquisition dates to be minimal
or zero.
The purchase price paid for GuestWorld and WiseWire reflected payment for
incomplete technology. Should the in-process projects fail, the value of Lycos'
investment in these incomplete technologies would be diminimous or zero.
In the case of Tripod, management does believe that other intangible assets
had been created by management at the acquisition date. As a result, in addition
to valuing in-process research and development, management has also allocated a
proportion of the purchase price, based on their respective fair values, to
existing technology employed in the creation and management of pods as well as
to other intangible assets associated with the existing community members.
49
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following unaudited pro forma financial information presents the
combined results of operations of Lycos, Tripod and WiseWire as if the
acquisitions had occurred as of the beginning of 1998, 1997 and 1996,
respectively, after giving effect to certain adjustments, including amortization
of goodwill and other intangible assets. The pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had Lycos, Tripod and WiseWire constituted a single entity during such periods.
Pro forma information for GuestWorld for periods prior to the acquisition have
not been presented because the results of GuestWorld's operations were not
material to the Company's historical results.
(UNAUDITED) LYCOS TRIPOD WISEWIRE COMBINED
-------------- ------------- ------------- ---------------
YEAR ENDED JULY 31, 1998
- - - ------------------------
Revenues..................................... $ 56,060,305 $ 731,499 $ 310,123 $ 57,101,927
Operating expenses and interest income, net.. 152,976,868 4,690,100 2,625,150 160,292,118
--------------------------------------------------------------
Net loss..................................... $(96,916,563) $(3,958,601) $(2,315,027) $(103,190,191)
==============================================================
YEAR ENDED JULY 31, 1997
- - - -------------------------
Revenues..................................... $ 22,273,042 $ 517,490 $ 111,490 $ 22,902,022
Operating expenses and interest income, net.. 28,892,232 3,506,191 2,463,770 34,862,193
--------------------------------------------------------------
Net loss..................................... $ (6,619,190) $(2,988,701) $(2,352,280) $ (11,960,171)
==============================================================
YEAR ENDED JULY 31, 1996
- - - -------------------------
Revenues..................................... $ 5,257,227 $ 239,856 $ 79,310 $ 5,576,393
Operating expenses and interest income, net.. 10,345,065 1,312,799 483,444 12,141,308
--------------------------------------------------------------
Net loss..................................... $ (5,087,838) $(1,072,943) $ (404,134) $ (6,564,915)
==============================================================
WhoWhere?, Inc.
On August 13, 1998, the Company entered into an Agreement and Plan of merger
to acquire WhoWhere?, Inc. See Note 7 "Subsequent Events".
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
JULY 31, JULY 31,
1998 1997
------------ ------------
Compensation and benefits.. 2,262,015 $ 942,749
Advertising and promotion.. 8,885,178 4,238,361
Professional fees.......... 1,262,351 627,884
Non-income taxes........... 567,500 407,401
Other...................... 4,612,656 1,171,312
------------ ------------
17,589,700 $ 7,387,707
============ ============
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain other equipment under
operating lease agreements expiring through 2004. Future noncancelable minimum
payments as of July 31, 1998 under these leases for each fiscal year end are as
follows:
1999................................. $8,557,981
2000................................. 5,854,175
2001................................. 3,612,403
2002................................. 3,402,195
2003................................. 2,384,660
Rent expense under noncancellable operating leases was $5,057,907,
$2,094,774, and $318,500 for the years ended July 31, 1998, 1997 and 1996,
respectively.
The Company is obligated to make payments totaling approximately $19
million under contracts to provide search and navigation services between June
1998 and September 1999. No payments had been made under these agreements as of
July 31, 1998.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or cash flows of the Company.
7. SUBSEQUENT EVENTS (UNAUDITED)
Acquisition of WhoWhere? Inc.
On August 7, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") by and among the Company, What Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company ("WWAC"), WhoWhere?
Inc., a California corporation ("WhoWhere?"), and certain shareholders of
WhoWhere? providing for the merger of WWAC with and into WhoWhere? (the
"Merger"). On August 13, 1998, the Company completed the closing of the Merger
and WhoWhere? became a wholly-owned subsidiary of the Company.
The acquisition will be accounted for as a purchase. The purchase price
will be allocated to the assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for WhoWhere? will be included with
those of the Company for periods subsequent to the date of acquisition.
In the Merger, all outstanding shares of Common Stock and Preferred Stock
of WhoWhere? were converted into an aggregate of 3,770,254 shares of Common
Stock , par value $.01 per share, of the Company (the "Lycos Common Stock"), and
all outstanding options and warrants to purchase Common Stock or Preferred Stock
of WhoWhere? were assumed by the Company and became options or warrants, as the
case may be, to purchase an aggregate of 1,335,244 shares of Lycos Common Stock.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has filed a Registration Statement on Form S-3 with respect to the
resale of the shares of Lycos Common Stock issued in the Merger and the shares
of Lycos Common Stock issuable upon the exercise of warrants assumed in the
Merger and filed a Registration Statement on Form S-8 with respect to the shares
of Lycos Common Stock issuable upon the exercise of options and warrants assumed
in the Merger.
Under the terms of the Agreement and related Escrow Agreement dated August
13, 1998, an aggregate of 377,038 shares of Lycos Common Stock and options and
warrants to purchase an additional 133,540 shares of Lycos Common Stock will be
held in escrow for the purpose of indemnifying the Company against certain
liabilities of WhoWhere? and its stockholders. The escrow will expire on August
13, 1999.
Acquisition of Wired Ventures, Inc.
On October 5, 1998, the Company entered into a definitive merger agreement
to acquire Wired Ventures Inc. in a stock-for-stock transaction valued at
approximately $83 million, net of cash to be acquired and the value of shares
issuable to the holders of options to purchase common stock of Wired which are
exercised prior to the closing of the acquisition. The transaction is intended
to be accounted for as a purchase, and accordingly, the purchase price will be
allocated to assets acquired and liabilities assumed based on their respective
fair values. Subject to several conditions, including approval of Wired's
shareholders, the transaction is expected to close in the second quarter of
fiscal 1999.
Acquisition of PlanetAll, Inc.
In August 1998, pursuant to an Agreement and Plan of Merger, Amazon.com
acquired all of the outstanding capital stock of PlanetAll. Amazon.com issued
approximately 800,000 shares of Amazon.com common stock, par value $.01 per
share valued at approximately $87 million. Of the total of 800,000 shares issued
by Amazon.com, the Company received 107,377 shares valued at approximately $11.6
million at the time of acquisition in exchange for its shares of PlanetAll. See
Note 2.
8. STOCKHOLDERS' EQUITY
Common Stock
On June 4, 1998, 4,500,000 of the Company's shares were sold under a
registration statement filed with the Securities Exchange Commission. Of the
4,500,000 shares sold, 4,000,000 shares were sold by the Company and 500,000
were sold by CMG Information Services, Inc ("CMGI"). The Company did not
receive any proceeds from the sale of shares by CMGI. Proceeds to the Company
were approximately $95 million, before deduction of expenses payable by the
Company of $350,000. The Underwriters exercised an option to purchase 675,000
additional shares of Common Stock, resulting in additional proceeds to the
Company of approximately $16 million.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1995 Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan") under which nonqualified stock options to purchase common stock may be
granted to officers and other key employees. Under the Plan, options to purchase
2,000,000 shares of common stock may be granted at an exercise price determined
by the Board of Directors. Options granted under the 1995 Plan are exercisable
in five equal annual installments beginning one year after date of grant, except
that the vesting of certain options are subject to acceleration upon the
occurrence of certain events. Options under the 1995 Plan expire six years from
date of grant. The total weighted average contractual life of options
outstanding at July 31, 1998 was 3.5 years.
A summary of option activity under the 1995 Plan is as follows:
WEIGHTED-
AVERAGE RANGE OF
OPTIONS EXERCISE PRICE EXERCISE PRICES
----------------------------------------------
Outstanding at July 31, 1995.... 1,120,000 $0.01 $ 0.01
Granted....................... 1,179,552 $2.41 $0.01 - $ 8.00
Exercised..................... -- -- ---
Terminated.................... (390,608) $0.07 $0.01 - $ 4.80
----------
Outstanding at July 31, 1996... 1,908,944 $1.48 $0.01 - $ 8.00
----------
Granted....................... 420,000 $7.20 $5.69 - $ 7.94
Exercised..................... (101,600) $0.03 $0.01 - $ 1.16
Terminated.................... (245,736) $1.72 $0.01 - $ 8.00
----------
Outstanding at July 31, 1997... 1,981,608 $2.73 $0.01 - $ 7.94
----------
Granted....................... -- -- ---
Exercised..................... (630,184) $0.34 $0.01 - $ 7.94
Terminated.................... (212,080) $1.25 $0.01 - $ 8.50
----------
Outstanding at July 31, 1998... 1,139,344 $3.11 $0.01 - $ 7.94
==========
Exercisable at July 31, 1998... 359,368 $3.75 $0.01 - $ 7.75
==========
The following table summarizes information about the Company's stock options
outstanding at July 31, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------
WEIGHTED-
1995 STOCK OPTION NUMBER AVERAGE WEIGHTED- WEIGHTED-
PLAN RANGE OF OUTSTANDING REMAINING AVERAGE NUMBER AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES JULY 31, 1998 LIFE (YEARS) PRICE JULY 31, 1998 PRICE
--------------------------------------------------------------------------------------
$0.01--$1.16 407,696 3.1 $0.02 82,200 $0.01
$4.80--$4.80 441,648 3.5 $4.80 269,168 $4.80
$5.69--$7.94 290,000 4.7 $7.15 8,000 $6.77
------------- --------------
1,139,344 359,368
============= ==============
Pursuant to the License Agreement, CMG@Ventures has agreed to sell to the
Company a number of shares of common stock equal to the shares issuable upon
exercise of options granted under the 1995 Plan and the 1996 Plan (as defined
below) prior to the initial public offering at a price equal to the exercise
price of the options as such options are exercised.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has recorded deferred compensation expense of approximately
$610,000 for the difference between the grant price and the estimated fair value
(determined by independent valuations or by reference to third party
transactions) of certain of the Company's stock options granted. This amount is
being amortized over the vesting period of the individual options on a straight-
line basis, determined separately for each portion of the options that vest in
each year. Deferred compensation expense recognized for the year ended July 31,
1998, 1997 and 1996 was approximately $47,000, $142,000 and $234,000,
respectively.
1996 Stock Option Plan
On February 2, 1996, the 1996 Stock Option Plan (the ''1996 Plan'') was
adopted by the Board of Directors. A maximum of 2,000,000 shares of common stock
may be issued pursuant to the 1996 Plan upon exercise of options. On June 27,
1997, the Company's Board of Directors voted to authorize an additional 400,000
shares for grant under the 1996 Plan.
Under the 1996 Plan, incentive stock options may be granted to employees
and officers of the Company and non-qualified stock options may be granted to
consultants, employees and officers of the Company. The exercise price of such
incentive stock options cannot be less than the fair market value of the common
stock on the date of grant, or less than 110% of fair market value in the case
of employees or officers holding 10% or more of the voting stock of the Company.
The Compensation Committee of the Board of Directors has the authority to select
optionees and to determine the terms of the options granted. Options granted
under the 1996 Plan are exercisable in five equal annual installments commencing
on the first anniversary of the date of grant, except that vesting of certain
options are subject to acceleration upon the occurrence of certain events.
Options under the 1996 Plan expire ten years from the date of grant. The total
weighted average contractual life of options outstanding at July 31, 1998, was
9.0 years.
A summary of option activity under the 1996 Plan is as follows:
WEIGHTED-
AVERAGE RANGE OF EXERCISE
OPTIONS EXERCISE PRICE PRICES
------------------------------------------------
Outstanding at July 31, 1995... -- -- --
Granted....................... 241,500 $ 6.52 $ 3.00 - $ 8.88
Exercised..................... -- -- --
Terminated.................... (62,000) $ 7.39 $ 6.50 - $ 8.50
-----------
Outstanding at July 31, 1996... 179,500 $ 6.21 $ 3.00 - $ 8.88
-----------
Granted....................... 2,169,844 $ 5.82 $ 2.91 - $ 10.75
Exercised..................... -- -- --
Terminated.................... (298,800) $ 6.56 $ 3.57 - $ 10.75
-----------
Outstanding at July 31, 1997... 2,050,544 $ 5.72 $ 2.91 - $ 10.75
-----------
Granted....................... 3,593,500 $ 22.43 $ 8.38 - $ 49.78
Exercised..................... (354,596) $ 5.81 $ 3.00 - $ 10.75
Terminated.................... (257,200) $ 8.14 $ 3.00 - $ 18.94
-----------
Outstanding at July 31, 1998... 5,032,248 $ 15.15 $ 2.91 - $ 49.78
===========
Exercisable at July 31, 1998... 96,312 $ 6.10 $ 2.91 - $ 10.25
===========
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about the Company's stock options
outstanding at July 31, 1998.
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------
WEIGHTED-
1996 STOCK OPTION AVERAGE WEIGHTED- WEIGHTED-
PLAN RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES JULY 31, 1998 LIFE (YEARS) PRICE AT JULY 31, 1998 PRICE
----------------------------------------------------------------------
$ 2.91--$ 5.18 545,276 8.1 $ 4.31 25,000 $3.79
$ 5.19--$ 5.57 355,812 8.2 $ 5.55 15,012 $5.53
$ 5.67--$ 7.88 463,100 8.0 $ 6.32 30,700 $6.58
$ 7.89--$ 10.75 1,219,160 8.9 $ 8.62 25,600 $8.14
$10.76--$ 25.00 1,367,000 9.4 $ 19.37 -- --
$25.01--$ 37.00 965,900 9.8 $ 28.73 -- --
$37.01--$ 53.46 116,000 9.6 $ 38.86 -- --
---------------- ------------------
5,032,248 96,312
================ ==================
In September 1996, the Company canceled 169,464 options previously granted
to employees under the 1995 Plan and 1996 Plan at various exercise prices and
granted an equivalent number of additional options to those same employees
pursuant to the 1996 Plan at an exercise price of $4.80 per share. No
compensation expense was recognized by the Company as the exercise price of
these options on the date of grant was at or above fair market value.
1995 Tripod Stock Option Plan
In connection with the acquisition of Tripod, the Company assumed the 1995
Stock Option Plan under which incentive stock options and nonqualified stock
options to purchase common stock may be granted to officers, key employees and
advisors. Under the Plan, options to purchase 367,926 shares of common stock
were reserved for grants. Options under the 1995 Tripod Stock Option Plan are
generally exercisable in eight semi-annual installments beginning six months
after date of grant. Options under the 1995 Tripod Stock Option Plan expire ten
years from the date of grant. The total weighted average contractual life of
options outstanding at July 31, 1998 was approximately 10.0 years.
A summary of option activity under the 1995 Tripod Stock Option Plan is as
follows:
WEIGHTED-
AVERAGE RANGE OF EXERCISE
OPTIONS EXERCISE PRICE PRICES
-----------------------------------------------
Outstanding at February 12, 1998... 367,926 $ 0.65 $ 0.62 - $ 1.54
Granted........................... -- -- --
Exercised......................... (134,492) $ 0.62 $ 0.62 - $ 1.54
Terminated........................ (24,820) $ 0.88 $ 0.62 - $ 1.54
----------
Outstanding at July 31, 1998....... 208,614 $ 0.65 $ 0.62 - $ 1.54
==========
Exercisable at July 31, 1998....... 79,995 $ 0.62 $ 0.62 - $ 1.54
==========
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1995 Tripod Stock Option Plan at July 31, 1998:
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------
WEIGHTED-
1995 STOCK OPTION AVERAGE WEIGHTED- WEIGHTED-
PLAN RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES JULY 31, 1998 LIFE (YEARS) PRICE AT JULY 31, 1998 PRICE
----------------------------------------------------------------------
$0.50--$ 0.75 201,222 10.3 $0.62 79,834 $0.62
$0.75--$ 2.00 7,392 2.9 $1.54 161 $1.54
---------------- ----------------
208,614 79,995
================ ================
1995 and 1996 WiseWire Stock Option Plans
In connection with the acquisition of WiseWire, the Company assumed the 1995
and 1996 Stock Option Plan under which incentive stock options and nonqualified
stock options to purchase common stock may be granted to officers, key employees
and advisors. Under these plans, the Company may grant either incentive stock
options or non-qualified stock options. These options are fully vested and are
exercisable over a 5 year period from date of grant. The employee plan was
adopted in 1995 and is restricted to Company employees. These options generally
have a term of ten years from the date of grant with 20% vesting after a brief
probationary period and the remainder vest over a four-year period. The non-
employee plan was adopted in 1996 and is intended primarily for directors or
other non-employees. Options granted under the non-employee plan typically vest
immediately. The total weighted average contractual life of options outstanding
under the 1995 and 1996 WiseWire Stock Option Plans at July 31, 1998 was
approximately 8.1 and 8.4 years, respectively.
A summary of option activity under the 1995 WiseWire Stock Option Plan is as
follows:
WEIGHTED-
AVERAGE RANGE OF EXERCISE
OPTIONS EXERCISE PRICE PRICES
----------------------------------------------
Outstanding at April 30, 1998... 210,274 $ 2.67 $1.34 - $ 53.46
Granted........................ -- -- --
Exercised...................... (63,024) $ 2.02 $1.34 - $ 8.02
Terminated..................... (27,096) $ 4.06 $1.34 - $ 8.02
---------
Outstanding at July 31, 1998.... 120,154 $ 2.69 $1.34 - $ 53.46
=========
Exercisable at July 31, 1998.... 25,960 $ 2.83 $1.34 - $ 53.46
=========
The following table summarizes information about stock options outstanding
under the 1995 WiseWire Stock Option Plan at July 31, 1998:
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------
WEIGHTED-
1995 STOCK OPTION AVERAGE WEIGHTED- WEIGHTED-
PLAN RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES JULY 31, 1998 LIFE (YEARS) PRICE AT JULY 31, 1998 PRICE
----------------------------------------------------------------------
$ 1.00--$ 2.00 89,224 8.3 $1.34 22,390 $ 1.34
$ 5.00--$ 53.46 30,930 7.6 $6.61 3,570 $12.18
---------------- ------------------
120,154 25,960
================ ==================
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of option activity under the 1996WiseWire Stock Option Plan is as
follows:
WEIGHTED-
AVERAGE RANGE OF EXERCISE
OPTIONS EXERCISE PRICE PRICES
-----------------------------------------------
Outstanding at April 30, 1998... 21,034 $13.19 0.14 - $ 53.46
Granted........................ -- -- --
Exercised...................... -- -- --
Terminated..................... (13,466) $13.10 0.14 - $ 53.46
---------
Outstanding at July 31, 1998.... 7,568 $13.37 13.37 - $ 13.37
=========
Exercisable at July 31, 1998.... 7,568 $13.37 13.37 - $ 13.37
=========
The following table summarizes information about stock options outstanding
under the 1996 WiseWire Stock Option Plan at July 31, 1998:
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------------
WEIGHTED-
1996 STOCK OPTION AVERAGE WEIGHTED- WEIGHTED-
PLAN RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES JULY 31, 1998 LIFE (YEARS) PRICE AT JULY 31, 1998 PRICE
---------------------------------------- -----------------------------
$ 10.69--$ 16.04 7,568 8.4 $13.37 7,568 $13.37
========== ===========
1996 Non-Employee Director Stock Option Plan
On February 2, 1996, the 1996 Non-Employee Director Stock Option Plan (the
"Director Plan") was approved by the Board of Directors. The Director Plan
authorizes the issuance of a maximum of 200,000 shares of common stock. The
Director Plan is administered by the Board of Directors. Under the Director Plan
each non-employee director first elected to the Board of Directors after the
completion of the initial public offering will receive an option for 20,000
shares on the date of his or her election. The exercise price per share for all
options granted under the Director Plan will be equal to the fair market value
of the common stock as of the date of grant. All options vest in three equal
installments beginning on the first anniversary of the date of grant. Options
under the Director Plan will expire 10 years from the date of grant and are
exercisable only while the optionee is serving as a director of the Company. As
of July 31, 1998, 40,000 options had been granted at exercise prices of between
$5.75 and $8.69 per share and remained outstanding under the Director Plan, of
which 13,333 were exercisable.
1996 Employee Stock Purchase Plan
On February 2, 1996, the 1996 Employee Stock Purchase Plan ("1996 Purchase
Plan") was adopted by the Company's Board of Directors. The 1996 Purchase Plan
authorizes the issuance of a maximum of 500,000 shares of common stock and is
administered by the Compensation Committee of the Board of Directors. All
employees of the Company who have completed six months of service with the
Company are eligible to participate in the 1996 Purchase Plan with the exception
of those employees who own 5% or more of the Company's stock and directors who
are not employees of the Company may not participate in this plan. Employees
elect to have deducted from 1%-10% of their base compensation. The exercise
price for the option is the lesser of 85% of the fair market value of the common
stock on the first or last business day of the purchase period (6 months). An
employee's rights under the 1996 Purchase Plan terminate upon his or her
voluntary withdrawal from the Plan at any time or upon termination of
employment.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock-Based Compensation
The Company has granted options to purchase shares of common stock to key
employees and directors. These options vest over periods of up to five years and
expire at various dates through 2007. The Company has adopted the disclosure
provisions of SFAS No. 123 with respect to its stock-based compensation. The
effects of applying SFAS No. 123 in this pro forma disclosure may not be
representative of the effects on reported income or loss for future years. SFAS
123 does not apply to awards prior to 1995. The Company anticipates additional
awards in future years. Had compensation cost for the Company's stock-based
compensation plans been determined based on the grant date fair value in
accordance with SFAS 123, the Company's net loss and net loss per share for the
years ended July 31, 1998, 1997 and 1996 would have been increased to the pro
forma amounts indicated below:
AS REPORTED PRO FORMA
--------------------------------- --------------------------------
NET LOSS LOSS PER SHARE NET LOSS LOSS PER SHARE
--------------------------------- --------------------------------
Year ended July 31, 1998....... $(96,916,563) $(3.13) $(103,919,264) $(3.36)
Year ended July 31, 1997....... $ (6,619,190) $(0.24) $ (7,548,626) $(0.28)
Year ended July 31, 1996....... $ (5,087,838) $(0.21) $ (5,191,133) $(0.22)
The grant date fair value of each stock option is estimated using the
Black-Scholes option-pricing model with the following assumptions: an expected
life of four years for both the 1996 plan and the 1995 plan for all three years,
expected volatility of 100% for both Plans in 1998 and 70% for both plans for
1997 and 1996, a dividend yield of 0% for both plans and a weighted average
risk-free interest rate of 5.48% for both Plans in 1998 and 6.50% for the 1996
plan and 5.75% for the 1995 plan in 1997 and 1996. The weighted average grant
date fair values of options granted in 1998, 1997 and 1996 were $16.47, $4.87
and $1.62, respectively. The weighted-average remaining contractual life of
options outstanding at July 31, 1998 was 9.0 years.
9. INCOME TAXES
The company did not record any provision for federal and state income taxes
through July 31, 1998. The actual tax expense for 1998, 1997 and 1996 differs
from "expected" tax expense (computed by applying the statutory U.S. federal
corporate tax rate of 34% to earnings before income taxes) as follows:
YEAR ENDED JULY 31,
-----------------------------------
1998 1997 1996
----------- ------------ ----------
(In thousands)
Computed "expected" tax benefit $(32,952) $(2,251) $(2,035)
Nondeductible amounts and other differences:
In Process Research and Development 31,459 -- 154
Other 85 (326) --
Change in valuation allowance for deferred taxes
allocated to income tax expense 1,408 2,577 1,881
----------- ------------ ----------
$ -- $ -- $ --
=========== ============ ==========
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At July 31, 1998 and 1997 deferred income tax assets and liabilities result
from temporary differences in the recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of these temporary
differences are presented below:
JULY 31,
---------------------
(In thousands) 1998 1997
--------- ---------
Deferred tax liabilities:
Book over tax basis of developed technology $ 2,806 $ 250
---------- ---------
Total deferred liabilities 2,806 250
---------- ---------
Deferred tax assets:
Deferred Revenue 2,169 1,823
Reserves 2,307 867
Tax in excess of book basis for differences in equity investments 2,164 1,923
Net operating losses and credit carryforwards 15,979 311
Other 594 103
---------- ---------
Total gross deferred tax assets 23,213 5,027
Less valuation allowance (20,407) (4,777)
Net deferred tax asset 2,806 250
---------- ---------
Net deferred income taxes $ -- $ --
========== =========
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some or all of the deferred tax asset
will not be realized. The Company believes that sufficient uncertainty exist
regarding the realizability of the deferred tax assets such that valuation
allowances of $20,407,000 and $4,777,000 for July 31, 1998 and 1997
respectively, have been established for deferred tax assets.
At July 31, 1998, the Company had approximately $38,000,000 of federal and
state net operating loss carryforwards which will begin to expire in 2007 for
federal purposes and 1998 for state purposes. Utilization of the net operating
losses may be subject to an annual limitation imposed by change in ownership
provisions of Section 382 of the Internal Revenue Code and similar state
provisions.
In accordance with FAS 109, the accounting for the tax benefits of acquired
deductible temporary differences, which are not recognized at the acquisition
date because a valuation allowance is established, and recognized subsequent to
the acquisitions will be applied first to reduce to zero, any goodwill and other
noncurrent intangible assets related to the acquisitions. Any remaining
benefits would be recognized as reduction of income tax expense. As of July 31,
1998, $5,460,000 of the Company's deferred asset pertains to acquired companies,
the future benefits of which will be applied first to reduce to zero any
goodwill and other noncurrent intangible related to the acquisitions prior to
reducing the Company's income tax expense. Deferred tax assets and related
valuation allowance of approximately $10,519,000 relate to certain operating
loss carryforwards resulting from the exercise of employee stock options, the
tax benefit of which, when recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of income tax.
The Company's deferred tax liability relates solely to the difference in bases
of acquired assets. A portion or all of net operating loss carryforwards which
can be utilized in any year may be limited by changes in ownership of the
Company, pursuant to Section 382 of the Internal Revenue Code and similar
statutes.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial and stock price
information for the years ended July 31, 1998 and 1997. The operating results
for any given quarter are not necessarily indicative of results for any future
period. The Company's common stock is traded on the NASDAQ National Market
System ("NASDAQ/NMS") under the symbol LCOS. Included below are the high and
low sales prices (adjusted for a 2-for-1 stock split effected as of August 1,
1995) during each quarterly period for the shares of common stock as reported by
NASDAQ/NMS.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------
FISCAL 1998 QUARTER ENDED FISCAL 1997 QUARTER ENDED
----------------------------------------------------------------------------------
OCT. 31 JAN. 31 APR. 30 JUL. 31 OCT. 31 JAN. 31 APR. 30 JUL. 31
----------------------------------------------------------------------------------
Total revenues................ $9,303 $12,603 $ 15,129 $19,025 $ 3,663 $ 5,004 $ 5,853 $ 7,753
Cost of revenues.............. 1,779 2,719 4,747 3,268 741 993 1,116 1,487
Gross profit.................. 7,524 9,884 10,382 15,757 2,922 4,011 4,737 6,266
Research & development
expense.................. 1,435 1,734 2,704 3,605 974 976 1,158 1,192
In-process research &
development expense...... -- -- 87,600 3,639 -- -- -- --
Sales and marketing........... 5,477 7,310 10,172 12,077 4,627 4,754 4,526 5,218
General and administrative
expenses................. 932 990 1,508 2,200 545 693 645 836
Amortization of intangibles... 113 113 444 1,462 117 141 161 122
Operating loss................ (433) (263) (92,046) (7,226) (3,341) (2,553) (1,753) (1,102)
Interest income............... 540 564 524 1,423 582 541 480 527
Net income (loss)............. 107 301 (91,522) (5,803) (2,759) (2,012) (1,273) (575)
Basic and diluted net income
(loss) per share.............. $ 0.00 $ 0.00 $ (2.95) $ (0.16) $ (0.10) $ (0.08) $ (0.05) $ (0.02)
Market Price:
High......................... 21.00 21.00 39.57 53.63 6.38 9.38 11.38 9.63
Low.......................... 8.13 12.63 17.60 24.16 2.88 4.75 6.00 5.60
11. RELATED PARTY TRANSACTIONS
In connection with the formation of the Company, the Company, CMU,
CMG@Ventures and CMG Information Services, Inc. ("CMGI") entered into a
license agreement ("License Agreement") pursuant to which CMU granted the
Company a perpetual, exclusive (with certain limited exceptions), worldwide
license to use the Lycos Internet search and indexing technology and the Lycos
Catalog. The Company paid licensing fees and additional payments equal to 50% of
certain cash receipts, as defined, totaling approximately $1,250,000. All
amounts due under the License Agreement were paid as of July 31, 1996. The
Company also issued 2,000,000 shares of common stock in connection with this
Agreement. Accumulated amortization under the License Agreement at July 31, 1997
and 1996 was $726,000 and $337,000, respectively.
On February 9, 1996, the Company sold 183,160 shares and 80,000 shares of
common stock and options to acquire 119,452 shares and 52,172 shares of Common
Stock to CMU and Dr. Michael Mauldin, respectively, for an aggregate purchase
price of $328,950, pursuant to the exercise of preemptive rights granted to
these parties in the License Agreement. These preemptive rights were exercised
in connection with the issuance of shares of common stock pertaining to the
Company's acquistion of Point Communications on October 12, 1995 (see Note 4).
The options granted to Dr. Mauldin and CMU have an exercise price of $1.00 per
share and became fully vested upon completion of the Company's initial public
offering in April 1996.
LYCOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to amounts paid to CMU in connection with the License Agreement,
the Company was also required to pay to CMU an additional $525,000 pursuant to
two licenses granted by CMU which were assigned to the Company. As of July 31,
1998, the Company had paid an aggregate of $400,000 to CMU pursuant to these
licenses.
In April 1998 the remaining carrying value of the License Agreement of
approximately $831,000 was written off as it was not considered to have any
remaining future economic benefit.
