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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File number 000-26671
ENGAGE TECHNOLOGIES, INC.
Delaware 04-3281378
(State of incorporation) (I.R.S. ID)
100 Brickstone Square, Andover, Massachusetts 01810
(978) 684-3884
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value per share
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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 checkmark 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 the Common Stock held by non-affiliates of the
registrant as of October 15, 1999 was approximately $319,511,000.
The number of shares outstanding of the registrant's Common Stock as of
October 15, 1999 was 48,707,398.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the Annual Meeting of Stockholders to be held December 17,
1999 are incorporated by reference in Items 10, 11, 12 and 13 of Part III of
this Report.
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ENGAGE TECHNOLOGIES, INC.
FISCAL YEAR 1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I.
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 15
Item 3. Legal Proceedings..................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................... 15
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 17
Item 6. Selected Financial Data............................................................... 18
Item 7. Management's Discussion and Analysis of Financial Position and Results of Operations.. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 40
Item 8. Financial Statements and Supplementary Data........................................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 67
Part III.
Item 10. Directors and Executive Officers of the Registrant.................................... 67
Item 11. Executive Compensation................................................................ 67
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 67
Item 13. Certain Relationships and Related Transactions........................................ 67
Part IV.
Part 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 68
Signatures............................................................................ 69
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PART 1.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K, including
information with respect to the Company's future business plans, constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "plans," "expects" and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause the results of the Company to differ materially from those
indicated by such forward-looking statements. These factors include those set
forth in Part II "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors that May Affect Future Results and Market
Price of Stock."
Item 1. Business
General
Engage Technologies, Inc. ("Engage" or "the Company"), is a leading provider
of profile-based Internet marketing solutions. Engage is an approximately 79%
owned subsidiary of CMGI, Inc. (Nasdaq: CMGI). The Company offers a range of
products and services that enable Web publishers, advertisers and merchants to
target the delivery of advertisements, content and e-commerce offerings to
their audiences and to measure their effectiveness. Engage has generated most
of its revenue to date through sales of its local profiling and advertising
management software and outsourced services, as well as its software and
services for measuring and analyzing Web site traffic. In July 1999, Engage
commercially introduced its Engage Knowledge data service to customers. Engage
Knowledge provides real-time access to Engage's database of more than 35
million anonymous profiles of Web users for more effective targeting of online
advertising, promotions and content. In October 1999, Engage introduced Engage
AudienceNet, the first Web-wide profile driven advertising and marketing
network that uses Engage's anonymous, behavior based profiles to deliver
substantial benefits to media buyers, Web sites and ad networks.
An Engage profile is an anonymous collection of information about an
individual Web user's consumer interests, demographic characteristics and
geographic location. These profiles are developed through a combination of a
user's browsing behavior on participating sites on the Internet and information
the user has voluntarily declared at those sites, such as information provided
on an online registration form. Each anonymous profile excludes information
that would permit the personal identification of the user, such as name,
address and e-mail address.
Based on its proprietary technology, Engage has built a database using data
drawn from multiple, diverse Web sites. When a user visits a Web site of any
customer subscribing to the Engage Knowledge data service or participating in
Engage AudienceNet, Engage matches that visitor with his or her profile in the
profile database. A Web site or advertiser can then use that profile to target
offerings to the visitor based on his or her particular preferences,
demographic characteristics and geographic location.
Engage's profiling technology can create local and global user profiles.
Local profiles, which are created and maintained by Engage's customers, contain
data derived from the customer's own Web site and typically map preferences
based on particular interest categories designed by the customer and
demographic characteristics. Global profiles, which are compiled from data
contributed to the centralized Engage Knowledge database from the Web sites of
all participating Engage customers, are provided to customers on a subscription
basis or in conjunction with a particular advertising campaign and provide a
broader description of users' interests. These global profiles do not contain
personally identifiable information of individual users, such as name, home or
e-mail address, IP address or domain name.
Each Engage global profile contains a series of numerical scores reflecting
each Web user's inferred preference level in hundreds of standard categories
and subcategories, such as books, business, computers,
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fashion, sports and travel as well as demographic and geographic information.
Engage software uses sophisticated proprietary algorithms and methodologies to
continuously update and refine these global profiles based on a visitor's
browsing behavior across multiple Web sites, including pages selected by the
user, the duration and frequency of the user's visits and the responses of the
user to specific advertisements and promotions. Engage global profiles also
incorporate anonymous demographic and geographic information reported
voluntarily by a visitor, such as data from an onsite registration form.
When a user visits a Web site of any customer subscribing to the Engage
Knowledge data service, Engage matches that visitor with his or her profile in
the global profile database. The profile is transmitted in real-time to the
subscribing Engage Knowledge customer site, which can then use the profile to
target advertisements, content and e-commerce offerings to that visitor. Based
on past user behavior at other Web sites, an Engage customer can determine the
interests and tailor the experience of even first-time visitors to its Web
site. Similarly, when a user visits a Web site participating in Engage
AudienceNet, Engage matches the visitor with a profile to enable an advertiser
that has purchased an advertising campaign through Engage AudienceNet to target
relevant advertisements to the visitor.
Engage profiles are designed to work with other Engage applications, third-
party software or customers' internally developed solutions, allowing customers
flexibility as the uses of profiling and related applications develop and
evolve.
The Company began to offer its ad management systems and services in April
1998 upon acquiring Accipter, Inc. Engage Accipiter products and services are
designed to manage and deliver advertising and direct marketing promotions on
individual Web sites and networks of Web sites. In April 1999, the Company also
acquired Internet Profiles Corporation (I/PRO), and began to offer products and
services that provide Web site traffic measurement and analysis and
verification of site traffic and advertising results. I/PRO operates as a
wholly owned subsidiary of Engage.
Engage was incorporated in Delaware on July 18, 1995. Engage's principal
executive offices are located at 100 Brickstone Square, Andover, Massachusetts
01810, and its telephone number is (978) 684-3884.
Engage, Accipiter, AdBureau, AdManager, Engage AudienceNet, ProfileServer,
DSServer, Engage Knowledge, GeoKnowledge, Engage Technologies, I/AUDIT and
I/PRO are trademarks of Engage. All other trademarks and service marks are the
property of their respective owners.
Market Overview
The Internet is capable of transforming the way businesses market and sell
products. The interactive nature of the Web offers the potential for businesses
to market to individuals on a one-to-one basis in real-time. Businesses are
seeking to improve the effectiveness of their marketing campaigns by directing
their advertisements and promotions toward the Web users they most want to
reach. By targeting advertisements and promotions to the relevant audience,
Internet marketers seek to improve their response rates and brand awareness and
reduce costs by eliminating spending that is not directed to their desired
audience.
While the growth and interactive nature of the Internet are generating a
large volume of consumer data useful for targeted marketing, Web users are
increasingly concerned about the potential for loss or abuse of their privacy.
To balance the desires of Internet marketers and consumers, there is a need for
a solution that enables marketers to tailor their offerings effectively to
individual users, while also preserving the privacy and anonymity available to
individuals on the Internet.
Business Strategy
The Company's objective is to enhance Engage's position as a leading
provider of profile driven Internet marketing solutions for Web publishers,
advertisers and merchants. The Company's strategy to achieve this objective
includes the following key elements:
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Establish Engage as the Recognized Brand for Internet Profiling. The Company
believes that there is an opportunity to establish Engage as the recognized
brand for profile driven marketing solutions on the Internet. To capitalize on
this opportunity, the Company has created a family of "Engage-enabled" products
and services that incorporate the Company's profiling technology to serve a
broad array of customer targeting needs on the Internet. Expanding from the
initial use of the Company's profiling technology in targeting the delivery of
advertisements through the Company's Accipiter advertisement management
software, Engage plans to integrate the Company's profiling technology with the
Company's I/PRO market intelligence services so that customers can better
measure and analyze audience behavior at their Web sites. The Company also
plans to develop solutions that will allow Web publishers, advertisers and
merchants to more effectively reach customers in specific markets. By
implementing the Company's solutions across a broad spectrum of customers and
customer applications, Engage seeks to establish the Company's profiling
technology as the most widely-used platform for the targeting of
advertisements, content and e-commerce offerings on the Web.
Offer Multiple Products Based on Open Standards. The Company offers multiple
products and services based on open standards that facilitate the use of
Engage's solutions with third-party applications. For example, the Company's
customers can use Engage Knowledge to target advertisements in conjunction with
either the Company's own Accipiter products or advertising management software
provided by other vendors. By enabling customers to choose applications from
third-party vendors, Engage believes it will be able to broaden the market for
Engage-enabled solutions and increase the quantity and quality of the profiles
compiled in the Engage Knowledge database.
Continue to Enhance Engage Global Profile Database. Each user visit to the
Web site of a participating subscriber to the Engage Knowledge data service or
Engage AudienceNet contributes to the depth of the global profile database and
enhances its value to all customers. The Company will continue to increase the
quality and usefulness of Engage Knowledge profiles by:
. expanding the number of consumer profiles through an increase in the
Company's installed base of subscribers and contributors to the Engage
Knowledge data service;
. developing new profiling algorithms to glean additional knowledge about
Web users from data compiled for each profile; and
. refining the Company's interest categories and subcategories to provide
more detailed and market-specific user profiles.
Focus on Specific Markets. The Company plans to develop and sell specific
Internet marketing solutions for different markets to include Web publishers
and advertising networks that derive revenue from advertising on the Web. In
addition, the Company seeks to increase its customers' advertising revenue by
allowing them to offer through Engage, a new program to advertisers, known as
Engage AudienceNet, in which an advertiser pays for the delivery of advertising
impressions only to those Web site visitors whose Engage profile matches the
criteria specified by the advertiser.
Offer Family of Engage Products and Services. Engage seeks to increase sales
to its installed base of customers by offering a range of software and services
that utilize common Engage profiling technology. For example, if a customer
uses Accipiter AdManager software to deliver Web advertisements, the Company
seeks to enroll the customer as a participant in Engage AudienceNet, or sell a
subscription to the Engage Knowledge data service, to enable the customer to
improve advertising response rates and brand awareness. The Company also offers
the customer a subscription to its I/PRO services to measure and better
understand visitor behavior. Using the Company's line of software and services,
a customer can rely upon Engage Knowledge profiles to perform a wide range of
functions and thus avoid the time and expense otherwise required to collect,
process and store large volumes of user data multiple times for multiple
functions.
Maintain Position as Advocate for Internet Privacy. The Company believes
that concerns about loss of privacy are increasingly important to Internet
users and therefore has designed the Engage Knowledge database
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with the goal of being a leader in the protection of the privacy of
individuals. Members of Engage's management team have been active participants
in the establishment of technology, industry and regulatory frameworks for
Internet privacy and plan to continue to promote the Company's commitment to
privacy.
Expand into International Markets. The Company currently markets its
products and services worldwide in sales offices across the U.S.,
internationally through sales offices in London and Germany, and through a
joint venture in Japan established with Sumitomo in July 1998. As of July 31,
1999, Engage had 43 international customers. The Company plans to expand its
penetration of the international market primarily through the formation of
foreign-based local subsidiaries and joint ventures with partners abroad.
Products
Engage offers a range of software and services that enable Web publishers,
advertisers and merchants to target and deliver advertisements, content and e-
commerce offerings to their audiences and to measure their effectiveness.
Targeted Delivery of Content and Commerce Offerings
Engage's profiling software and global profiles allow Web publishers,
advertisers and merchants to customize the content of Web pages and target
relevant advertising, content and e-commerce offerings based on each individual
user's interests. By providing Web site visitors information that is more
relevant to them, Web publishers and merchants can strengthen visitor loyalty
and increase the likelihood that a visitor will stay at the site and make a
purchase.
Engage AudienceNet
Engage AudienceNet is a Web-wide profile-driven advertising and marketing
network that uses profiles from the Engage Knowledge database to deliver to
advertisers their desired target audience within hundreds of Web sites
participating in Engage AudienceNet. Using Engage AudienceNet, an Internet
media buyer can define and target an audience based on demographic, geographic
and other interest categories in the Engage Knowledge database. An
advertisement is shown only to those Web users matching the specified criteria.
Engage AudienceNet is designed to enable an advertiser to pay only for those
advertisements that reach its target audience, and is designed to enable Web
sites to increase the value of their advertising inventory by augmenting
existing advertising sales on premium content Web pages with the sale of
underutilized advertising inventory at higher CPM (cost per thousand) rates.
Engage Knowledge
The Engage Knowledge data service, commercially launched in late July 1999,
uses a database which contains user profiles collected from participating sites
across the Internet. Engage's database has been designed to create, refine and
deliver millions of profiles in real-time to meet the demands of multiple Web
sites. The global profiles used in the delivery of the Engage Knowledge data
service omit personally identifiable information of individual users such as
name, home or e-mail address, IP address or domain name. The database assigns a
computer-generated identifier to distinguish each Web visitor. This identifier
is currently stored as a browser cookie on the Web user's computer. This Engage
Knowledge identifier is correlated with site-specific identifiers using a
proprietary technique called "dual blind" identification. This technique
protects the privacy of the individual because the participating Web site
cannot access the Engage Knowledge identifier and Engage does not maintain any
personally identifiable information that may have been gathered at the Web
site.
Engage Knowledge global profiles contain a series of numerical ranking
codes, as well as demographic and geographic information, with scores that
indicate the level of the consumer's interest in a category or the accuracy of
a demographic or geographic attribute. The categories are hierarchical, with
the top level representing a broad interest area such as "Books", and lower
levels representing increased specificity, such as
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"Children's Books". Engage also maintains demographic and geographic
information for each profile by using computer algorithms that infer
demographic characteristics or geographic locations based on Web browsing
behavior at participating sites and by using declared information reported
voluntarily by the visitor, such as data provided by a user on an online
registration form. Engage does not retain any of the personally identifiable
information that may have been provided on the registration form, and therefore
the identity of the Web user cannot be derived from the information contained
in the global profile. Each Web page at a customer site is classified to
indicate the interest categories that will be attributed to visitors to that
page.
When a user visits a Web site of any customer subscribing to the Engage
Knowledge data service, Engage matches that visitor to his or her profile in
the global profile database. The profile is then transmitted in real-time to
the subscribing Engage Knowledge customer site, which can then use the profile
to target advertisements, content and e-commerce offerings to that visitor.
As a Web visitor browses through any Engage-enabled Web site, Engage's
software dynamically updates and refines the profile of that visitor based on
the recency, frequency and duration of the consumer's browsing behavior in each
interest category. The Engage Knowledge database can be integrated with third-
party data sources, such as geographic databases, to further enhance the
consumer profiles. Unlike profiles based solely on static registration data,
Engage Knowledge profiles are constantly changing to more accurately reflect
the current interests of an individual.
Engage Knowledge profiles can be used to enhance third-party software
applications by providing targeting capabilities. These applications include
advertising management, content delivery and e-commerce offerings. Engage
provides software tools and services to facilitate the integration of Engage
Knowledge profiles with these third-party applications.
Engage expects that a significant portion of its future growth will be
attributable to sales of data services related to the Engage Knowledge
database. However, as of July 31, 1999, Engage has recognized little revenue
from such services. Engage began to recognize revenue from sales of
subscriptions to the Engage Knowledge service in late July 1999.
Engage ProfileServer
Engage ProfileServer software collects Web visitor behavior data at the
customer's Web site and declared user information reported voluntarily by a
visitor to create and deliver profiles of individual Web site visitors. The
system enables customers to create their own local profile database, which is
maintained at the customer's site, and to use these local profiles to target
advertisements, content and e-commerce offerings. The ProfileServer system
permits customers to customize the interest categories in the local profiles so
that they track preferences specific to the customer's market. For example, a
clothing retailer could create size and style subcategories. Customers can also
use the system to collect proprietary user data, including identifying
information supplied voluntarily by visitors to their sites. The local
databases created with ProfileServer, which do not become part of the Engage
Knowledge database, can be used by customers either alone or in conjunction
with Engage Knowledge data service.
Targeted Delivery of Advertising
Engage's advertising management software and services allow Web publishers
and advertising networks to target advertising campaigns using either local
profiles, Engage AudienceNet, or global profiles from the Engage Knowledge data
service. Engage also offers a turnkey outsourced advertising management service
that allows Web sites to gain the advantage of profile-based advertising
without making a significant upfront investment of cash and personnel. By
allowing advertisers to target advertisements based not only on the content of
the Web page being viewed, but also on the visitor's profile, these advertising
solutions are designed to enable Web publishers and advertising networks to
sell more of their advertising inventory and to allow advertisers to improve
their return on investment. Engage's advertising management products, when used
in
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conjunction with its profiling products and services, can schedule and serve
advertisements in real-time while simultaneously optimizing the impact of a
message by, for example, showing a minivan advertisement to a visitor
interested in family subjects and a sport utility vehicle advertisement to an
outdoor enthusiast. In addition, if it is known that a user is a likely minivan
buyer, specific ads can be served when the visitor is in an unrelated site or
section of a site.
Accipiter AdManager. Accipiter AdManager automates online advertising
management for Web sites by scheduling and targeting ads, automatically
rotating ad inventory and generating up-to-the-minute, customized reports.
AdManager tracks all active advertising campaigns and Web site visitors and
optimizes scheduling of advertisements in real-time to ensure that each
campaign is delivered on schedule to qualified visitors or to the specified
content areas of a site.
AdManager allows sites to deliver relevant advertising to individual
visitors using a wide range of targeting criteria, including:
. Engage global and local profiles;
. area of content that a visitor is viewing;
. geographic location of users;
. key-word or key-phrase searches; and
. time of day or day of week.
AdManager provides versatile easy-to-use scheduling features. Advertisements
within a campaign can be scheduled by the total number of impressions or
clicks, by specific time frames specified by the advertiser or any combination
of counts and date ranges. The campaign reservation system can lock in portions
of available inventory for upcoming campaigns.
Customers can access a variety of reports to see how well a campaign is
performing. Reports can detail, for example, how many impressions and clicks
were generated both from the entire site and by each ad and advertiser.
AdManager also enables customers to securely assign access privileges for
specific functions or information to a variety of users at different levels
from different organizations. For example, a single system can provide
different levels of access to advertising agencies, web site advertising sales
representatives, and third party advertising sales representatives. AdManager
can be distributed across multiple servers to expand ad serving capacity and
provide high availability to handle the volume requirements of the largest Web
sites.
Accipiter AdBureau. Accipiter AdBureau is Engage's turnkey, outsourced
advertisement management service based on AdManager technology. By subscribing
to AdBureau, a customer can obtain the advertisement management capabilities of
AdManager without the need to invest in on-site and management hardware, server
and administrative software or databases.
Web Site Traffic Measurement, Auditing and Analysis
Engage's analysis and traffic measurement products and services allow Web
publishers and merchants to collect, manage and analyze data about visitors and
their behavior. By analyzing how users behave and react to specific
advertising, pages or specific content areas, Web publishers can better
understand their visitors and improve the effectiveness of their Web sites.
Engage offers a range of solutions, from a basic outsourced reporting service
to sophisticated software enabling analysis of large amounts of data. Engage
also offers a comprehensive range of auditing services, including total site
traffic audits and internal reporting verification. Engage's auditing services
allow Web publishers to provide advertising buyers with the standardized
verification from an independent third party that these buyers increasingly
require before they will purchase Internet advertising inventory.
Engage offers products and services that provide Web site traffic
measurement and analysis and verification of site traffic and advertising
results through its wholly owned subsidiary, I/PRO. Through its I/PRO services,
Engage currently measures over seven billion page views per month across over
350 Web sites.
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I/PRO NetLine. I/PRO NetLine is an outsourced traffic measurement service
that continuously measures Web site traffic and delivers results on a daily
basis to the customer. This service enables customers to access reports
immediately, combine data from multiple sites and standardize information for
meaningful comparisons. I/PRO provides a wide range of standard reports and
enables users to customize their reports and the data to be tracked. I/PRO
provides standard reports that contain key data about traffic at a Web site,
including information about the number of users to visit a Web site, the
duration of user visits and the most frequently visited pages of the site.
Customized reports can include information regarding specific pages,
directories and clicks and other in-depth data.
Nielsen I/PRO I/Audit. Nielsen I/PRO I/Audit outsourced services include
audits of circulation on total audience, specific advertisements or advertising
campaigns, internal management systems and co-operative marketing arrangements.
Nielsen I/PRO I/Audit verifies information directly at the specific Web site
rather than relying on a sample from a panel or other indirect methods. Engage
believes that I/PRO was the first company to offer Web site specific audits of
Web site traffic and advertising campaigns. Engage believes that over 70% of
the 50 most visited sites currently use Nielsen I/PRO I/Audit. Nielsen I/PRO
I/Audit reports are guaranteed to be delivered within ten days of I/PRO's
receipt of the necessary data.
I/PRO Research Services. I/PRO offers custom consulting services to help
clients meet their Web marketing goals. These services combine analysis of Web
audience data with customized research. Consultants produce in-depth reports
and detailed analyses that allow customers to measure audience behavior,
monitor results against strategic objectives and more effectively manage their
Web strategies.
Engage DecisionSupportServer. Engage DecisionSupportServer is a data
warehouse management and analysis solution that is implemented at the
customer's site. DecisionSupportServer supports a complex, visitor-focused
marketing analysis of Web site usage and profiles. Web marketers can monitor
standard Web site usage and visitor reports or use Engage's Web marketing
analysis application to answer critical and sophisticated business questions
about visitors, their behavior and their profiles. For example, a marketer
could configure DecisionSupportServer to determine the percentage of a Web
site's repeat visitors who initially visited the Web site from the major portal
sites and who have an interest in sports. DecisionSupportServer can be used in
conjunction with a variety of decision support applications from data
warehousing vendors. In addition, customers with unique requirements can retain
professional services from Engage or one of its system integration partners to
customize the data warehouse.
Consulting, Maintenance and Support Services
Engage offers comprehensive services and product support to its customers.
Engage's service and support organization, consisting of 45 service
professionals as of July 31, 1999, assists customers in implementing,
administering and maintaining Engage products and services.
Professional Services. Engage's team of service professionals provides
customers with consulting services, project implementation and integration
services and training. Engage's service professionals assist customers with
strategic site assessments and deployment planning in order to optimize each
customer's use of Engage products. These professionals also help customers
implement Engage products and integrate them into the customer's existing
technology infrastructure.
Maintenance and Support Services. Engage provides maintenance and support
services to customers pursuant to annual maintenance agreements. These services
include software version updates and maintenance, as well as telephone and on-
site support. Engage provides regular functional releases to its customers, as
well as maintenance releases as needed. Engage offers a variety of support
services, including "help desk" telephone support on a 14 hour per day, five
days per week basis and a dedicated technical support Web site on a 24 hour per
day, seven days per week basis. Engage's maintenance and support activities are
supplemented by training programs for customers, including introductory
training for new users and custom designed seminars for experienced users of
Engage products.
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Customers
Engage licenses its software products to Web publishers and merchants for
use at their Web sites. Engage also offers customers outsourced services
through its AdBureau advertising management service and its I/PRO NetLine
traffic measurement service. Engage had approximately 335 customers as of July
31, 1999.
Sales to Informix Corporation accounted for approximately 12% of Engage's
total revenues in fiscal 1999. Notes to Consolidated Financial Statements (see
Item 8) includes information for the geographic breakdown of Engage's revenues.
Sales and Marketing
United States
The Company's sales and marketing strategy in the United States is to sell:
. directly to prominent Web publishers, Web site networks, advertisers,
agencies, and media buyers;
. through original equipment manufacturer, reseller and co-marketing
arrangements to reach other customers; and
. through Web design and systems integration firms.
As of July 31, 1999, the Company's U.S. sales and marketing organization
consisted of 94 employees. The field sales organization is supported by sales
representatives and systems engineers located throughout the United States.
Sales representatives handle incoming calls, help generate qualified leads and
generally advance the sales process. Systems engineers provide comprehensive
pre-sales technical services and support, including creating and delivering
technical and architectural presentations, product demonstrations and product
training, as well as post-sales telephone support, problem escalation
management, patch distribution and publication of technical notes. Engage's
U.S. sales and marketing employees are located in Andover, Massachusetts;
Raleigh, North Carolina; Redwood City, California; and San Francisco,
California.
The sales teams are organized as dedicated groups along product lines.
Within each group, sales people are focused on customers in specific industry
groups, thereby enabling them to develop an in-depth understanding of the
evolving needs of a particular industry. In addition, each sales force
identifies cross-selling opportunities for other Engage products.
An important element of the sales strategy is to form business relationships
with third parties to assist in marketing and selling the Company's products.
In July 1999, Engage launched a new channel strategy to focus specifically on
partnering with various system integrators. System integrators plan to
integrate Engage's local profile software, ProfileServer and
DecisionSupportServer, with applications used by e-commerce merchants and
corporations. Additionally, the Company seeks to enter into original equipment
manufacturer relationships to permit the Company to embed its software products
within products sold by other vendors, such as e-commerce and Web serving
software and hardware systems. In addition, some of the Company's indirect
sales channels will consist of either reseller arrangements, in which the
Company's partner resells and possibly customizes the Company's products, or
co-marketing arrangements, in which the Company will work together with a
partner to promote and generate sales referrals for each others' respective
products. The Company also expects to develop relationships with Internet
systems integrators who often recommend advertising and marketing management
and other Internet solutions to their clients as part of their design,
procurement and deployment work.
To support the Company's sales efforts and actively promote the Engage
brand, the Company conducts comprehensive marketing programs, including public
relations, print advertisements, online advertisements, seminars, trade shows
and ongoing customer communications programs.
International
The Company maintains sales offices in London and Germany. The Company
intends to expand its operations outside the United States primarily by opening
local subsidiary offices and partnering with locally
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based third parties. The Company has formed a joint venture for the Japanese
market with Sumitomo Corporation. As part of this joint venture, Sumitomo
markets a Japanese language version of Engage software products and the Engage
Knowledge data service throughout Japan.
Operating Infrastructure
Engage's operating infrastructure has been designed to support the combined
volumes of its largest Web site customers. Engage's data center operations are
provided by NaviSite, an affiliate of CMGI, and are located in Andover,
Massachusetts. Engage's infrastructure is designed for maximum reliability,
including redundant network access, backup power pools and advanced network
security. NaviSite provides comprehensive facilities management services,
including monitoring and support 24 hours per day, seven days per week.
Engage operations are run by a variety of Sun Enterprise servers of various
sizes to support its Engage AudienceNet, AdBureau and Engage Knowledge
operations. All of Engage's production data is archived nightly to offline,
offsite storage.
Intellectual Property
The Company has filed for patents covering its profiling algorithm and its
dual-blind methodology for protecting end-user privacy. The profiling algorithm
patent application covers the process and algorithm for creating user interest
profiles from behavioral data. The dual-blind methodology patent application
covers the process of identifying visitors uniquely at each Web site while
maintaining a central database of cross-referenceable identifiers and allowing
Web sites to access globally derived data only via their local identifier.
There can be no assurance that any of the Company's patent applications will be
granted. Even if they are granted, these patents may be successfully challenged
by others or invalidated.
The Engage Knowledge database contains detailed information about millions
of Web users. The Company believes it has rights to this database's entire data
content, all records and all derived information from the database as a whole,
all updating routines and quality assurance processes and all underlying data
warehousing technology. However, there can be no assurance that any patent,
trade secret or other intellectual property protection will be available for
such information.
The Company relies upon a combination of patent, trade secret, copyright and
trademark laws to protect its intellectual property. The Company also limits
access to and distribution of its proprietary information. However, the steps
the Company takes to protect its intellectual property may not be adequate to
deter misappropriation of the Company's proprietary information. In addition,
the Company may be unable to detect unauthorized uses of and take appropriate
steps to enforce its intellectual property rights.
Although senior management believes that the Company's services and products
do not infringe on the intellectual property rights of others, the Company is
subject to the risk that such a claim may be asserted in the future.
Competition
The market for Internet marketing solutions, including consumer profiling,
online advertising services and systems, and Web site traffic analysis is new,
rapidly evolving and intensely competitive. Engage expects competition to
increase both from existing competitors and new market entrants for various
components of its services. Engage competes primarily on the basis of its
product features and performance, such as its scalable, application-independent
technology and the anonymity and quality of its global database of profiles,
level of service and, to a lesser extent, on price. While Engage offers
products and services that may compete with the offerings of the companies
mentioned below, Engage has developed its profiling technology with an open
interface to create the opportunity to partner with those companies.
11
<PAGE>
Profiling Solutions
Engage competes directly with providers of profiling technology, such as
Personify, and indirectly with applications that include more limited profiling
capability integrated into their solution, such as BroadVision and Vignette.
NetGravity, through a partnership with Aptex and MatchLogic, and businesses
that offer cash or other incentives to users to voluntarily provide profile
data have indicated their intent to compete in the global profiling solutions
market. Engage also competes with companies such as DoubleClick and MatchLogic
that have the ability to aggregate large quantities of customer behavior data
across the Web.
Online Advertising Systems and Services
The primary competitors to Engage's Accipiter AdManager software are
providers of ad serving systems, such as NetGravity and Real Media. In the
outsourced ad serving market, Engage's Accipiter AdBureau service competes with
providers of ad serving services, such as those offered by DoubleClick.
Web Site Traffic Measurement, Auditing and Analysis
The primary competitors for I/PRO's NetLine Web measurement service and the
Engage DecisionSupportServer product are companies offering outsourced
solutions or software solutions, such as Accrue, Andromedia, net.Genesis and
WebTrends. Nielsen I/PRO I/Audit service competes with auditing services from
ABC Interactive, BPA and PricewaterhouseCoopers.
Many of Engage's current competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition and
substantially greater financial, technical and marketing resources than Engage.
Engage's current and potential competitors also may have more extensive
customer bases and larger proprietary databases. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to more effectively
distribute their products or to enhance their product and service offerings.
In addition to these current and potential commercial competitors, Engage
also faces competition from the internal capabilities of some potential
customers. Some of the largest Web publishers use internally developed
interactive marketing solutions rather than the commercial solutions offered by
Engage and its competitors. There can be no assurance that Engage will be able
to compete successfully with these internally developed solutions.
Increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which could have a material adverse effect on
Engage's business, financial condition and results of operations. There can be
no assurance that Engage will be able to compete successfully against existing
or potential competitors or that competitive pressures will not have a material
adverse effect on Engage's business, financial condition and results of
operations.
Employees
As of October 15, 1999, Engage had approximately 331 employees. Of the
total, 92 were in development, 78 in customer support and operations, 133 in
selling and marketing, and 28 in finance and administration. Of these, 315
employees were located in the United States and 16 in Europe.
Engage believes that its future success is dependent on attracting and
retaining highly skilled engineering, sales and marketing, and senior
management personnel. Competition for such personnel is intense, and there can
be no assurance that Engage will continue to be able to attract and retain
high-caliber employees. Engage believes that the use of offshore developers
gives it access to scarce technical talent at a favorable cost.
None of Engage's employees are subject to any collective bargaining
agreements. Engage believes that its relationship with its employees is good.
12
<PAGE>
Privacy
The Web offers the potential for privacy by allowing parties to communicate
one-to-one without knowing each other's identity. However, Web users are
increasingly concerned about privacy and the ability of third parties to gather
personal data about them from their activities on the Web. For this reason, the
Engage Knowledge global database of profiles does not store personal
information of individual users such as name, home or e-mail address, IP
address or domain name.
The Company maintains this level of privacy through a proprietary
methodology known as "dual blind" identification. Engage assigns an anonymous
numerical identifier to each Web visitor and matches this "blind" identifier
only with information relating to online usage of a specific computer and does
not store or otherwise use any personally identifying information. This
identifier is currently stored as a browser cookie on the Web user's computer.
Each Web visitor also is assigned a different identifier for each Engage-
enabled Web site visited. This technique is known as "dual blind"
identification because a Web site does not have access to the Engage Knowledge
identifier and cannot correlate the information it may have with information
from other Web sites. Conversely, the Company does not maintain any information
identifying particular users that a Web site may have correlated with a
visitor's local Web site identifier.
The Company also protects Web user privacy by contractually prohibiting Web
sites subscribing to Engage Knowledge from using global profiles other than for
the purpose of tailoring the experience of the visitor. Customers may not store
the information, correlate it to personal information or use it to try to infer
the physical identity of the visitor. In addition, since October 1998, Engage
contractually has required Web sites contributing to Engage Knowledge to post a
privacy policy statement on their Web sites disclosing that the site provides
non-personally identifiable information to Engage. The policy statement must
include a link to the Engage Web site where a Web user may opt out of the
Engage Knowledge database by clicking on a link that automatically replaces the
Engage Knowledge identifier on the user's computer. In addition, the Engage
Knowledge database excludes profile classifications for sensitive subject
matter including sexual, medical illness and racial references. While not
legally required at this time, the Company believes that these protections are
appropriate.
Senior members of the Company actively participate in the development of
privacy standards for the Internet and are key contributors to industry groups
that are developing industry standards for privacy. For example, a member of
the Company is a co-author of several of the specifications of the World Wide
Web Consortium's Platform for Privacy Preferences Project, supported by
AOL/Netscape, AT&T, IBM, Microsoft and others, which seeks to develop an
industry standard that will allow Web users to express their privacy
preferences about the type and amount of information they are willing to share
with Web applications. Senior Engage personnel have also authored a proposed
protocol for the distribution of privacy labels for Web cookies as part of
privacy standards developed by the Internet Engineering Task Force. A senior
member of Engage management is a participant on the board of advisors of
TRUSTe, of which the Company is a corporate sponsor. TRUSTe is a non-profit
organization with the goal of promoting the adoption of fair information
practices on the Web through a program which permits Web sites to display a
seal representing compliance with TRUSTe privacy guidelines. Engage is also a
member of the Online Privacy Alliance, which is an organization dedicated to
improving the protection of individuals' privacy online through self-regulatory
efforts. The Company actively monitors proposed privacy laws and regulations
and seeks to comply with all applicable privacy requirements, both in the
United States and throughout the world.
Government Regulation
The Company is not currently subject to any direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access
to or commerce by use of the Internet. However, due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect thereto, covering such issues as
privacy or the use of cookies. The adoption of any such laws or regulations may
decrease the growth of
13
<PAGE>
electronic commerce and/or the Internet, which could in turn decrease the
demand for the Company's products and services or increase the Company's cost
of doing business or otherwise have an adverse effect on the Company's
business, operating results or financial condition. Moreover, the applicability
to the Internet of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain.
Environmental Matters
Based on the Company's experience to date, the cost of compliance with
environmental matters has been immaterial and the Company believes that it is
in material compliance with applicable environmental laws and regulations.
14
<PAGE>
Item 2. Properties
The Company's principal executive offices are located in Andover,
Massachusetts consisting of approximately 33,000 square feet of office space
leased to Engage by CMGI, Inc. The Company obtains space from CMGI under a
facilities and services agreement which either party may terminate with twelve
months notice.
The Company also leases facilities in Raleigh, North Carolina, Redwood
Shores and San Francisco, California, New York, New York and London, England
for sales and marketing and research and development activities. Aggregate
square footage under these leases approximates 47,000 square feet.
In addition, the Company leases office space in several other locations in
the United States and in Germany under short-term lease arrangements.
The Company's facilities are fully utilized for current operations and the
Company believes that suitable additional space is available to accommodate
expansion needs.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
On July 3, 1999, certain stockholders of the Company acted by written
consent in lieu of a special meeting to (i) amend and restate the Company's
Certificate of Incorporation, (ii) amend and restate the Company's bylaws,
(iii) increase the number of shares of Common Stock reserved for issuance under
the Company's 1995 Equity Incentive Plan from 3,544,737 shares to 15,000,000
shares, (iv) adopt the Company's 1999 Stock Option Plan for Non-Employee
Directors and (v) adopt the Company's 1999 Employee Stock Purchase Plan.
39,439,950 shares voted in favor of the above actions. There were no votes
against the actions, and there were no abstentions.
15
<PAGE>
Executive Officers of the Registrant
Below is the name, age and principal occupations for the last five years of
each current executive officer of the Company. All such persons have been
elected to serve until their successors are elected and qualified or until
their earlier resignation or removal:
<TABLE>
<CAPTION>
Name Age Office(s)
- ---- --- -----------------------------------------------
<S> <C> <C>
Paul L. Schaut.............. 40 Chief Executive Officer, President and Director
David A. Fish............... 43 Chief Operating Officer
Daniel J. Jaye.............. 34 Chief Technology Officer
Stephen A. Royal............ 43 Chief Financial Officer and Treasurer
</TABLE>
Paul L. Schaut has served as Chief Executive Officer, President and a
director of Engage since December 1997. Prior to joining Engage, Mr. Schaut was
Vice President of Strategic Partnering for Open Market, Inc., a provider of
electronic commerce software, from January 1997 until November 1997. Prior to
joining Open Market, Mr. Schaut served as Vice President of Sales and Marketing
for ONTOS, Inc., a software company, from March 1995 until December 1996 and as
Managing Director of InterSystems Corporation, a software database company,
from April 1988 until March 1995.
David A. Fish has served as Chief Operating Officer of Engage since January
1999 and served as Vice President of Marketing from April 1998 until December
1998. Mr. Fish is the founder of Rocket Science Software, Inc. and served as
its full time President from October 1997 until April 1998. Prior to that, Mr.
Fish was Division Manager of Knowledge Services at Context Media, LLC, a
knowledge management consulting and software company, from June 1996 until
September 1997. From August 1993 until May 1996, Mr. Fish served as President
and Chief Executive Officer of Narrowcast Technologies Inc., an electronic
publishing and multimedia consulting company, which he founded. Prior to that,
from October 1990 until July 1993, he was Engineering Director of the One
Source Division at Lotus Development Corporation, a software company. Mr. Fish
was Vice President of Marketing of Articulate Systems, Inc., a voice
recognition start-up company, from March 1989 until September 1990. From June
1980 until February 1989, he occupied various positions at Epsilon Data
Management, Inc., a provider of marketing database services.
Daniel J. Jaye has served as Engage's Chief Technology Officer since
September 1995. Prior to joining Engage, Mr. Jaye was Director of High
Performance Computing for Fidelity Investments, a financial services firm, from
February 1993 until September 1995. Prior to joining Fidelity Investments, Mr.
Jaye was a technical manager for Epsilon Data Management, a provider of
marketing database services, from 1991 until 1993 and a Senior Consultant for
Andersen Consulting from 1987 until 1991.
Stephen A. Royal has served as Chief Financial Officer and Treasurer of
Engage since March 1998. Prior to joining Engage, Mr. Royal was Senior Vice
President and Chief Financial Officer and later Chief Administrative Officer of
Omega Performance Corporation, an interactive multimedia training software and
consulting company, from January 1992 until March 1998.
16
<PAGE>
PART II.
Item 5. Market of Registrant's Common Equity and Related Stockholder Matters
The Company's common stock has been traded on the Nasdaq National Market
under the symbol "ENGA" since its initial public offering in July 1999. As of
October 15, 1999, the Company had approximately 135 stockholders of record.
Because many of such shares are held by brokers and other institutions on
behalf of stockholders', the Company is unable to estimate the total number of
stockholders represented by these record holders. The initial public offering
price was $15 per share. The following table sets forth the range of high and
low closing sales prices for the Common Stock for the period July 20, 1999, the
first day of trading of the Company's common stock, through July 31, 1999 and
for the period August 1, 1999 through October 15, 1999:
<TABLE>
<CAPTION>
Low High
------ ------
<S> <C> <C>
July 20, 1999 through July 31, 1999........................ $26.00 $41.00
August 1, 1999 through October 15, 1999.................... $25.19 $41.00
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently does not anticipate paying any dividends in the
foreseeable future. Any payment of future dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of dividends
and other factors that the Company's Board of Directors deems relevant.
Through its initial public offering in July 1999, the Company sold 6,900,000
common shares, inclusive of the underwriters' over allotment, through Goldman,
Sachs & Co., Hambrecht & Quist and Bear Stearns & Co. Inc. at an initial public
offering price of $15 per share. Net proceeds received by the Company in its
initial public offering were approximately $94.8 million reflecting gross
proceeds of $103.5 million net of underwriter commissions of approximately $7.2
million and other estimated offering costs of approximately $1.5 million. On
July 19, 1999, the Securities and Exchange Commission declared the Company's
Registration Statement on Form S-1 (File No. 333-78015) effective.
Use of Proceeds of Initial Public Offering
From July 23, 1999 to July 31, 1999, the Company had not used any of the net
proceeds of its initial public offering. As a result, as of July 31, 1999, the
Company had not used any proceeds for construction of plant, building and
facilities; purchase and installation of machinery and equipment; purchases of
real estate; acquisitions of other businesses; repayment of indebtedness;
working capital; temporary investments, or any other purpose.
17
<PAGE>
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes to
those statements.
<TABLE>
<CAPTION>
July 18, 1995
(inception)
to July 31, Year Ended July 31,
------------- ---------------------------------
1996 1997 1998(1) 1999(2)
------------- -------------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue....................... $ -- $ 25 $ 2,217 $ 16,023
Cost of revenue............... -- 31 2,238 9,451
------- -------- -------- --------
Gross (loss) profit....... -- (6) (21) 6,572
Operating expenses:
In-process research and
development................ -- -- 9,200 4,500
Research and development.... 1,796 7,261 5,859 8,699
Selling and marketing....... 155 1,566 4,015 12,776
General and administrative.. 428 1,429 1,993 4,115
Amortization of goodwill and
other intangibles.......... -- -- 1,391 5,829
Stock-based compensation.... -- -- 426 1,455
------- -------- -------- --------
Total operating expenses.. 2,379 10,256 22,884 37,374
------- -------- -------- --------
Loss from operations.......... (2,379) (10,262) (22,905) (30,802)
Gain on sale of product
rights....................... -- -- 9,240 --
Other expense................. -- -- (172) (1,201)
------- -------- -------- --------
Net loss...................... $(2,379) $(10,262) $(13,837) $(32,003)
======= ======== ======== ========
Unaudited pro forma basic and
diluted net loss per share... $ (.83) $ (.89)
======== ========
Weighted average shares of
common stock used in
computing pro forma basic and
pro forma diluted net loss
per share.................... 16,750 35,931
======== ========
<CAPTION>
July 31,
-----------------------------------------------
1996 1997 1998 1999
------------- -------------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents.......... $ -- $ -- $ 96 $112,034
Working (deficit) capital..... (4,427) (14,209) (8,609) 103,553
Total assets.................. 2,403 1,782 24,046 163,948
Debt to CMGI.................. 3,507 14,018 7,753 131
Long-term obligations......... -- -- -- 1,875
Stockholders' (deficit)
equity....................... (2,299) (12,539) 12,720 146,298
</TABLE>
- --------
(1) Includes the results of operations of Accipiter from April 1998, the date
of acquisition.
(2) Includes the results of operations of Internet Profiles Corp from April
1999, the date of acquisition.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Engage offers a range of software products and services that enable Web
publishers, advertisers and merchants to target and deliver advertisements,
content and e-commerce offerings to their audiences and to measure their
effectiveness.
Engage commenced operations in September 1995 as a wholly owned subsidiary
of CMGI. As of July 31, 1999, CMGI owned approximately 79% of the outstanding
common stock of Engage.
Engage derives its revenues from product revenue and service and support
revenue. Product revenue consists of revenue from: (1) licenses of its software
products, AdManager, ProfileServer and DecisionSupportServer, and (2)
subscriptions to its service offerings, AdBureau advertising management
services, I/PRO web site traffic measurement, auditing and analysis services
and the Engage Knowledge data service.
Product licenses are typically perpetual, although some have a one to three
year term. The fees for licenses of AdManager vary based on the volume of
advertisements served, and the fees for licenses of ProfileServer and
DecisionSupportServer vary based on the volume of activity on the customer's
site. Engage recognizes revenue from product licenses when a signed, non-
cancelable license exists, delivery of the product has occurred and Engage's
fees are fixed and determinable and collection is probable. Engage typically
recognizes revenue from perpetual product licenses in the quarter in which the
software is shipped and recognizes revenue from periodic licenses ratably over
the period of the license.
Subscriptions to Engage's services typically have a one year term, although
some are on a quarterly or monthly basis. The subscription fees for the Engage
Knowledge data service vary based on traffic to the customer's site,
contributions of data by the customer and the application with which the
service is used. Fees also vary based on the number of profiles used. The fees
for AdBureau vary based on the number of advertisements served. Revenue is
recognized ratably over the period of the subscription or, in the case of
usage-based subscriptions, monthly based on actual usage. Subscription
agreements typically include terms for automatic renewal unless the customer
provides notice of termination.
Engage's support and service revenue derives from its software maintenance
and other professional services, including consulting, installation and
training. Engage recognizes revenue from these services upon the delivery of
these services or, in the case of maintenance agreements, over the term of the
agreement. To date, substantially all of Engage's customers that have purchased
perpetual product licenses have entered into maintenance contracts.
Engage began commercial shipments of its first software products,
ProfileServer and DecisionSupportServer, in the early part of fiscal 1998.
Effective April 1998, Engage acquired Accipiter, Inc., and began to sell the
Accipiter AdManager system and subscriptions to the Accipiter AdBureau service.
In April 1999, Engage acquired Internet Profiles Corporation (I/PRO) and began
to sell the I/PRO line of analysis and audit products and services. During July
1999, Engage commercially released its Engage Knowledge data service for sale
to customers.
Engage expects that a significant portion of its future revenue will be
attributable to the Engage Knowledge data service and other products and
services based on its profiling technology that enable its customers to create
and use profiles that categorize information about a Web user's consumer and
demographic characteristics and geographic location. Any failure of the Engage
Knowledge data service, or Engage's global profiling technology, to achieve
widespread customer acceptance would have a material adverse effect on Engage's
business, financial condition and results of operation.
19
<PAGE>
Engage's revenue from sales to related parties consists of sales of products
and services to customers that are affiliates of CMGI. In the fiscal year ended
July 31, 1999, Engage sold products and services to 12 affiliates of CMGI.
Engage believes that the terms and conditions of those sales are substantially
similar to the terms and conditions of sales to unrelated third parties.
In August 1997, Engage sold rights to certain of its data warehouse products
to Red Brick Systems, Inc. for $9.5 million in cash and 238,160 shares of Red
Brick common stock, recording a pretax gain of $9.2 million on the sale. In
January 1999, the Red Brick shares were exchanged for 142,896 shares of
Informix Corp. due to Informix's acquisition of Red Brick.
In April 1998, CMGI acquired Accipiter, which sells Internet advertising
management solutions, in exchange for 5,054,768 shares of CMGI common stock. In
August 1998, Accipiter was merged with Engage in a stock-for-stock merger in
which 700,000 shares of Engage's Series A convertible preferred stock were
issued to CMGI. Engage has reflected the acquisition of Accipiter in its
consolidated financial statements as if it occurred in April 1998. The total
purchase price for Accipiter was valued at $31.3 million.
Approximately $1.7 million of deferred compensation was recorded during
fiscal 1998 relating to approximately 173,080 shares of CMGI common stock held
in escrow to be issued to employee stockholders of Accipiter who satisfy a two-
year employment continuation provision. Compensation expense is being
recognized over the two-year service period beginning April 1, 1998. The
acquisition has been accounted for using the purchase method, and, accordingly,
the purchase price has been allocated to the assets purchased and liabilities
assumed based upon their fair values at the date of acquisition. The portion of
the purchase price allocated to goodwill and developed technology is being
amortized on a straight-line basis over five years. Amounts allocated to the
employee workforce and the Accipiter trade name are being amortized on a
straight-line basis over two years.
In August 1998, Engage acquired, for $1.4 million in cash, 49% of the shares
of Engage Technologies Japan, a joint venture with Sumitomo Corporation in
Japan. Engage's ownership interest was subsequently reduced to 46% after the
issuance of additional equity in the joint venture to a new investor. The joint
venture was established to sell Engage's products and services in Japan. This
investment is being accounted for under the equity method of accounting.
Engage's share of the joint venture's foreign currency translation adjustments
is reflected in both the investment account and in shareholders' equity as a
component of comprehensive income on the consolidated balance sheet. Under a
separate license agreement, Engage licensed its Engage Knowledge technology to
the joint venture in consideration for a non-refundable $3.0 million prepaid
royalty and future royalties of 11.11% of future revenue. The initial lump sum
royalty has been deferred and is being recognized as income over three years
beginning in December 1998, the estimated period over which Engage expects to
provide maintenance and support. In addition, Engage and the joint venture
entered into a reseller agreement under which Engage granted the joint venture
an exclusive right to resell its products to end users in Japan. Under the
terms of the reseller agreement, the joint venture is entitled to purchase
Engage's products for resale to end-users in Japan, excluding Japanese
distribution rights granted to Red Brick.
In April 1999, Engage acquired I/PRO, which provides Web site traffic
measurement and audit services, for approximately $32.7 million, consisting of
$1.6 million in net cash, $20.9 million in CMGI shares and $10.2 million in
Engage shares and options. The acquisition has been accounted for using the
purchase method, and, accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their fair values at the
dates of acquisition. Engage has recorded an expense of $4.5 million in the
third quarter of fiscal 1999 representing acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. Goodwill and other intangibles, totaling $27.2 million,
were recorded and are being amortized on a straight-line basis over two or five
years, depending on the asset class. In addition, CMGI must pay up to $3.0
million to I/PRO stockholders if the following performance goals are met:
. the gross revenue of I/PRO for the twelve months ended March 31, 2000
exceeds $10.8 million;
20
<PAGE>
. as of May 31, 1999 data contributed to the Engage knowledge database
equals 65% or more of the volume of data contributed to I/PRO on the
closing of the transaction and this data constitutes 75% or more of the
data generated by visitors to the Web sites of I/PRO customers as of
March 31, 2000; and
. various employees of I/PRO are employed by Engage on March 31, 2000.
Engage must reimburse CMGI for any such payments, at CMGI's election, in
cash or by issuance of shares of Engage common stock at its then fair market
value. Any additional payment will be treated as additional purchase price and
amortized over the balance of the two or five year period.
Engage recorded deferred compensation of $1.7 million in 1998 related to the
Accipiter acquisition and $4.2 million in 1999, representing the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock at the date of grant. The
difference is recorded as a reduction of stockholders' equity and is being
amortized over the vesting period of applicable options, typically four years.
Of the total deferred compensation amount, $1.9 million had been amortized as
of July 31, 1999. The amortization of deferred compensation is recorded as an
operating expense. The Company currently expects to amortize the following
remaining amounts of deferred compensation as of July 31, 1999 in the periods
indicated:
<TABLE>
<CAPTION>
in thousands
------------
<S> <C>
2000............................ $1,223
2001............................ 1,043
2002............................ 1,043
2003............................ 715
------
$4,024
======
</TABLE>
In September 1999, Engage signed an agreement pursuant to which it will
acquire AdKnowledge, a provider of products and services which allow on line
marketers and ad agencies to plan, target, serve, track and analyze advertising
campaigns. See "Results of Operations--Pending Acquisitions."
Engage's corporate headquarters are shared with CMGI and several other CMGI
affiliates. CMGI allocates facility and services costs among these affiliates
based upon headcount within each affiliate and within each department of each
affiliate. Services provided by CMGI include support for human resources,
systems, business development and marketing. Actual expenses could have varied
had Engage been operating on a stand-alone basis. Costs allocated to Engage are
considered to equal fair market value for the facilities used and services
provided. Engage anticipates that the support provided by CMGI will decrease or
be eliminated as Engage increases its internal resources through hiring
employees for the related support functions.
Engage has incurred significant net losses and negative cash flows from
operations since its inception, and as of July 31, 1999, had an accumulated
deficit of approximately $58.5 million. Engage had net losses of $13.8 million
in fiscal 1998 and $32.0 million in fiscal 1999. Prior to the Company's
completion of its initial public offering, these losses were funded primarily
through the issuance of preferred stock to CMGI, which stock was converted into
Engage common stock in connection with the Company's initial public offering.
Engage intends to continue to invest heavily in sales, marketing and promotion,
technology and infrastructure development. As a result, Engage believes that it
will continue to incur operating losses and negative cash flows from operations
for the foreseeable future and that the rate at which such losses will be
incurred may increase from current levels.
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Results of Operations
Comparison of Fiscal 1998 to Fiscal 1999
Revenue
Total revenue increased from $2.2 million in the year ended July 31, 1998 to
$16.0 million in the year ended July 31, 1999, a result of the commencement of
sales of Accipiter AdManager and AdBureau due to the acquisition of Accipiter
as well as the introduction of ProfileServer and DecisionSupportServer. In
addition, a portion of this increase is the result of the acquisition of I/PRO
and the inclusion of I/PRO's revenue in product revenues for the last four
months of fiscal 1999. Revenue from product licenses and services accounted for
approximately 88% of total revenue during fiscal 1998 and 1999. Revenue from
one customer accounted for approximately 12% of total revenue during fiscal
1999.
Cost of Revenue
Cost of product revenue includes royalties paid to various parties for the
incorporation of their technology into Engage's products, costs associated with
the I/PRO product offerings, as well as fees paid for outsourced data center
operations and the amortization of developed technology acquired in the
Accipiter and I/PRO acquisitions. Cost of support and services revenue is
primarily comprised of payroll and benefits, and allocated overhead costs
associated with Engage's customer support, installation and training staff.
Cost of product revenue increased from $185,000 in the year ended July 31,
1998 to $3.5 million in the year ended July 31, 1999. The increase was due
primarily to the I/PRO acquisition and the resultant four months of incremental
operational costs associated with I/PRO's product offerings, as well as costs
associated with the introduction of Engage's AdBureau services. In addition, a
portion of the increase is the result of costs associated with the resale of a
third-party vendor's products in conjunction with Engage's product offerings.
The costs associated with such arrangements typically provide for lower margins
than sales of Engage's own product offerings. Finally, a portion of the
increase is the result of increased amortization costs resulting from the
amortization of developed technology acquired in the Accipiter and I/PRO
acquisitions.
Cost of service and support revenue increased from $2.1 million in the year
ended July 31, 1998 to $6.0 million in the year ended July 31, 1999. Costs in
both periods exceeded the related revenue due to Engage's continued investment
in service and support staff in advance of anticipated product sales. Engage's
service and support staff increased from 23 at July 31, 1998 to 81 at July 31,
1999.
Operating Expenses
In-Process Research and Development. In-process research and development
expense was $9.2 million during the year ended July 31, 1998 due to the
completion of the Accipiter transaction, compared to $4.5 million during the
year ended July 31, 1999 which resulted from the I/PRO acquisition.
Research and Development. Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expenses. Research and development expenses increased from $5.9
million in the year ended July 31, 1998 to $8.7 million in the year ended July
31, 1999. The increases were the result of the growth of Engage's research and
development activities and the inclusion of Accipiter's operations for the
entire year ended July 31, 1999, and the inclusion of I/PRO's operations for
four months in the year ended July 31, 1999. Engage's research and development
staff increased from 41 at July 31, 1998 to 77 at July 31, 1999.
Selling and Marketing. Selling and marketing expenses consist primarily of
payroll and related costs, consulting and professional fees and advertising
expenses. Selling and marketing expenses increased from $4.0 million in the
year ended July 31, 1998 to $12.8 million in the year ended July 31, 1999. The
increase in
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costs was primarily due to the continuing expansion of Engage's sales force and
the inclusion of Accipiter's and I/PRO's operations. Engage's sales and
marketing staff increased from 26 at July 31, 1998 to 105 at July 31, 1999. In
addition, a portion of the increase was related to increases in product
advertising costs resulting from the release of new products.
General and Administrative. General and administrative costs consist
principally of payroll and related costs, consulting and professional fees,
facility and related costs and depreciation expense. General and administrative
expenses increased from $2.0 million in the year ended July 31, 1998 to $4.1
million in the year ended July 31, 1999. The increase was primarily due to an
increase in payroll and related costs associated with the support of growing
operations as well as the inclusion of Accipiter's and I/PRO's operations. In
addition, a portion of this increase was the result of increased professional
fees incurred in connection with increased contract activity and the formation
of Engage's Japanese joint venture.
Amortization of Goodwill and other Intangibles. Amortization of intangible
assets increased from $1.4 million in the year ended July 31, 1998 to $5.8
million during the year ended July 31, 1999. The increase was primarily due to
the acquisition of Accipiter in April 1998, and the acquisition of I/PRO in
April 1999.
Stock Compensation
Stock compensation costs increased from $426,000 in fiscal 1998 to $1.5
million during fiscal 1999. Beginning in April 1998, Engage commenced the
recognition of compensation expense relating to approximately 173,080 shares of
CMGI common stock held in escrow to be issued to employee stockholders of
Accipiter who satisfy a two-year employment continuation provision.
Additionally, stock compensation costs of $330,000 were recorded during fiscal
1999 as a result of stock options granted during 1999 with exercise prices
below the estimated fair market value of the common stock at the date of grant.
Gain on Sale of Product Rights
Gain on sale of product rights was approximately $9.2 million during fiscal
1998 as a result of Engage's sale of certain rights to its data warehouse
products to Red Brick during the first quarter of fiscal 1998.
Equity in Loss of Joint Venture
Equity in loss of joint venture was a loss of approximately $723,000 during
fiscal 1999. In August 1998, Engage acquired 49% of the shares of Engage
Technologies Japan, a joint venture with Sumitomo Corporation in Japan.
Engage's ownership interest was subsequently reduced to 46% after the issuance
of additional equity in the joint venture to a new investor. The joint venture
was established to sell Engage's products and services in Japan. This
investment is being accounted for under the equity method of accounting, and as
such, Engage's portion of the joint venture's losses during fiscal 1999 are
included in Engage's results of operations. Engage anticipates that the joint
venture will experience continued losses for the foreseeable future and as
such, the value of its investment in the joint venture will likely decrease
significantly in fiscal 2000.
Interest Expense, Net
Interest expense, net was approximately $172,000 for fiscal 1998, compared
to $313,000 for fiscal 1999. No interest expense was recorded during the first
six months of the year ended July 31, 1998. In the second half of fiscal 1998,
Engage entered into an arrangement with CMGI which requires Engage to accrue
interest on intercompany debt at a rate of 7% per annum. During fiscal 1999,
interest expense was partially offset by interest income earned on the proceeds
from the Company's initial public offering. Interest income is expected to
increase substantially in fiscal 2000 due to Engage's investment of the
proceeds from its initial public offering.
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Comparison of Fiscal 1997 to Fiscal 1998
Revenue
Total revenue increased from $25,000 in fiscal 1997 to $2.2 million in
fiscal 1998. The increase in fiscal 1998 resulted from the acquisition of
Accipiter in April 1998, which added Accipiter's AdManager and AdBureau
products and services to Engage's product portfolio, as well as the
introduction of Engage's ProfileServer and DecisionSupportServer products. All
revenue during fiscal 1997 was derived from one customer, while revenue from
three customers accounted for 20%, 12% and 11% of revenue during fiscal 1998.
Cost of Revenue
Cost of product revenue was 10% of product revenue in fiscal 1998. Cost of
services and support revenue exceeded services and support revenue in fiscal
1998 as Engage hired additional services and support staff throughout the year
in anticipation of increased product sales. In addition, Engage's release of
several new products during the year resulted in additional support costs to
diagnose and correct customer-specific product issues that typically occur with
the release of a new software product.
Operating Expenses
In-Process Research and Development. In-process research and development
expense in fiscal 1998 was $9.2 million, resulting from the acquisition of
Accipiter.
Research and Development. Research and development expenses decreased from
$7.3 million in fiscal 1997 to $5.9 million in fiscal 1998. The decrease in
fiscal 1998 was primarily due to a decrease in staffing that occurred when
Engage sold some rights to its data warehouse products to Red Brick at the
beginning of fiscal 1998. In addition, a portion of the decrease was the result
of reassigning employees from research and development to product support,
consulting and training upon the release of several of Engage's products in
fiscal 1998.
Selling and Marketing. Selling and marketing expenses increased from $1.6
million in fiscal 1997 to $4.0 million in fiscal 1998. The increase was the
result of significant growth in Engage's sales force during this period, as
well as increased advertising expenditures.
General and Administrative. General and administrative expenses increased
from $1.4 million in fiscal 1997 to $2.0 million in fiscal 1998. The increase
was the result of increased payroll and related costs, as well as increased
facilities costs required to support growing operations.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles assets was $1.4 million in fiscal 1998, resulting from the
acquisition of Accipiter in April 1998.
Gain on Sale of Product Rights
Gain on sale of product rights was approximately $9.2 million during fiscal
1998, as a result of Engage's sale of certain rights to its data warehouse
products to Red Brick during the first quarter of fiscal 1998.
Interest Expense, Net
Interest expense, net was $172,000 in fiscal 1998. In the second half of
fiscal 1998, Engage entered into an arrangement with CMGI which requires Engage
to accrue interest on intercompany debt at a rate of 7% per annum. No interest
expense was recorded in fiscal 1997.
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Liquidity and Capital Resources
Since its inception, Engage has financed its operations primarily through
funds advanced from CMGI. In addition, the Company has funded its investing
activities, specifically its acquisition of Accipiter and I/PRO, through the
issuance of its convertible preferred stock. In July 1999, the Company
completed its initial public offering for the sale of 6,900,000 shares of
common stock, including the underwriter's over-allotment. The Company received
proceeds from its initial public offering of approximately $94.8 million, net
of underwriting discounts and expenses associated with the offering. Such
proceeds will be used primarily to meet the Company's working capital and
capital expenditure needs. In addition, a portion of these proceeds may be used
to acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies.
Net cash used in operating activities amounted to approximately $9.0
million, $10.5 million and $9.4 million for fiscal 1997, fiscal 1998 and fiscal
1999, respectively. The increase in cash used in operations has primarily been
caused by increasing net operating losses, which are partially offset by non-
cash depreciation and amortization charges included in the applicable net
income or loss. In addition, net cash used in operating activities in fiscal
1998 included a non-cash gain on sale of product rights of $9.2 million, offset
by the non-cash write-off of in-process research and development costs of $9.2
million. Of the $9.4 million of net cash used in operations during fiscal 1999,
approximately $5.6 million was from the increase in accrued expenses during the
period, along with $4.3 million from the increase in deferred revenue during
the period. The increase in deferred revenue is the result of advance payments
received from customers for the Company's products.
Net cash used in investing activities amounted to approximately $490,000 and
$1.4 million during fiscal 1997 and fiscal 1999, respectively, while investing
activities provided $473,000 during fiscal 1998. Investing activities used
$490,000, $216,000, $342,000 during fiscal 1997, fiscal 1998 and fiscal 1999 to
acquire property and equipment required to support the growth of the business
and hiring needs. Investing activities during fiscal 1998 included $689,000 of
net cash acquired from the acquisition of Accipiter. Investing activities
during fiscal 1999 used approximately $1.4 million in the Company's investment
in a Japanese joint venture, which was partially offset by $347,000 of net cash
acquired from the acquisition of I/PRO.
Net cash provided by financing activities amounted to approximately $9.5
million, $10.1 million and $122.7 million for fiscal 1997, fiscal 1998 and
fiscal 1999, respectively. Cash provided in fiscal 1999 included net proceeds
from the Company's initial public offering of approximately $94.8 million, net
of underwriting discounts and expenses associated with the offering, as well as
net proceeds of $1.9 million from the issuance of Series B convertible
preferred stock, and additional net proceeds of approximately $13.1 million
from a private placement of the Company's common stock. Additional cash
provided in each period was primarily related to funds advanced from CMGI to
fund the Company's operations. Cash provided by financing activities during
fiscal 1997 was partially offset by the repayment of debt of $1.0 million. Cash
provided by financing activities during fiscal 1997 and fiscal 1999 includes
$22,000 and $558,000, respectively, received from employee stock option
exercises.
Prior to the Company's initial public offering, under an informal
arrangement with CMGI, the Company maintained a zero balance cash account. CMGI
funded Engage's operations as needed, with a corresponding increase in the
Company's obligations to CMGI. Customer and other receipts were remitted to
CMGI and were applied to reduce the Company's obligations to CMGI. The
outstanding balance of Engage's obligation to CMGI at the end of each fiscal
quarter, commencing with the quarter ended January 31, 1998, have been
evidenced by demand promissory notes bearing interest at an annual rate of 7%
and convertible into shares of the Company's convertible preferred stock at the
fair market value of such stock as of the end of the applicable quarter. At
June 30, 1999, all outstanding obligations to CMGI were converted to common
stock at the fair market value of the stock at that date. The Company expects
that all future obligations under this arrangement will be repaid to CMGI on a
monthly basis, with terms similar to those between unrelated parties.
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The Company has experienced a substantial increase in its expenditures since
inception consistent with its growth in operations and staffing. The Company
anticipates that expenditures will continue to increase for the foreseeable
future as the Company accelerates the growth of its business. Additionally, the
Company will continue to evaluate investment opportunities in businesses that
management believes will complement its technologies and market strategies.
The Company currently anticipates that its available cash resources,
together with the net proceeds from the initial public offering, will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. However, the Company may need to
raise additional funds in order to fund more rapid expansion, to develop new or
enhance existing services or products, to respond to competitive pressures or
to acquire complementary products, businesses or technologies. On a long-term
basis, the Company may require additional external financing through credit
facilities, sales of additional equity or other financing vehicles. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of the Company's stockholders will be
reduced and its stockholders may experience additional dilution. If adequate
funds are not available or are not available on acceptable terms, the Company's
ability to fund its expansion, take advantage of unanticipated opportunities,
develop or enhance services or products or otherwise respond to competitive
pressures would be significantly limited.
In-Process Research and Development
Accipiter
CMGI acquired Accipiter on April 8, 1998 for total purchase consideration of
$31.3 million. In August 1998, Accipiter merged with the Company in a stock-
for-stock merger in which consideration of 700,000 shares of the Company's
Series A Convertible Preferred Stock were issued to CMGI. The portion of the
purchase price allocated to in-process research and development was $9.2
million, or approximately 29% of the total purchase price. At the acquisition
date, Accipiter's major in-process project was the development of AdManager
version 4.0, which was intended to provide the ad serving functionality that
customers were requiring as the use of the Internet rapidly increased and
customer Web sites became more complex. In general, previous AdManager releases
did not provide for the fault tolerance, redundancy and scalability that
customers began to seek after AdManager versions 1.0 and 2.0 were released.
Accordingly, customers' long-term product needs required Accipiter to
substantially redesign the AdManager architecture to develop new technologies
to provide:
. improved fault tolerance, which is the ability to operate during a
system failure, and scalability, which is the ability to expand
capacity,
. an object-oriented user interface, which is a screen display that
enables users to easily operate a computer program,
. application programming interfaces, which enable a program to exchange
data with other programs and
. a new report engine, which is a component that generates reports.
This redesigned AdManager architecture was later released as version 4.0.
At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. The
Company began beta testing AdManager version 4.0 at a customer site in June
1998 and commercially released the product in August 1998. The initial
development effort had commenced in late 1997. At the acquisition date, the new
AdManager technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the Accipiter purchase, the
AdManager version 4.0 project was approximately 71% complete. The AdManager
version 4.0 project was substantially completed within the time originally
estimated.
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The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining
after deducting from cash flows related to the in-process technology, the
market rates of return on contributory assets, including developed technology,
assembled workforce, working capital and fixed assets. The cash flows are then
discounted to present value at an appropriate rate. Discount rates are
determined by an analysis of the risks associated with each of the identified
intangible assets. The discount rate used for in-process research and
development was 24.5%, a slight premium over the estimated weighted-average
cost of capital of 24%, and the discount rate used for developed technology was
21%.
The resulting net cash flows to which the discount rate was applied are
based on the Company's estimates of revenue, cost of revenue, research and
development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are
based on the assumptions set forth below.
Accipiter recorded revenue in 1997 of less than $1 million. Because of the
absence of meaningful historical revenue of Accipiter, management projected
revenue for the initial year of the forecast period based on its assessment of
future market potential and the ability of Accipiter to successfully launch its
new product offering. These projections are based on Engage management's
estimates of the significant growth in the number of companies engaged in e-
commerce, the need for e-commerce companies to serve ads over the Internet,
expected trends in technology and the nature and expected timing of new product
introductions by Engage and its competitors. These estimates also include
growth related to the use of Accipiter technologies in conjunction with
Engage's products, the marketing and distribution of the resulting products
through Engage's sales force and the benefits of the Company's incremental
financial support and stability.
The Company's estimated cost of sales as a percentage of revenue is expected
to be slightly lower than Accipiter's on a stand-alone basis, which was 16% in
1997, as fixed costs included in cost of sales are spread over a larger revenue
base and provide for the realization of efficiencies due to economies of scale
through combined operations. Due to these savings, the estimated cost of sales
as a percentage of revenue is expected to decrease by 1% each year from
Accipiter's historical percentage, to a low of 11% in the fifth forecast year.
The Company's selling, general and administrative costs are expected to be
higher than Accipiter's on an absolute basis, but lower as a percentage of
revenue. Due to the small revenue base in 1997 and the impact of significant
costs associated with building a corporate infrastructure and building a
workforce for future operations, Accipiter's selling, general and
administrative costs in 1997, as a percent of revenue, are not representative
of the expected costs for the combined operations of Engage and Accipiter.
Efficiencies due to economies of scale through combined operations, such as
consolidated marketing and advertising programs, are expected to be realized
immediately.
I/PRO
The Company acquired I/PRO on April 7, 1999 for total purchase consideration
of $32.7 million. The portion of the purchase price allocated to in-process
research and development was $4.5 million, or approximately 14% of the total
purchase price. At the acquisition date, I/PRO's major in-process project was
the development of a new data processing system, project name Normandy, which
is intended to provide improved functionality. In general, the existing data
processing system does not provide sufficient fault tolerance, scalability and
data processing efficiency to meet future customer needs. Accordingly,
customers' long-term product needs required I/PRO to substantially redesign the
data processing system to develop new technologies in the areas of: (1) fault
tolerance and scalability, (2) system management, (3) data capture and (4) path
analysis functionality, which is the ability to track movement of Web visitors
across Web pages.
At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August 1999. The initial
development effort had commenced in late 1998. At the acquisition
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date, the new Normandy technology had not reached a completed prototype stage
and beta testing had not yet commenced. At the time of the I/PRO purchase, the
Normandy project was approximately 64% complete. The Normandy project was
substantially completed within the time originally estimated.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining
after deducting from cash flows related to the in-process technology, the
market rates of return on contributory assets, including core developed
technology, assembled workforce, working capital and fixed assets. The cash
flows are then discounted to present value at an appropriate rate. Discount
rates are determined by an analysis of the risks associated with each of the
identified intangible assets. The discount rate used for in-process research
and development was 30%, a premium over the estimated weighted-average cost of
capital of 25%, and the discount rate used for core developed technology was
22%.
The resulting net cash flows to which the discount rate was applied are
based on the Company's estimates of revenue, cost of revenue, research and
development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are
based on the assumptions set forth below.
Management projected average annual revenue increases for the forecast
period based on its assessment of future market potential and the ability of
I/PRO to successfully implement the Normandy technology. Revenue was predicted
to grow at rates comparable to the growth of Internet users and online activity
and the impact such growth would have on Internet service companies. Revenue
related to the Normandy project were separately identified.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce, the need
for e-commerce companies to utilize independent audit, verification and
analysis services, expected trends in technology and the nature and expected
timing of new product introductions by its competitors. These estimates also
include growth related to the use of certain I/PRO technologies in conjunction
with the Company's products and the benefits of the Company's incremental
financial support and stability.
I/PRO's estimated cost of sales as a percentage of revenue is expected to
significantly decrease on a stand-alone basis, which was 85% in 1998, as
certain fixed costs included in cost of sales are spread over a larger revenue
base and provide for the realization of efficiencies due to economies of scale.
The Normandy technology is expected to greatly increase the automation of data
processing, allowing significant labor cost savings per revenue dollar.
Increases in hardware utilization are also expected. Due to these savings, the
estimated cost of sales as a percentage of revenue is expected to decrease to a
low of 20% in the fifth forecast year.
I/PRO's operating expenses are expected to increase on an absolute basis,
but to significantly decrease as a percentage of revenue over the term of the
forecast, which was 192% in 1998. Certain fixed expenses are spread over a
larger revenue base and provide for the realization of efficiencies due to
economies of scale. Due to these savings, the estimated cost of sales as a
percentage of revenue is expected to decrease to a low of 49% in the fifth
forecast year.
Pending Acquisition
In September 1999, the Company signed an agreement pursuant to which it will
acquire AdKnowledge, a provider of products and services which allow online
marketers and ad agencies to plan, target, serve, track and analyze advertising
campaigns. Under the terms of the merger and contribution agreement, CMGI will
initially acquire control of AdKnowledge through the issuance of approximately
$170 million of CMGI common stock in a merger of a subsidiary of CMGI into
AdKnowledge. The value of the CMGI common stock being delivered is based on
$84.80, the average of the last reported sales prices of the CMGI common stock
over the 45 consecutive trading days ending on September 20, 1999, which value
may be adjusted upward by up to 10% or downward by up to 10% based upon the
average of the last reported sales prices of such stock over the 45 consecutive
trading days ending two trading days prior to the effective time of this
merger.
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Upon completion of this merger, CMGI will own approximately 88% of the
common stock of AdKnowledge. This merger will be followed by a contribution of
AdKnowledge shares held by CMGI and AdKnowledge shareholders to the Company in
exchange for approximately $193 million of the Company's common stock. The
value of the Company's common stock being delivered is $31.45, the average of
the last reported sales prices of the Company's common stock over the 45
consecutive trading days ending on September 20, 1999 and may be adjusted
upward or downward in the same manner as the CMGI stock described above. Any
remaining holders of AdKnowledge common stock will receive the Company's common
stock in a short-term merger with a subsidiary of the Company.
The transactions are intended to be tax free under Section 368(a) and
Section 351 of the Internal Revenue Code of 1986, as amended. The transaction,
which will be accounted for as a purchase, is subject to certain conditions,
regulatory approval and the shareholder approval of the Company and
AdKnowledge.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires the capitalization of various 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, and expects that the adoption of SOP 98-1 will not have a material
impact on its financial position or its results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting Costs of Start-Up Activities". Under SOP 98-5, the cost of start-up
activities should be expended as incurred. Start-up activities are broadly
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new
roperation or organizing a new entity. SOP 98-5 will be effective for the
Company's fiscal 2000 financial statements. The Company does not expect its
adoption to have a material impact on its financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 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 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. Engage is required to adopt this standard in the first quarter of
fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. The Company expects that the adoption
of SFAS 133 will not have a material impact on the its financial position or
its results of operations.
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 these "Year 2000"
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. The Company 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.
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State of Readiness
The Company has made an assessment of the Year 2000 readiness of its
operating, financial and administrative systems, including the hardware and
software that support the Company's systems. The Company's Year 2000 compliance
efforts consist of the following:
. Identification of all software products, information technology systems
and non-information technology systems that may be affected by Year 2000
issues. This phase has been significantly completed.
. Assessment of repair or replacement requirements. This phase has been
significantly completed.
. Repair or replacement. This phase has been significantly completed.
. Testing of software products is approximately 85% complete, with the
Company's I/PRO subsidiary in the final stages of testing their
products.
. Implementation of repaired software products is approximately 85%
complete, with the Company's I/PRO subsidiary waiting to implement final
product changes until testing has been completed.
. Creation of contingency plans in the event of Year 2000 failures. This
phase has been significantly completed. Contingency plans will be
reviewed and updated periodically to allow for changes to business
processes and procedures.
For its currently marketed software products, the Company has substantially
completed its Year 2000 compliance testing efforts and believes that its
products are Year 2000 compliant in all material respects. The Company's I/PRO
subsidiary is in the final stages of testing its products, and expects to
complete testing and implementation in November. The Company also has conducted
less extensive testing of older versions of its products. While the Company is
not aware of any material respect in which its older products are not Year 2000
compliant, it has offered customers using older products the option to upgrade
to current versions at no additional charge. The Company also has tested its
internal and third party provided systems that are used to deliver customer
services. The Company has received assurances from NaviSite, a major third-
party vendor, that NaviSite will be responsible for ensuring that its system is
Year 2000 ready.
For all other systems, the Company's Year 2000 task force has inventoried
and tested all software and related systems that it believes may be affected by
Year 2000 issues. Since third parties developed and currently support many of
the systems that the Company uses, a significant part of this effort has been
to ensure that these third-party systems are Year 2000 compliant. The internal
evaluation has resulted in the identification of a small number of desktop
computers whose operating systems were not Year 2000 compliant. These computers
were replaced by the Company in the third quarter of fiscal 1999. The testing
and implementation phases are expected to be completed by the end of November
1999.
Costs
Through July 1999, the Company has spent approximately $625,000 on Year 2000
compliance issues and expects to incur an additional $375,000 in connection
with identifying, evaluating and addressing Year 2000 compliance issues and
replacing non-compliant computer hardware. Most of the Company's expenses have
related to, and are expected to continue to relate to, the operating costs
associated with time spent by employees and consultants in the evaluation
process and Year 2000 compliance matters generally. Such expenses, if higher
than anticipated, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks
The Company is not currently aware of any Year 2000 compliance problems
relating to its products or systems that would have a material adverse effect
on its business, financial condition and results of operations, without taking
into account the Company's efforts to avoid or fix such problems. There can be
no assurance
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that the Company will not discover Year 2000 compliance problems in its
products or systems that will require substantial revision. In addition, there
can be no assurance that third-party software, hardware or services
incorporated into the Company's material systems will not need to be revised or
replaced, all of which could be time-consuming and expensive. The failure of
the Company to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenue, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Moreover, the failure to adequately address Year 2000 compliance issues in its
internally developed proprietary software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
The Company is heavily dependent on NaviSite to provide outsourced data
services. A significant Year 2000 related disruption of the outsourced data
services that NaviSite provides to the Company could cause customers to
consider canceling services with the Company or cause an unmanageable burden on
the Company's technical support, which in turn could materially and adversely
affect the Company's business, financial condition and results of operations.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of the Company's control will be Year 2000 compliant. The failure by
such entities to be Year 2000 compliant could result in a systemic failure
beyond the control of the Company, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent the Company
from delivering its services to its customers, decrease the use of the Internet
or prevent users from accessing its Web sites which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Contingency Plan
As discussed above, the Company has developed Year 2000 contingency plans.
The results of the Company's Year 2000 simulation testing and the responses
received from third-party vendors and service providers were taken into account
in writing contingency plans. Contingency plans will be reviewed and updated as
needed to reflect any changes in staffing, business process, or vendor
dependencies.
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
The Company has incurred substantial losses and anticipates continued losses
The Company has never been profitable. The Company has incurred net losses
totaling $58.5 million from inception to July 31, 1999. The Company expects to
increase its spending significantly and therefore expects to continue to incur
significant losses for the foreseeable future.
The Company will need to generate significant additional revenue to achieve
profitability. The Company may not achieve profitability. If the Company's
revenue grows more slowly than it anticipates or if the Company's operating
expenses either increase more than expected or cannot be reduced in light of
lower revenue, the Company's business, financial condition and results of
operations will be materially and adversely affected.
The Company has recently begun to introduce its Engage Knowledge data
service, and it is uncertain whether it will achieve widespread customer
acceptance
In July 1999, the Company released its Engage Knowledge data service for
sale to customers. The profiling capabilities used to create and maintain the
Engage Knowledge data service serve as the platform for most of the Company's
current and planned profile-based products and services, including Engage
AudienceNet which was introduced in October 1999. The Company expects that a
significant portion of its future revenue will depend on sales of the Engage
Knowledge data service and other products and services incorporating the
Company's profile technology. To date, however, an insubstantial portion of
the Company's revenue is attributable to the Engage Knowledge data service or
related products and services. There can be no assurance that the Company's
Engage Knowledge data service, or the Company's profiling approach for the
creation of anonymous profiles, will achieve widespread customer acceptance,
and any failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
Profile-based targeting may not achieve its intended benefits and the
Company's revenue therefore may not grow as expected
The Company's products and services are designed to enable Web publishers,
advertisers and merchants to target their intended audiences more effectively.
Because the Company's profiling technology is new, the Company cannot be sure
that the use of its anonymous profiles will result in more effective targeting
of advertisements or other marketing and promotional activities. The Company's
revenue would be adversely affected if advertisers and merchants do not
perceive that the use of profiles will improve the effectiveness of their
marketing campaigns or if its customers are otherwise unable to generate a
sufficient return on investment from the use of the Company's profiles. If the
use of the Company's profile-based products and services does not demonstrably
improve the responsiveness of Web visitors, the Company's business, financial
condition and results of operations will be materially adversely affected.
The value of the Engage Knowledge service depends on continued contributions
of data
Decisions by the Company's major customers or strategic partners not to
contribute their data to the Engage Knowledge database would hinder the
quality and growth of the Engage Knowledge database and could severely impair
the effectiveness and value of the Engage Knowledge data service and the
Company's other planned profile-based products including Engage AudienceNet.
The anonymous user profiles currently in the Engage Knowledge database have
been created from data generated by customers that are testing the Engage
Knowledge data service. Organizations subscribing to the Engage Knowledge data
service currently can elect not to contribute user data to the the Company's
profile database. These organizations may elect not to contribute data due to
concerns relating to sharing proprietary information about their users and
perceived privacy concerns. Although customers that do not contribute their
data generally are required to pay significantly higher subscription fees for
use of the Engage Knowledge data service, the impact of these higher fees may
be insufficient to cause customers to contribute data to the Engage Knowledge
database.
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The Company's business may be seriously harmed if the Company does not
successfully develop profile-based products and services for specific markets
The Company plans to develop Engage Knowledge data services that are
tailored for the requirements of specific markets, such as the automotive
market. The Company's success in introducing these services will depend on its
ability to obtain access to the consumer information necessary to create a
meaningful database of market-specific interests and preferences, as well as
the ability to enter into marketing relationships with partners having
expertise in these markets. There can be no assurance that the Company will be
successful in obtaining this data or the necessary marketing relationships, and
any failure to do so would impair the Company's ability to introduce its
planned products and services for these markets.
The Company's quarterly operating results are subject to significant
fluctuations
The Company's revenue and operating results may vary significantly from
quarter to quarter due to a number of factors, not all of which are in the
Company's control. Future revenue is difficult to forecast and for the
foreseeable future will be influenced by the timing and amount of sales to new
customers, as well as user traffic levels and advertising and electronic
commerce activity on the Company's customers' Web sites.
The market for profile-based marketing products and services is new. As a
result, the Company must educate potential customers on the use and benefits of
its products and services. In addition, the implementation of the Engage
Knowledge data service requires a significant commitment of resources by the
Company's customers. It can, in some cases, take the Company's sales
organization several months to finalize a sale. This makes it difficult to
predict the quarter in which a sale may occur.
Many of the Company's expenses, particularly personnel costs and rent, are
relatively fixed, and are incurred in part based on expectations of future
revenue. The Company may be unable to adjust spending quickly enough to offset
any unexpected revenue shortfall. Accordingly, any shortfall in revenue may
cause significant variation in operating results in any quarter.
Because of these factors, quarter-to-quarter comparisons of the Company's
results of operations may not be an indication of the Company's future
performance. It is possible that, in future periods, the Company's results of
operations may be below the expectations of public market analysts and
investors. This could cause the trading price of the Company's common stock to
decline.
The Company has only been in business for a short period of time
The Company began commercial shipments of its first software products in
early 1998. the Company faces risks, expenses and uncertainties as an early
stage company, particularly in the new and rapidly evolving Internet market.
Because the Company only recently commenced commercial sales, its past results
and rates of growth may not be meaningful and should not be relied upon as an
indication of the Company's future performance.
The Company will continue to be controlled by CMGI, Inc., whose interests may
differ from other stockholders
CMGI, Inc. currently beneficially owns approximately 79% of the outstanding
shares of the Company's common stock. As a result of the Company's repaying
CMGI for the value of CMGI common stock contributed in the AdKnowledge
acquisition, CMGI's ownership percentage will increase upon the acquisition of
AdKnowledge. Accordingly, CMGI will continue to have the power to elect the
Company's entire board of directors and to approve or disapprove any corporate
transaction or other matter submitted to the Company's stockholders for
approval, including the approval of mergers or other significant corporate
transactions. The interests of CMGI may differ from the interests of the other
stockholders. Future decisions by CMGI as to the disposition of any or all of
its ownership position in the Company could be influenced by the possible need
of CMGI to maintain control of the Company in order for CMGI to avoid becoming
a registered investment
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company. Registration as an investment company would subject CMGI to numerous
regulatory requirements with which CMGI would have difficulty complying. As a
result, CMGI may be motivated to maintain at least a majority ownership
position of the Company, even if other stockholders of the Company might
consider a sale of control of the Company to be in their best interests. As
long as it is a majority stockholder, CMGI has contractual rights to purchase
shares in any financing of the Company sufficient to maintain its majority
ownership position. CMGI's ownership may have the effect of delaying or
preventing a change in control of the Company or discouraging a potential
acquirer from attempting to obtain control of the Company, which in turn could
adversely affect the market price of the Company's common stock.
A material portion of the Company's growth to date has been attributable to
sales to CMGI affiliates
Twelve of the Company's customers are affiliates of CMGI. In fiscal 1999,
sales of products and services to affiliates of CMGI accounted for
approximately $1.9 million, or approximately 12%, of the Company's total
revenue. To the extent that the Company's growth in revenue has been
attributable to sales of products and services to these affiliates, there can
be no assurance that the Company's historical rate of growth is an indication
of the Company's future prospects.
The terms of the Company's sales to CMGI affiliates could change
While the Company believes that the transactions between it and other
affiliates of CMGI have been on arms'-length terms, it is possible that the
Company might have received more favorable terms than it would have if it were
not an affiliate of CMGI. In addition, the terms of the Company's sales to
affiliated customers could change if these customers cease to be affiliates of
CMGI in the future. CMGI has been and continues to be instrumental in
introducing the Company to customers and other business partners. If the
relationship between the Company and CMGI ended or was fundamentally altered,
the Company's business, financial condition and results of operations could be
materially adversely affected.
Growing concerns about the use of "cookies" and data collection may limit the
Company's ability to develop user profiles
Web sites typically place small files of information commonly known as
"cookies" on a user's hard drive, generally without the user's knowledge or
consent. Cookie information is passed to the Web site through the Internet
user's browser software. The Company's technology currently uses cookies to
collect information about an Internet user's movement through the Internet.
Most currently available Internet browsers allow users to modify their browser
settings to prevent cookies from being stored on their hard drive, and a small
minority of users are currently choosing to do so. Users can also delete
cookies from their hard drive at any time.
Some Internet commentators and privacy advocates have suggested limiting or
eliminating the use of cookies. The effectiveness of the Company's technology
could be limited by any reduction or limitation in the use of cookies.
If the use or effectiveness of cookies is limited, the Company would likely
have to switch to other technology that allows us to gather demographic and
behavioral information. While such technology currently exists, it is
substantially less effective than cookies. Replacement of cookies could require
significant reengineering time and resources, might not be completed in time to
avoid negative consequences to the Company's business, financial condition or
results of operations, and might not be commercially feasible.
In addition, privacy concerns may cause some Web users to be less likely to
visit Web sites that subscribe to the Engage Knowledge data service. If enough
Web users choose not to visit sites using or providing information to the
Engage Knowledge data service, the Company's ability to sell subscriptions to
the Engage Knowledge data service and attract participants to Engage
AudienceNet would be adversely affected. This would, in turn, have a material
adverse effect on the Company's business, financial condition or results of
operations.
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Legislation or regulations may be adopted that could affect the Company's
ability to generate or use information for profiles and may hinder the
Company's ability to conduct business
The legal and regulatory environment governing the Internet and the use of
information about Web users is uncertain and may change. United States
legislators in the past have introduced a number of bills aimed at regulating
the collection and use of personal data from Internet users and additional
similar bills are being considered during the current congressional session.
Although the Company believes that none of the current bills, as drafted, would
have a material adverse effect on our business, it is possible that a bill may
be modified and enacted into law that negatively affects the Company's ability
to collect and use data about Web users. The European Union has recently
adopted a directive addressing data privacy that may result in limitations on
the collection and use of specific personal information regarding Internet
users. In addition, Germany has imposed its own laws protecting data that can
become personally identifiable through subsequent processing. Other countries
may also enact limitations on the use of personal data.
To date, these regulations have not materially restricted the use of the
Company's products. However, legislation or regulations may in the future be
adopted which may limit the Company's ability to target advertising or collect
and use information in one or more countries. Further, a number of laws and
regulations have been and may be adopted covering issues such as pricing,
acceptable content, taxation and quality of products and services on the
Internet. Such legislation could dampen the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. In addition, due to the global nature of the Internet, it is
possible that multiple federal, state or foreign jurisdictions might
inconsistently regulate the Company's activities and our customers. Any of the
foregoing developments could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company may have difficulty managing its expanding operations
The Company has recently experienced a period of rapid growth. This growth
has placed a significant strain on the Company's managerial, operational and
financial resources. The Company's total revenue increased from $25,000 in the
fiscal year ended July 31, 1997 to $2.2 million in the fiscal year ended July
31, 1998, to $16.0 million in the fiscal year ended July 31, 1999. The number
of the Company's employees increased from 67 as of July 31, 1997 to 293 as of
July 31, 1999. A number of the Company's senior managers have been with us for
less than a year. In addition, the Company's pending acquisition of
AdKnowledge, Inc. will place a significant additional strain on the Company's
resources. To accommodate this growth, the Company must implement new or
upgraded operating and financial systems, procedures and controls throughout
many different locations. The Company may not succeed in these efforts. Failure
to expand and integrate these areas in an efficient manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company continues to grow, the Company will need
to recruit, train and retain a significant number of employees, particularly
employees with technical, marketing and sales backgrounds. These individuals
are in high demand. The Company may not be able to attract the staff it needs.
The acceptance and effectiveness of Internet advertising is not yet fully
established
The Company's future success is dependent in part on an increase in the use
of the Internet as an advertising medium. The Internet advertising market is
new and rapidly evolving, and it cannot yet be compared with traditional
advertising media to gauge its effectiveness. As a result, demand for and
market acceptance of Internet advertising solutions are uncertain. In addition,
there are software programs that limit or prevent advertising from being
delivered to a user's computer. Web users' widespread adoption of such software
would significantly undermine the commercial viability of Internet advertising.
If the market for Internet advertising fails to develop or develops more slowly
than the Company expects, its business, financial condition and results of
operations could be materially and adversely affected.
There are currently no generally accepted standards for the measurement of
the effectiveness of Internet advertising and standard measurements may need to
be developed to support and promote Internet advertising
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as a significant advertising medium. The Company's advertising customers may
challenge or refuse to accept the Company's or third-party measurements of
advertisement delivery requests from the Web sites of Web publishers using the
Company's solutions.
The acceptance and effectiveness of the Internet as a medium for consumer
transactions is not yet fully established
The Company's future success is dependent in part on an increase in the use
of the Internet for business transactions with consumers. The electronic
commerce market is new and rapidly evolving and the extent of consumer
acceptance of the Internet is uncertain. If a sufficiently broad base of
consumers do not accept the use of the Internet for transacting business, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
The Company has many competitors and may not be able to compete effectively
The markets for Internet advertising, user targeting and Web site
assessment tools are intensely competitive. The Company competes directly with
providers of profiling technology, such as Personify, and indirectly with
applications that include more limited profiling capability integrated into
their solutions, such as BroadVision and Vignette. The primary competitors to
the Company's advertising management software are systems provided by
NetGravity and Real Media. In the outsourced ad serving market, the Company
competes with providers of ad serving services, including AdForce (on
September 20, 1999, CMGI announced that it had signed a definitive agreement
to acquire AdForce) and DoubleClick. The Company's traffic measurement and
analysis services and software compete with software offered by Accrue,
Andromedia, net.Genesis and WebTrends, and the Company's audit services
compete with ABC Interactive, BPA and PricewaterhouseCoopers. The Company also
encounters competition from a number of other sources, including content
aggregation companies, companies operating advertising sales networks,
advertising agencies and other companies that facilitate Internet advertising
and electronic commerce.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than the Company. Such competitors may also
engage in more extensive research and development, undertake more far-reaching
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to existing and potential employees, strategic partners,
advertisers and Web publishers. The Company's competitors may develop products
or services that are equal or superior to the Company's solutions or that
achieve greater market acceptance than the Company's solutions. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. The Company may not be able to compete successfully or
competitive pressures may materially and adversely affect the Company's
business, financial condition and results of operations.
Companies doing business on the Internet, including the Company, must also
compete with television, radio, cable and print media for a share of
advertisers' total advertising budgets.
The Company's systems may fail or experience slowdowns and the Company could
lose key data used in its user profiles
Substantially all of the Company's communications hardware and other data
center operations are located at NaviSite Inc.'s facilities in Andover,
Massachusetts. Fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events could damage these systems, including
loss of data used to create the Company's user profiles. The Company's
business, financial condition and results of operations could be materially
and adversely affected if its systems were affected by any of these
occurrences or if any data used in its Engage Knowledge database were lost.
The Company's insurance policies may not adequately compensate the Company for
any losses that may occur due to any failures or interruptions in the
Company's systems or loss of data.
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The Company may need additional financing which could be difficult to obtain
The Company intends to grow its business rapidly and expects to incur
significant operating losses for the foreseeable future. Therefore, the Company
may require significant external financing in the future. Obtaining additional
financing will be subject to a number of factors, including:
. market conditions;
. the Company's operating performance; and
. investor sentiment, particularly for Internet-related companies.
These factors may make the timing, amount, terms and conditions of
additional financing unattractive for the Company. If the Company is unable to
raise capital to fund its growth, its business, financial condition and results
of operations would be materially and adversely affected.
Technological change may render the Company's products and services obsolete
The Internet market is characterized by rapidly changing technology,
evolving industry standards, frequent new product announcements and
enhancements and changing customer demands. The introduction of new products
and services embodying new technologies and the emergence of new industry
standards can render existing products and services obsolete. The Company's
success depends on its ability to adapt to rapidly changing technologies and to
improve the performance, features and reliability of its services and products
in response to changing customer and industry demands. Furthermore, the Company
may experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of services. New services or
enhancements to existing services may not adequately meet the requirements of
the Company's current and prospective customers or achieve any degree of
significant market acceptance.
The Company faces risks associated with its international operations and plans
for expansion
The Company has operations in a number of international markets. The Company
intends to continue to expand the Company's international operations and
international sales and marketing efforts. To date, the Company has limited
experience in developing localized versions of its solutions and in marketing,
selling and distributing its solutions internationally. The Company has
established direct sales offices in the United Kingdom and Germany and a joint
venture with Sumitomo to conduct operations in Japan. The Company intends to
enter other international markets primarily by partnering with locally based
third parties, including entering into joint ventures and distribution
arrangements. The Company's success in such markets is directly dependent on
the success of its business partners and their dedication of sufficient
resources to the relationship.
International operations are subject to other inherent risks, including:
. compliance with the laws and regulations of different countries;
. difficulties in enforcing contractual obligations and intellectual
property rights in some countries;
. difficulties and costs of staffing and managing foreign operations; and
. fluctuations in currency exchange rates.
These risks may materially and adversely affect the Company's business,
results of operations and financial condition.
The Company may not be successful in acquiring and integrating new
technologies or businesses
The Company has acquired two companies, has signed a definitive agreement to
acquire a third, and intends in the future to continue to acquire or make
investments in complementary businesses, products, services or technologies.
The Company cannot assure you that it will be able to identify additional
acquisition
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or investment candidates. Even if the Company does identify suitable
candidates, the Company cannot assure you that it will be able to make such
acquisitions or investments on commercially acceptable terms. The Company
recently purchased I/PRO and may not be successful in managing its operations.
In addition, the key personnel of I/PRO or other acquired companies may decide
not to work for the Company. In addition, the Company may not be successful in
integrating and managing AdKnowledge's operations. If the Company makes other
types of acquisitions, the Company could have difficulty in assimilating the
acquired products, services or technologies into its operations. These
difficulties could disrupt the Company's ongoing business, distract the
Company's management and employees, increase the Company's expenses and
adversely affect the Company's results of operations. Furthermore, the Company
may incur debt or issue equity securities to pay for any future acquisitions.
The issuance of equity securities could be dilutive to the Company's existing
stockholders.
The Company depends on the continued viability of the Internet infrastructure
The Company's success depends upon the development and maintenance of a
viable Internet infrastructure. The current Internet infrastructure may be
unable to support an increased number of users. The timely development of
products such as high-speed modems and communications equipment will be
necessary to continue reliable Web access. Furthermore, the Web has experienced
outages and delays as a result of damage to portions of its infrastructure.
Such outages and delays, including those resulting from Year 2000 problems,
could adversely affect Web sites and the level of traffic on the Company's
customers' sites. The effectiveness of the Web may decline due to delays in the
development or adoption of new standards and protocols designed to support
increased levels of activity. If such new infrastructure, standards or
protocols are developed, the Company may be required to incur substantial
expenditures to adapt its products to the new technologies.
The Company's business may suffer if the Company cannot protect its
intellectual property
The Company's success and ability to compete are substantially dependent on
its internally developed technologies and trademarks, which the Company seeks
to protect through a combination of patent, copyright, trade secret and
trademark law. In February 1998, the Company filed two patent applications in
the United States. The Company cannot assure that any of its patent
applications or trademark registrations will be approved, or even if approved,
would not be successfully challenged by others or invalidated. In addition, the
Company cannot assure that it will be able to prevent misappropriation of its
solutions or technologies, particularly in foreign countries where laws or law
enforcement practices may not protect its proprietary rights as fully as in the
United States.
The Company's profiling technology collects and utilizes data derived from
user activity on its customers' Web sites. This data is used for advertising
and content targeting. Although the Company believes that it has the right to
use such data and the compilation of such data in its database, the Company
cannot assure that any trade secret, copyright or other protection will be
available for such information. In addition, others may claim rights to such
information.
The Company's business will suffer if it is unable to retain key personnel
The Company depends on the services of its senior management and key
technical personnel. In particular, the Company's success depends on the
continued efforts of the Company's Chief Executive Officer, Paul L. Schaut; the
Company's Chief Operating Officer, David A. Fish; and the Company's Chief
Technology Officer, Daniel J. Jaye, with whom the Company does not have
employment agreements. The loss of the services of any key employee could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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Year 2000 problems may disrupt the Company's business
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Therefore, the year 2000 will
appear as "00", which the system might consider to be the year 1900 rather than
the year 2000. This could result in system failures, delays or miscalculations
causing disruptions to the Company's operations.
The failure of any of the Company's systems or systems maintained by third
parties to be Year 2000 compliant could:
. cause the Company to incur significant expenses to remedy any problems;
. affect the availability and performance of the Company's network; or
. otherwise seriously damage the Company's business.
A significant Year 2000-related disruption to the Company's network could
cause the Company's users, advertisers or electronic commerce partners to be
dissatisfied with its network or could impose an unmanageable burden on its
technical support staff. The Company's failure to correct a material Year 2000
problem could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company will continue to rely on CMGI for various administrative services,
and conflicts of interest could arise in the provision of such services
CMGI and the Company have entered into a facilities and administrative
support agreement under which CMGI will continue to make available space at its
headquarters in Massachusetts and will provide various services to the Company,
including tax and administration, computer and information systems,
telecommunications, utilities and employee benefits administration. Under this
agreement, CMGI has agreed to make available to the Company at least 28,000
square feet of space at its headquarters facilities in Andover, Massachusetts,
subject to termination upon at least 12 months' notice by CMGI. The fees
payable by the Company for the availability of space and other services are
generally determined through an allocation of CMGI's costs based upon the
proportion of the Company's employee headcount to the total headcount of CMGI
and other CMGI-affliated companies located in the same facility or using the
same services. The Company has not independently determined the market value
for these services and may be paying more than fair market value for them if
this allocation method does not fairly reflect the Company's use of these
services or if CMGI were obtaining them at rates greater than their fair market
value. This agreement may be amended by agreement of CMGI and the Company. It
is possible that personnel of CMGI providing these services may encounter
conflicts of interests such as demands on their time by CMGI that might detract
from their level of availability or service to the Company. In addition, the
Company's reliance on these services could result in higher costs than would be
incurred if the Company's were to obtain such services from an unrelated third
party.
The Company's stock price is likely to be highly volatile
The price at which the Company's common stock will trade has been and is
likely to continue to be highly volatile and may fluctuate substantially due to
a number of factors, including:
. actual or anticipated fluctuations in the Company's results of
operations;
. changes in or the Company's failure to meet securities analysts'
expectations;
. technological innovations;
. increased competition;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
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In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
securities of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of the Company's common stock, regardless of its operating performance. In the
past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. The Company may become involved in this type of
litigation in the future. Litigation is often expensive and diverts
management's attention and resources, which could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Item 7A. Quantitative and Qualitative Disclosure 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 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 increase.
Therefore, in the future, the Company may consider utilizing derivative
instruments to mitigate such risks.
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
<TABLE>
<CAPTION>
Page
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<S> <C>
Independent Auditors' Report.............................................. 42
Consolidated Balance Sheets as of July 31, 1998 and 1999.................. 43
Consolidated Statements of Operations for the three years ended July 31,
1999..................................................................... 44
Consolidated Statements of Changes in Stockholders' Equity for the three
years
ended July 31, 1999...................................................... 45
Consolidated Statements of Cash Flows for the three years ended July 31,
1999..................................................................... 46
Notes to Consolidated Financial Statements................................ 47
</TABLE>
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Engage Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Engage
Technologies, Inc. and subsidiaries as of July 31, 1998 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended July 31,
1999. These 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 financial position of Engage
Technologies, Inc. and subsidiaries as of July 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
September 10, 1999, except for note 17,
which is as of September 23, 1999
Boston, Massachusetts
42
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of July 31, 1998 and 1999
(In thousands, except par value)
<TABLE>
<CAPTION>
July 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 96 $112,034
Available-for-sale securities.............................. 567 1,067
Accounts receivable, less allowance for doubtful accounts
of $360 and $986 at July 31, 1998 and
1999, respectively........................................ 1,824 5,632
Prepaid expenses........................................... 230 595
------- --------
Total current assets........................................ 2,717 119,328
------- --------
Property and equipment, net................................. 789 1,801
Investment in joint venture................................. -- 1,047
Intangible assets, net of accumulated amortization of $1,498
and $7,903 at July 31, 1998 and
1999, respectively......................................... 20,540 41,401
Other assets................................................ -- 371
------- --------
Total assets............................................... $24,046 $163,948
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Debt to CMGI............................................... $ 7,753 $ 131
Obligation under capital lease............................. -- 302
Accounts payable........................................... 499 2,987
Accrued expenses........................................... 1,614 8,062
Deferred revenue........................................... 1,460 4,293
------- --------
Total current liabilities.................................. 11,326 15,775
------- --------
Deferred revenue............................................ -- 1,508
Obligation under capital lease, net of current portion...... -- 367
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock, $.01 par value, 1,500 shares
authorized, 1,500, and 0 shares issued and outstanding at
July 31, 1998 and 1999, and 0 shares issued and
outstanding at July 31, 1998 and 1999, respectively
(liquidating preference of $16,340 at July 31, 1998)...... 15 --
Series B Preferred Stock, $.01 par value, 239 shares
authorized, 0 shares issued and outstanding at July 31,
1998 and 1999 ............................................ -- --
Series C Preferred Stock, $.01 par value, 2,000 shares
authorized, 0 shares issued and outstanding at July 31,
1998 and 1999............................................. -- --
Common Stock, $.01 par value, 150,000 shares authorized,
190 and 48,674 shares issued and outstanding at
July 31, 1998 and 1999, respectively...................... 2 487
Additional paid-in capital................................. 41,679 208,669
Deferred compensation...................................... (1,305) (4,024)
Accumulated other comprehensive loss....................... (1,193) (353)
Accumulated deficit........................................ (26,478) (58,481)
------- --------
Total stockholders' equity................................. 12,720 146,298
------- --------
Total liabilities and stockholders' equity................. $24,046 $163,948
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended July 31, 1997, 1998 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Revenue:
Product revenue............................... $ 25 $ 1,742 $ 12,366
Product revenue, related parties.............. -- 203 1,801
Services and support revenue.................. -- 240 1,719
Services and support revenue, related
parties...................................... -- 32 137
-------- -------- ---------
Total revenue............................... 25 2,217 16,023
-------- -------- ---------
Cost of revenue:
Cost of product revenue....................... 31 185 3,494
Cost of services and support revenue.......... -- 2,053 5,957
-------- -------- ---------
Total cost of revenue....................... 31 2,238 9,451
-------- -------- ---------
Gross (loss) profit......................... (6) (21) 6,572
-------- -------- ---------
Operating expenses:
In-process research and development........... -- 9,200 4,500
Research and development...................... 7,261 5,859 8,699
Selling and marketing......................... 1,566 4,015 12,776
General and administrative.................... 1,429 1,993 4,115
Amortization of goodwill and other
intangibles.................................. -- 1,391 5,829
Stock compensation............................ -- 426 1,455
-------- -------- ---------
Total operating expenses.................... 10,256 22,884 37,374
-------- -------- ---------
Loss from operations............................ (10,262) (22,905) (30,802)
Other income (expense):
Gain on sale of product rights................ -- 9,240 --
Equity in loss of joint venture............... -- -- (723)
Loss on disposal of property and equipment ... -- -- (165)
Interest expense, net......................... -- (172) (313)
-------- -------- ---------
Net loss........................................ $(10,262) $(13,837) $ (32,003)
======== ======== =========
Pro forma basic and diluted net loss per share.. $ (.83) $ (.89)
======== =========
Pro forma weighted average number of basic
and diluted shares outstanding................. 16,750 35,931
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended July 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Preferred Preferred Accumulated
Stock Stock Stock Common Stock Additional Other
-------------- ------------- ------------- --------------- Paid-in Deferred Comprehensive Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Compensation Income (Loss) Deficit
------ ------ ------ ------ ------ ------ ------- ------ ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July
31, 1996......... -- $ -- -- $ -- -- $ -- 16,000 $160 $ (80) $ -- $ -- $ (2,379)
Exercise of
stock options... -- -- -- -- -- -- 188 2 20 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (10,262)
------ ----- ---- ----- ---- ----- ------- ---- -------- ------- ------ --------
Balance at July
31, 1997......... -- -- -- -- -- -- 16,188 162 (60) -- -- (12,641)
Reorganization.. 800 8 -- -- -- -- (16,000) (160) 8,072 -- -- --
Acquisition of
Accipiter....... 700 7 -- -- -- -- -- -- 33,667 (1,731) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- 426 -- --
Exercise of
stock options... -- -- -- -- -- -- 2 -- -- -- -- --
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- -- -- -- -- (1,193) --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (13,837)
------ ----- ---- ----- ---- ----- ------- ---- -------- ------- ------ --------
Balance at July
31, 1998......... 1,500 15 -- -- -- -- 190 2 41,679 (1,305) (1,193) (26,478)
Issuance of
preferred stock,
net of issuance
costs of $66.... -- -- 239 2 -- -- -- -- 1,932 -- -- --
Acquisition of
I/PRO........... -- -- -- -- -- -- 1,010 10 10,171 -- -- --
Deferred
compensation on
stock option
issuances....... -- -- -- -- -- -- -- -- 4,174 (4,174) -- --
Conversion of
debt to CMGI.... -- -- -- -- 414 4 355 4 42,768 -- -- --
Issuance of
common stock,
net of issuance
costs of $50.... -- -- -- -- -- -- 938 9 13,073 -- -- --
Initial public
offering, net of
issuance costs
of $1,500, and
conversion of
preferred
stock........... (1,500) (15) (239) (2) (414) (4) 45,648 457 94,319 -- -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- 340 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- 1,455 -- --
Exercise of
stock options... -- -- -- -- -- -- 533 5 553 -- -- --
Unrealized gain
on available-
for-sale
securities...... -- -- -- -- -- -- -- -- -- -- 500 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- (32,003)
------ ----- ---- ----- ---- ----- ------- ---- -------- ------- ------ --------
Balance at July
31, 1999 ........ -- $ -- -- $ -- -- $ -- 48,674 $487 $208,669 $(4,024) $ (353) $(58,481)
====== ===== ==== ===== ==== ===== ======= ==== ======== ======= ====== ========
<CAPTION>
Total
---------
<S> <C>
Balance at July
31, 1996......... $ (2,299)
Exercise of
stock options... 22
Net loss........ (10,262)
---------
Balance at July
31, 1997......... (12,539)
Reorganization.. 7,920
Acquisition of
Accipiter....... 31,943
Amortization of
deferred
compensation.... 426
Exercise of
stock options... --
Unrealized loss
on available-
for-sale
securities...... (1,193)
Net loss........ (13,837)
---------
Balance at July
31, 1998......... 12,720
Issuance of
preferred stock,
net of issuance
costs of $66.... 1,934
Acquisition of
I/PRO........... 10,181
Deferred
compensation on
stock option
issuances....... --
Conversion of
debt to CMGI.... 42,776
Issuance of
common stock,
net of issuance
costs of $50.... 13,082
Initial public
offering, net of
issuance costs
of $1,500, and
conversion of
preferred
stock........... 94,755
Foreign currency
translation
adjustment...... 340
Amortization of
deferred
compensation.... 1,455
Exercise of
stock options... 558
Unrealized gain
on available-
for-sale
securities...... 500
Net loss........ (32,003)
---------
Balance at July
31, 1999 ........ $146,298
=========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended July 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Years ended July 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(10,262) $(13,837) $(32,003)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................ 947 1,863 7,184
Equity in loss of joint venture.............. -- -- 723
Provision for bad debts...................... -- 240 343
Stock compensation........................... -- 426 1,455
Gain on sale of product rights............... -- (9,240) --
Loss on disposal of property and equipment... -- -- 165
In-process research and development.......... -- 9,200 4,500
Changes in operating assets and liabilities,
net of impact of acquisitions:
Accounts receivable........................ (30) (1,438) (3,182)
Prepaid expenses and other assets.......... 194 (147) (188)
Accounts payable........................... -- 475 1,753
Accrued expenses........................... 137 835 5,557
Deferred revenue........................... 15 1,117 4,324
-------- -------- --------
Net cash used for operating activities... (8,999) (10,506) (9,369)
-------- -------- --------
Cash flows from investing activities:
Investment in joint venture.................... -- -- (1,424)
Net cash acquired on acquisition of
subsidiaries.................................. -- 689 347
Purchases of property and equipment............ (490) (216) (342)
Proceeds from sale of property and equipment... -- -- 8
-------- -------- --------
Net cash (used for) provided by investing
activities.............................. (490) 473 (1,411)
-------- -------- --------
Cash flows from financing activities:
Net change in debt to CMGI..................... 10,511 10,129 12,579
Issuance of common stock, net of issuance
costs......................................... -- -- 107,837
Proceeds from stock option exercises........... 22 -- 558
Issuance of preferred stock, net of issuance
costs......................................... -- -- 1,934
Repayment of capital lease obligations......... -- -- (184)
Principal payments on notes.................... (1,044) -- --
-------- -------- --------
Net cash provided by financing
activities.............................. 9,489 10,129 122,724
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents..................................... -- -- (6)
-------- -------- --------
Net increase in cash and cash equivalents........ -- 96 111,938
Cash and cash equivalents, beginning of period .. -- -- 96
-------- -------- --------
Cash and cash equivalents, end of period......... $ -- $ 96 $112,034
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
46
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
Engage provides products and services that enable customers to create and
use profiles of individual Web visitors to target advertisements, content and
e-commerce offerings.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The Company is a majority owned subsidiary of CMGI, Inc. ("CMGI"). The
accompanying consolidated financial statements, which have been prepared as if
the Company had operated as a separate stand-alone entity for all periods
presented, include only revenue and expenses attributable to the Company since
it commenced operations in September 1995.
The consolidated financial statements include certain allocations based on
headcount from CMGI for certain general and administrative expenses such as
rent, legal services, insurance and employee benefits. Management believes that
the method used to allocate the costs and expenses is reasonable; however, such
allocated amounts may or may not necessarily be indicative of what actual
expenses would have been incurred had the Company operated independently of
CMGI.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries, Internet Profiles Corporations ("I/PRO") and
Engage Technologies Limited, after elimination of all significant intercompany
balances and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain 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 periods. Actual results could differ from those estimates.
Revenue Recognition
Prior to August 1, 1998, revenue from sales of product licenses to customers
were generally recognized when the product was shipped, provided no significant
obligations remain and collectibility is probable, in accordance with Statement
of Position ("SOP") 91-1, Software Revenue Recognition. Effective August 1,
1998, the Company adopted the provisions of SOP 97-2, Software Revenue
Recognition. For transactions after August 1, 1998, revenues from software
product licenses, Knowledge database services and web-site traffic audit
reports are generally recognized when (i) a signed noncancelable software
license exists, (ii) delivery has occurred, (iii) the Company's fee is fixed or
determinable, and (iv) collectibility is probable. Revenue from license
agreements that have significant customizations and modifications of the
software product is deferred and recognized using the percentage of completion
method. There was no material change to the Company's accounting for revenue as
a result of the adoption of SOP 97-2.
Revenue from periodic subscriptions is recognized ratably over the
subscription term, typically twelve months. Revenue from usage based
subscriptions is recognized monthly based on actual usage.
47
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Service and support revenue includes software maintenance and other
professional services revenues, primarily from consulting, implementation and
training. Revenue from software maintenance is deferred and recognized ratably
over the term of each maintenance agreement, typically twelve months. Revenue
from professional services is recognized as the services are performed,
collectibility is probable and such revenues are contractually non-refundable.
Amounts collected prior to satisfying the above revenue recognition criteria
are classified as deferred revenue.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less from the date of purchase. Investments with
maturities of greater than three months and less than twelve months are
considered short-term investments. At July 31, 1999, cash equivalents consists
of an investment in a money market fund.
Prior to the Company's initial public offering, under an arrangement with
CMGI, the Company maintained a zero balance cash account. Cash required by the
Company for the funding of its operations is provided as needed with a
corresponding increase in the "Debt to CMGI" account. Customer receipts and
other cash receipts of the Company are remitted to CMGI upon receipt by the
Company and serve to reduce the "Debt to CMGI" account. Cash on hand at July
31, 1998 is held by the Company's subsidiaries.
During fiscal 1998, non-cash investing activities included the sale of data
warehouse product rights in exchange for available-for-sale securities and the
reduction of approximately $8,400,000 of debt due to CMGI. In addition, non-
cash investing activities also include the Company's acquisition of Accipiter
(see note 7) in exchange for 700,000 shares of the Company's Series A
Convertible Preferred Stock.
During fiscal 1998, non-cash financing activities included the issuance of
800,000 shares of the Company's Series A Convertible Preferred Stock in
exchange for 16,000,000 shares of the Company's common stock and an $8,000,000
reduction in the debt to CMGI (see note 11).
During fiscal 1999, non-cash investing activities include the acquisition of
I/PRO (see note 7) in exchange for 1,010,184 shares of the Company's common
stock, and additional debt to CMGI totaling $22,086,000.
During fiscal 1999, non-cash financing activities included the issuance of
413,564 shares of the Company's Series C Preferred Stock as repayment of
approximately $37,447,000 of debt to CMGI. In addition, non-cash financing
activities included the issuance of 355,262 shares of the Company's Common
Stock as repayment of approximately $5,329,000 of debt to CMGI.
Marketable Securities
The appropriate classification of marketable securities is determined at the
time of acquisition and reevaluated 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, with unrealized gains and losses included
in accumulated other comprehensive income (loss) on the consolidated balance
sheets.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and assets under capital leases are amortized using the
straight-line method over the shorter of the lease term or estimated useful
life of the asset. Expenditures for maintenance and repairs are charged to
expense as incurred.
48
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investment in Joint Venture
The Company's investment in the common stock of a Japanese joint venture is
accounted for by the equity method.
Intangibles
Intangibles relate to the Company's purchase of Accipiter, Inc. in April
1998 and I/PRO in April 1999 (see note 7). Such costs are being amortized on a
straight-line basis over either two or five years, depending on the periods
expected to be benefited.
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
companies acquired. During this review, the significant assumptions used in
determining the original cost of long-lived assets are reevaluated. 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 by comparing future estimated undiscounted
cash flows to the asset's carrying value. If the estimated future undiscounted
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the asset's carrying value over fair value.
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, there have been no capitalized software
development costs to date. Additionally, at the date of acquisition or
investment, the components of the purchase price of each acquisition or
investment are evaluated 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.
Foreign Currency Translation
The functional currency for the Company's foreign subsidiary and its
investment in joint venture is its local currency. The financial statements of
this subsidiary and the joint venture are translated into United States dollars
using period-end exchange rates for assets and liabilities and average exchange
rates during the period for revenues and expenses. The resulting translation
adjustments are included in accumulated other comprehensive income (loss) on
the consolidated balance sheets. Net gains and losses resulting from foreign
currency transactions arising from exchange rate fluctuations on transactions
denominated in currencies other than the functional currencies are included in
the consolidated statements of operations and were immaterial for all periods
presented.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
49
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit 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. The Company was greater than 80% owned by CMGI up
through the date of the initial public offering, and as such, CMGI realized the
full benefit of all federal and part of the state net operating losses that had
been incurred by the Company up through the initial public offering. Therefore,
such net operating losses incurred by the Company prior to the initial public
offering will have no future benefit to the Company. Subsequent to the initial
public offering, CMGI owned approximately 79% of the Company and thus the
Company will have available to it the full benefit of all Federal and state net
operating losses incurred subsequent to the date of the initial public
offering. In the event that CMGI's ownership interest later increases to 80% or
more, CMGI will again realize the full benefit of all of the Company's Federal
and state net operating losses beginning the day that CMGI's ownership interest
increases above the 80% threshold. The tax sharing agreement between the
Company and CMGI requires the Company to reimburse CMGI to the extent it
contributes to the consolidated tax liability of the CMGI group; however, under
the policy, CMGI is not obligated to reimburse the Company for any losses
utilized in the consolidated CMGI group.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
approximately $40,000, $175,000 and $1,204,000 for the fiscal years ended July
31, 1997, 1998 and 1999, respectively.
Stock-Based Compensation Plans
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), 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 income tax benefits realized, are credited to equity.
Compensation cost for stock options granted with exercise prices below
estimated fair market value is recognized over the vesting period, typically
four years. The adoption of SFAS 123 was not material to the Company's
financial condition or results of operations; however, the pro forma impact on
earnings has been disclosed in the notes to the consolidated financial
statements as required by SFAS 123 (see note 12).
Segment Reporting
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 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 131 requires
the use of the "management approach" in disclosing segment information, based
largely on how senior management generally analyzes the business operations.
SFAS 131 has been adopted effective August 1, 1998. The Company currently
operates in only one segment, and as such, no additional disclosures are
required.
Pro Forma Basic and Diluted Net Loss per Share
Pro forma supplemental basic earnings (loss) per share is based upon the
weighted average number of common shares outstanding during the period. Pro
forma diluted earnings (loss) per share is based upon the
50
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
weighted average number of common shares outstanding during the period plus
additional weighted average common equivalent shares outstanding during the
period, computed using the "if-converted method". Common equivalent shares have
been excluded from the computation of diluted loss per share in each period, as
their effect would have been anti-dilutive in each period presented.
As described in note 11, conversion of all preferred stock and debt to CMGI
occurred upon the completion of the Company's initial public offering in July
1999. The pro forma basic and diluted net loss per share information included
in the accompanying statements of operations for the years ended July 31, 1998
and 1999 reflects the impact on pro forma basic and diluted net loss per share
of such conversion as of the beginning of each period or date of issuance, if
later, using the if-converted method.
Historical basic and diluted net loss per share have not been presented
because they are irrelevant due to the significant change in the Company's
capital structure and resultant basic and diluted loss per share that resulted
upon conversion of the convertible preferred stock and debt to CMGI.
The reconciliation of the numerators and denominators of the pro forma basic
and pro forma diluted loss per share computation for the Company's reported net
loss is as follows:
PRO FORMA BASIC AND DILUTED LOSS PER SHARE
<TABLE>
<CAPTION>
Year ended July 31,
------------------------
1998 1999
----------- -----------
(In thousands,
except per share data)
<S> <C> <C>
Numerator:
Loss................................................ $ (13,837) $ (32,003)
----------- -----------
Denominator:
Weighted average shares outstanding................. 15,398 1,966
Assumed conversion of preferred stock............... 790 29,534
Assumed conversion of debt to CMGI.................. 562 4,431
----------- -----------
Weighted average number of diluted shares
outstanding........................................ 16,750 35,931
----------- -----------
Pro forma basic and diluted loss per share ......... $ (.83) $ (.89)
=========== ===========
</TABLE>
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 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 2000, and expects that the adoption of SOP 98-1
will not have a material impact on its financial position or its results of
operations.
In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting Costs
of Start-Up Activities" ("SOP 98-5"). Under SOP 98-5, the cost of start-up
activities should be expensed as incurred. Start-up activities are broadly
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new operation
or organizing a new entity. SOP 98-5 is effective for the Company's fiscal 2000
financial statements. The Company does not expect its adoption to have a
material impact on its financial position or results of operations.
51
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 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 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. Engage is required to adopt this standard in the first quarter of
fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. Engage expects that the adoption of
SFAS 133 will not have a material impact on the its financial position or its
results of operations.
(3) Sale of Product Rights
In August 1997, the Company sold rights to some of its data warehouse
software products to Red Brick Systems, Inc. ("Red Brick") for $9,500,000 in
cash and 238,160 shares of Red Brick common stock, recording a pretax gain of
$9,240,000 on the sale. The cash component was received directly by CMGI and
Debt to CMGI was reduced by a corresponding amount. In January 1999, the Red
Brick shares were exchanged for 142,896 shares of Informix Corp. due to
Informix's acquisition of Red Brick.
(4) Available-for-Sale Securities
Available-for-sale securities at July 31, 1998 consists of 238,160 shares of
Red Brick common stock received as part of the Company's sale of product rights
to Red Brick. Available-for-sale securities at July 31, 1999 consists of
142,896 shares of Informix Corp. (see note 3). These securities are carried at
fair value based on quoted market prices. A $1,193,000 unrealized holding loss
and $500,000 unrealized holding gain was recorded on the Red Brick shares at
July 31, 1998 and 1999, respectively, based on the change in market value since
the date of acquisition. The unrealized holding loss is presented in the equity
section of the Company's consolidated balance sheet as a component of
accumulated other comprehensive loss.
(5) Property and Equipment
<TABLE>
<CAPTION>
July 31,
Estimated ---------------
Useful Life 1998 1999
------------------------ ------ -------
(In thousands)
<S> <C> <C> <C>
Office furniture and computer
equipment.......................... 3-5 years $ 940 $ 2,490
Software licenses................... 3 years 273 305
Leasehold improvements.............. 4 years or life-of-lease 105 244
------ -------
1,318 3,039
Less: Accumulated depreciation and
amortization....................... (529) (1,238)
------ -------
$ 789 $ 1,801
====== =======
</TABLE>
Property and equipment recorded under capital leases amounted to
approximately $735,000 at July 31, 1999. Total accumulated amortization related
to these assets amounted to approximately $177,000 at July 31, 1999. The
Company had no assets under capital lease at July 31, 1998.
(6) Investment in Joint Venture
In August 1998, the Company acquired for $1.4 million in cash, 49% of the
shares of Engage Technologies Japan (the "Joint Venture"), a joint venture with
Sumitomo Corporation in Japan. The Company's ownership interest was reduced to
46.3% in March 1999 as a result of the Joint Venture's selling
52
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
an ownership interest to an additional investor. The Joint Venture was
established to sell the Company's products and services in Japan. The Joint
Venture is authorized to solicit additional investors so long as the new
investors' ownership interests do not exceed 30% on a fully diluted, aggregate
ownership basis. If the Joint Venture requires funds in excess of $4 million
(excluding the parties' initial capital contributions) for its operations, the
Company is required to provide a bank guarantee in an amount proportionate to
its ownership interest. This investment is being accounted for under the equity
method of accounting. The Company's share of the Joint Venture's foreign
currency translation adjustments is reflected in both the investment account
and shareholders' equity on the consolidated balance sheet as a component of
accumulated other comprehensive income (loss).
Under a separate license agreement, the Company licensed its Engage
Knowledge technology to the Joint Venture in consideration for a non-refundable
$3 million prepaid royalty and royalties of 11.11% of all future revenues. The
initial prepaid royalty has been recorded as deferred revenue and is being
recognized as income over three years, the estimated period over which the
Company expects to provide maintenance and support. In addition, the Company
and the Joint Venture entered into a reseller agreement under which the Company
granted the Joint Venture an exclusive right to resell its products to end
users in Japan, excluding certain Japanese distribution rights granted to Red
Brick (see note 3).
(7) Acquisitions
Accipiter
In April 1998, CMGI acquired Accipiter, Inc. ("Accipiter"), a company
specializing in Internet advertising management solutions, in exchange for
5,054,768 shares of CMGI Common Stock (which number reflects three CMGI two-
for-one stock splits between April 1998 and the date of these financial
statements). In August 1998, Accipiter was legally merged with the Company in a
stock-for-stock merger in which consideration of 700,000 shares of the
Company's Series A Convertible Preferred Stock was issued to CMGI. The Company
has reflected in its consolidated financial statements the acquisition of
Accipiter as if it occurred in April 1998. The total purchase price for
Accipiter was valued at $31,253,000, including acquisition costs of $198,000.
The value of the CMGI shares included in the purchase price was recorded net of
a weighted average 10% market value discount to reflect the restrictions on
transferability.
Management is primarily responsible for estimating the fair value of
purchased in-process research and development. The portion of the purchase
price allocated to in-process research and development was $9,200,000, or
approximately 29% of the total purchase price. At the acquisition date,
Accipiter's major in-process project was the development of AdManager version
4.0, which was intended to provide the ad serving functionality that customers
were requiring as the use of the Internet rapidly increased and customer Web
sites became more complex. In general, previous AdManager releases did not
provide for the fault tolerance, redundancy and scalability that customers
began to seek after AdManager versions 1.0 and 2.0 were released. Accordingly,
customers' long-term product needs required Accipiter to substantially redesign
the AdManager architecture (later released as version 4.0) to develop new
technologies in the areas of: (1) fault tolerance and scalability, (2) an
object-oriented user interface, (3) application programming interfaces and (4)
a new report engine.
At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. Engage
began testing AdManager version 4.0 at a customer's site (beta testing) in June
1998 and commercially released the product in August 1998. The initial
development effort had commenced in late 1997. At the acquisition date, the new
AdManager technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the Accipiter purchase, the
AdManager version 4.0 project was approximately 71% complete. The AdManager
version 4.0 project was substantially completed within the time originally
estimated.
53
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining
after deducting from cash flows related to the in-process technology, the
market rates of return on contributory assets, including developed technology,
assembled workforce, working capital and fixed assets. The cash flows are then
discounted to present value at an appropriate rate. Discount rates are
determined by an analysis of the risks associated with each of the identified
intangible assets. The discount rate used for in-process research and
development was 24.5%, a slight premium over the estimated weighted-average
cost of capital of 24%, and the discount rate used for developed technology was
21%.
The resulting net cash flows to which the discount rate was applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are
based on the assumptions set forth below.
Accipiter recorded revenue in 1997 of less than $1 million. Because of the
absence of meaningful historical revenue of Accipiter, management projected
revenue for the initial year of the forecast period based on its assessment of
future market potential and the ability of Accipiter to successfully launch its
new product offering. After the initial year of the forecast period, revenue
was predicted to grow at rates comparable to the growth of Internet users and
online activity and the impact such growth would have on Internet advertising.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce (which is
supported by independent market data), the need for e-commerce companies to
serve ads over the Internet, expected trends in technology (such as increased
speed of the Internet, reduced hardware costs and the resulting increase in new
Internet users to whom ads will be served) and the nature and expected timing
of new product introductions by Engage and its competitors. These estimates
also include growth related to the use of certain Accipiter technologies in
conjunction with Engage's products, the marketing and distribution of the
resulting products through Engage's sales force and the benefits of Engage's
incremental financial support and stability.
Engage's estimated cost of sales as a percentage of revenue is expected to
be slightly lower than Accipiter's (classified as support and royalties by
Accipiter) on a stand-alone basis (16% in 1997), as certain fixed costs
included in cost of sales are spread over a larger revenue base and provide for
the realization of efficiencies due to economies of scale through combined
operations. Due to these savings, the estimated cost of sales as a percentage
of revenue is expected to decrease by 1% each year from Accipiter's historical
percentage, to a low of 11% in the fifth forecast year.
Engage's selling, general and administrative costs are expected to be higher
than Accipiter's on an absolute basis, but lower as a percentage of revenue.
Due to the small revenue base in 1997 and the impact of significant costs
associated with building a corporate infrastructure and building a workforce
for future operations, Accipiter's selling, general and administrative costs in
1997, as a percent of revenue, are not representative of the expected costs for
the combined operations of Engage and Accipiter. Efficiencies due to economies
of scale through combined operations, such as consolidated marketing and
advertising programs, are expected to be realized immediately.
Approximately $1,700,000 of deferred compensation was recorded during fiscal
1998 relating to approximately 173,080 shares of CMGI common stock issued to
the then 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. Compensation expense is being recognized over the two-year
service period beginning April 1, 1998.
54
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I/PRO
In April 1999, Engage acquired I/PRO, a provider of Web-site traffic
measurement and audit services, for approximately $32,651,000, including
acquisition costs of $244,000. The purchase price consisted of $1,563,000 in
net cash, $20,907,000 in CMGI common shares and $10,181,000 in Engage common
shares and options. The per share value of the CMGI shares included in the
purchase price was $57.99, net of a 9% weighted average market value discount
to reflect the restriction on transferability. The per share value of the
Engage shares included in the purchase price was $6.58 per share. In addition,
CMGI must pay up to $3,000,000 to the former I/PRO stockholders if stated
performance goals are met by I/PRO one year after the closing. Engage must
reimburse CMGI for any payments, due under stated performance goals, in cash or
by issuance of shares of Engage's Series C convertible preferred stock at its
then fair market value, at CMGI's election. Any additional payments will be
treated as additional purchase price.
I/PRO's major in-process project was the development of a new data
processing system, project name Normandy, which is intended to provide the
improved functionality required as the use of the Internet rapidly increases
and customer Web site activity increases in volume and complexity. In general,
the existing data processing system does not provide sufficient fault
tolerance, scalability, and data processing efficiency that will be required to
meet future customer needs. Accordingly, customer's long-term product needs
required I/PRO to substantially redesign the data processing system to develop
new technologies in the areas of: (1) fault tolerance and scalability, (2)
system management, (3) data capture and (4) path analysis functionality.
At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August 1999. The initial
development effort had commenced in late 1998. At the acquisition date, the new
Normandy technology had not reached a completed prototype stage and beta
testing had not yet commenced. At the time of the I/PRO purchase, the Normandy
project was approximately 64% complete. The Normandy project was substantially
completed within the time originally estimated.
The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining
after deducting from cash flows related to the in-process technology, the
market rates of returns on contributory assets, including core developed
technology, assembled workforce, working capital and fixed assets. The cash
flows are then discounted to present value at an appropriate rate. Discount
rates are determined by an analysis of the risks associated with each of the
identified intangible assets. The discount rate used for in-process research
and development was 30%, a premium over the estimated weighted-average cost of
capital of 25%, and the discount rate used for core developed technology was
22%.
The resulting net cash flows to which the discount rate was applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technology. These estimates are
based on the assumptions set forth below.
Management projected average annual revenues increases for the forecast
period based on its assessment of future market potential and the ability of
I/PRO to successfully implement the Normandy technology. Revenue was predicted
to grow at rates comparable to the growth of Internet users and online activity
and the impact such growth would have on Internet service companies. Revenues
related to the Normandy project were identified.
These projections are based on Engage management's estimates of the
significant growth in the number of companies engaged in e-commerce, the need
for e-commerce companies to utilize independent audit, verification and
analysis services, expected trends in technology (such as increased speed of
the Internet,
55
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reduced hardware costs and the resulting increase in new Internet users) and
the nature and expected timing of new product introductions by Engage and its
competitors. These estimates also include growth related to the use of certain
I/PRO technologies in conjunction with Engage's products and the benefits of
Engage's incremental financial support and stability.
I/PRO's estimated cost of sales as a percentage of revenue is expected to
significantly decrease on a stand-alone basis (85% in 1998), as certain fixed
costs included in cost of sales are spread over a larger revenue base and
provide for the realization of efficiencies due to economies of scale. Normandy
technology is expected to greatly increase the automation of data processing
allowing significant labor cost savings per revenue dollar. Increases in
hardware utilization are also expected.
Due to these savings, the estimated cost of sales as a percentage of revenue
is expected to decrease to a low of 20% in the fifth forecast year.
The acquisitions of Accipiter and I/PRO 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 amount of the purchase prices allocated to
goodwill and developed technology is being amortized on a straight-line basis
over five years. The amount of the purchase price allocated to other
identifiable intangible assets is being amortized on a straight line basis over
the following periods; Accipiter and I/PRO work force over two years, Accipiter
trade name over two years, and I/PRO tradename over five years. Amortization of
developed technology is charged to cost of product revenue while both goodwill
and other identifiable intangible assets are reflected as separate components
within operating expenses.
The purchase price of the Accipiter and I/PRO acquisitions was allocated as
follows:
<TABLE>
<CAPTION>
Accipiter I/PRO
--------- -------
(In thousands)
<S> <C> <C>
Working capital deficit, net of cash acquired of $689 for
Accipiter and $347 for I/PRO.............................. $ (249) $ (498)
Property and equipment..................................... 262 1,676
Other assets............................................... 2 230
In-process research and development........................ 9,200 4,500
Long-term obligations...................................... -- (465)
Goodwill................................................... 20,158 22,288
Developed technology....................................... 1,600 3,000
Other identifiable intangible assets....................... 280 1,920
------- -------
Purchase price, net of cash acquired....................... $31,253 $32,651
======= =======
</TABLE>
The following table represents the unaudited pro forma results of operations
of the Company for the years ended July 31, 1997, 1998 and 1999, as if the
Accipiter acquisition had occurred on August 1, 1996 and the I/PRO acquisition
had occurred on August 1, 1997. These pro forma results include adjustments for
the amortization of goodwill and other intangibles and deferred compensation
and the elimination of amounts expensed for in-process research and
development. They have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made at the beginning of the periods noted or of results that may occur in the
future.
<TABLE>
<CAPTION>
July 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenues.......................... $ 428 $ 7,348 $ 19,925
Net loss.............................. (16,825) (23,149) (36,107)
Pro forma net loss per share.......... (.56) (.64) (.91)
</TABLE>
56
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Debt to CMGI
In May 1999, the Company formalized its borrowing arrangement with CMGI and
executed a secured convertible demand note with CMGI dated February 1, 1999.
Advances accrue interest at the annual rate of 7%, and advances and accrued
interest may be prepaid without penalty. Advances outstanding under this note
are secured by substantially all assets and intellectual property of the
Company and principal, and accrued interest may be converted at the option of
CMGI into shares of Series C Preferred Stock or common stock. The number of
Series C Preferred shares or common shares to be issued upon conversion of each
borrowing represented by the note is based on the estimated fair value of the
Company at the end of the period in which such borrowing was made.
In accordance with this arrangement, CMGI elected to convert advances and
accrued interest outstanding in the amount of $37,447,000 into 413,564 shares
of Series C Preferred Stock. An additional $5,329,000 was converted into
355,262 shares of common stock at the initial public offering price per common
share.
(9) Leases
The Company leases certain computer equipment under capital leases which
expire at various dates through November 2002.
In addition to leasing computer equipment under various capital leases, the
Company has entered into noncancelable operating leases covering certain of its
office facilities and equipment which expire through 2004. In addition, the
Company pays CMGI for office facilities used as the Company's headquarters for
which it is charged based upon an allocation of the total costs for the
facilities at market rates.
The Company leases certain property and equipment from a subsidiary of CMGI.
Under the arrangement, the related party negotiates the terms and conditions of
the lease and obtains the assets to be leased. The related party bears all
liability for payment, and the Company is not financially obligated under the
leases. The Company is charged the actual lease fees paid by the related party,
plus an additional administrative charge that approximates the fair value of
the services received.
Total rent expense amounted to $305,000, $483,000 and $1,169,000 for the
years ended July 31, 1997, 1998 and 1999, respectively. Rent expense for office
facilities paid to CMGI amounted to approximately $274,000, $258,000 and
$335,000 for the years ended July 31, 1997, 1998 and 1999, respectively. Rent
expense for equipment paid to a subsidiary of CMGI amounted to approximately
$31,000, $125,000 and $302,000 for the years ended July 31, 1997, 1998 and
1999, respectively.
57
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minimum annual rental commitments are as follows at July 31, 1999:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(In thousands)
<S> <C> <C>
2000....................................................... $ 833 $336
2001....................................................... 716 311
2002....................................................... 643 76
2003....................................................... 206 4
2004....................................................... 154 --
------ ----
$2,552 727
======
Less: amount representing interest......................... 58
----
Present value of capital lease obligations................. $669
====
Comprised of:
Current portion.......................................... $302
Non-current portion...................................... 367
----
$669
====
</TABLE>
(10) Income Taxes
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. At July 31,
1999, the Company had no significant net operating loss carryforwards available
to offset future federal taxable income as the Company's parent, CMGI, has
utilized substantially all of the Company's net operating losses through July
31, 1999. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after considering all the
available objective evidence, both positive and negative, historical and
prospective, with greater weight given to historical evidence, it is not more
likely than not that these assets will be realized. No income tax benefit has
been recorded for all periods presented because of the valuation allowance.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
federal deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
July 31,
-----------------
1998 1999
------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Research credits........................................... $ 72 $ 72
Deferred revenue........................................... 288 2,337
Accruals and other reserves................................ 377 2,456
Loss carryforwards......................................... 1,862 12,351
Depreciation and amortization.............................. 345 --
Basis difference in available for sale securities.......... 821 615
------- --------
3,765 17,831
Less: Valuation allowance.................................... (3,765) (16,549)
------- --------
Net deferred tax assets...................................... -- 1,282
------- --------
Deferred tax liabilities:
Depreciation and amortization.............................. -- (1,282)
------- --------
$ -- $ --
======= ========
</TABLE>
58
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of July 31, 1998 and 1999 will be allocated as follows:
<TABLE>
<CAPTION>
July 31,
--------------
1998 1999
------ -------
<S> <C> <C>
Income tax benefit that would be recognized in the
consolidated statements of operations.......................... $2,085 $ 4,760
Goodwill and other non-current intangible assets................ 1,189 11,504
Accumulated other comprehensive income (loss)................... 491 285
------ -------
$3,765 $16,549
====== =======
</TABLE>
The Company has net operating loss carryforwards for Massachusetts tax
purposes of approximately $10,700,000 and $11,000,000 as of July 31, 1998 and
July 31, 1999, respectively. The net operating loss carryforwards will expire
from 2001 through 2003. In addition, the Company has net operating loss
carryforwards for North Carolina tax purposes of approximately $4,400,000 and
$8,300,000 as of July 31, 1998 and July 31, 1999, respectively, which will
expire from 2001 through 2003, of which $2,700,000 is related to losses
incurred by Accipiter, Inc. prior to its acquisition by the Company. The
Company also has net operating loss carryforwards for California tax purposes
of $16,500,000 as of July 31, 1999, of which, $15,000,000 is related to the
pre-acquisition period of I/PRO. The Company also has $2,700,000 of federal net
operating loss carryforwards, which will expire from 2011 through 2012, related
to losses incurred by Accipiter, Inc. prior to its acquisition.
The tax benefits related to net operating loss carryforwards from the pre-
acquisition periods of Accipiter and I/PRO, when realized, will be recorded as
a decrease in goodwill and other non-current intangible assets. The utilization
of these net operating losses may be limited pursuant to Internal Revenue Code
Section 382 as a result of prior and future ownership changes.
(11) Stockholders' Equity
Issuance of Common Stock to Compaq Computer
Immediately prior to the effectiveness of the Company's initial public
offering, the Company sold 938,000 shares of common stock to Compaq Computer
Corporation for net proceeds of approximately $13,082,000.
Public Offering of Common Stock
In July 1999, the Company completed its initial public offering for the sale
of 6,900,000 shares of common stock. The Company received proceeds of
approximately $94,755,000, net of underwriting discounts and expenses
associated with the offering.
Authorized Share Increase and Stock Split
In June 1999, the Board of Directors approved an increase in the number of
authorized common shares from 30,000,000 to 150,000,000. Upon approval of the
share increase, a two-for-one stock split was declared. All share data shown in
the accompanying consolidated financial statements have been retroactively
restated to reflect this split.
Deferred Compensation
Engage recorded deferred compensation of $1.7 million in 1998 related to the
Accipiter acquisition and $4.2 million in 1999, representing the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock at the date of grant. The
difference is recorded as
59
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a reduction of stockholders' equity and is being amortized over the vesting
period of applicable options, typically four years. Of the total deferred
compensation amount, $1.9 million had been amortized as of July 31, 1999. The
amortization of deferred compensation is recorded as an operating expense.
Preferred Stock
In July 1998, the Company's shareholders authorized 5,000,000 shares of
preferred stock, of which 1,500,000 have been designated as Series A
convertible preferred stock ("Series A Preferred Stock"), 238,597 shares have
been designated as Series B convertible preferred stock ("Series B Preferred
Stock"), and 2,000,000 shares have been designated as Series C Convertible
Preferred Stock ("Series C Preferred Stock").
Series A Preferred Stock
In July 1998, the Board of Directors authorized and issued 800,000 shares of
Series A Preferred Stock in exchange for 16,000,000 shares of the Company's
common stock and $8,000,000 in principal amount of debt to CMGI. The Series A
Preferred Stock is entitled to receive annual dividends at 7%, as and if
declared. As of and prior to July 31, 1999, no dividends had been declared or
paid by the Company. Each share of Series A Convertible Preferred Stock votes
on an as-converted basis and is convertible into twenty shares of common stock
under certain conditions and subject to certain adjustments. In the event of
any liquidation, dissolution or winding up of the Company, the Series A
Preferred Stock has a liquidation preference of $5 per share, plus cumulative
dividends of 7% compounded annually beginning on February 1, 1998. The Series A
Preferred Stock is convertible into common stock immediately at the option of
the holder.
In July 1998, the Board of Directors authorized the issuance of an
additional 700,000 shares of Series A Preferred Stock to CMGI in connection
with the Company's acquisition of Accipiter, Inc.
All outstanding shares of Series A Preferred Stock converted to 30,000,000
shares of common stock upon the completion of the Company's initial public
offering.
Series B Preferred Stock
In August 1998, the Board of Directors designated and issued 238,597 shares
of Series B Preferred Stock. Proceeds from the sale were $1,934,000, net of
issuance costs of $6,000. Each share of Series B Preferred Stock votes on an
as-converted basis and is convertible into two shares of common stock under
certain conditions and subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the Series B Preferred
Stock has a liquidation preference of $8.38 per share, subject to the prior
payment of the liquidation preference on Series A Preferred Stock. The Series B
Preferred Stock is convertible into common stock immediately at the option of
the holder.
All outstanding shares of Series B Preferred Stock converted to 477,194
shares of common stock upon the completion of the Company's initial public
offering.
Series C Convertible Preferred Stock
In May 1999, the Board of Directors approved the designation of 2,000,000
shares of the Company's preferred stock as Series C Convertible Preferred Stock
("Series C Preferred Stock"). The Series C Preferred Stock is entitled to
receive noncumulative annual dividends, payable when, as and if declared at the
rate of 7% per annum. In the event of any liquidation, dissolution or winding
up of the Company, the Series C Preferred
60
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock ranks senior to the Series B Preferred Stock and pari passu with the
Series A Preferred Stock, and has a liquidation preference equal to its
purchase price plus dividends computed at 7% per share per annum. Each share of
Series C Preferred Stock votes on an as-converted basis and is convertible at
the option of the holder into twenty shares of common stock, subject to certain
adjustments. During fiscal 1999, the Company issued 413,564 shares of Series C
Preferred Stock in connection with its borrowing agreement with CMGI (see
Note 8).
All outstanding shares of Series C Preferred Stock converted to 8,271,280
shares of common stock upon the completion of the Company's initial public
offering.
(12) Stock Option Plans
Engage 1995 Equity Incentive Plan
In August 1995, the Company's Board of Directors and Stockholders approved
the 1995 Equity Incentive Plan (the "1995 Plan"). Under the 1995 Plan, up to
15,000,000 non-qualified stock options or incentive stock options may be
granted to the Company's or its affiliates' 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. Options granted under the 1995 Plan typically vest over a four year
period, with 25% of options granted becoming exercisable one year from the date
of grant and the remaining 75% vesting monthly for the next thirty-six (36)
months.
1999 Stock Option Plan for Non-Employee Directors
The 1999 Stock Option Plan for Non-Employee Directors (the "1999 Directors
Plan") was adopted by the board of directors in June 1999. Under the terms of
the 1999 Directors Plan, directors who are not employees of Engage or any
subsidiary of Engage and not affiliates of an institutional investor that owns
shares of Engage's common stock receive nonstatutory options to purchase shares
of Engage's common stock. A total of 250,000 shares of common stock may be
issued upon exercise of options granted under the plan. The board of directors
has discretion to establish the terms of options granted under the plan. All
options must have an exercise price equal to the fair market value of the
common stock on the date of grant.
The following table reflects activity and historical prices of stock options
under the Company's 1995 Plan and the 1999 Stock Option Plan for Non-Employee
Directors for the three years ended July 31, 1999:
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------------------------------------
1997 1998 1999
------------------- -------------------- -------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... 2,575,500 $0.15 2,391,000 $0.24 4,148,054 $1.09
Granted................. 903,500 0.60 3,290,500 1.46 6,438,510 9.58
Exercised............... (187,500) 0.12 (1,600) 0.43 (533,398) 1.05
Cancelled............... (900,500) 0.38 (1,531,846) 0.57 (982,026) 4.12
--------- ----- ---------- ----- --------- -----
Options outstanding, end
of period.............. 2,391,000 $0.24 4,148,054 $1.09 9,071,140 $6.79
========= ===== ========== ===== ========= =====
Options exercisable, end
of period.............. 606,178 $0.12 639,444 $0.30 1,596,419 $0.80
========= ===== ========== ===== ========= =====
Options available for
grant, end of period... 1,421,500 1,452,320 5,436,362
========= ========== =========
</TABLE>
61
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options under the
Company's 1995 Plan outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted
Average
Remaining
Contractual Weighted Weighted
Range of Number Life Average Number Average
Exercise Prices Outstanding (years) Exercise Price Outstanding Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01-$
0.42 2,378,886 2.9 $ 0.22 1,163,820 $0.20
$ 0.43-$
0.84 81,000 2.2 0.71 56,852 0.71
$ 0.85-$
1.67 38,426 2.7 1.04 23,890 1.05
$ 1.68-$
2.94 1,421,588 3.8 2.38 318,229 2.38
$ 2.95-$
4.19 343,000 4.4 4.19 16,666 4.19
$ 4.20-$
5.05 664,092 4.6 4.93 -- --
$5.06 -
$ 14.91 1,871,848 4.8 10.04 16,962 9.19
$14.92-
$15.00 2,272,000 4.9 15.00 -- --
$15.01-
$31.00 300 5.0 31.00 -- --
--------- ---------
9,071,140 4.1 $ 6.79 1,596,419 $0.80
========= =========
</TABLE>
CMGI 1986 Stock Option Plan
Certain Engage employees have been granted stock options under the CMGI 1986
Stock Option Plan (the "1986 Plan"). Options under the 1986 Plan are granted at
fair market value on the date of the grant and are generally exercisable in
equal cumulative installments over a four-to-ten year period beginning one year
after the date of grant. Outstanding options under the 1986 Plan expire through
2007. Under the 1986 Plan, non-qualified stock options or incentive stock
options may be granted to CMGI's or its subsidiaries' employees, as defined.
The Board of Directors of CMGI 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 following table reflects activity and
historical prices of stock options granted to Company employees under CMGI's
1986 Plan for the three years ended July 31, 1999:
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------------------------------
1997 1998 1999
----------------- ------------------ -----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period.... 160,320 $0.91 181,240 $1.25 140,780 $2.11
Granted................. 48,800 1.95 80,000 2.32 307,600 10.00
Exercised............... (21,880) 0.15 (106,292) 0.84 (62,425) 2.04
Cancelled............... (6,000) 1.77 (14,168) 1.85 -- --
------- ----- -------- ----- ------- -----
Options outstanding, end
of period.............. 181,240 $1.25 140,780 $2.11 385,955 $8.41
======= ===== ======== ===== ======= =====
Options exercisable, end
of period.............. 83,598 $0.81 18,602 $1.76 16,914 $1.98
======= ===== ======== ===== ======= =====
</TABLE>
62
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options under the
CMGI 1986 Stock Plan outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Outstanding Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.61-$
1.94 29,520 1.88 $ 1.81 13,747 $1.75
$ 2.31 46,667 3.24 2.31 1,666 2.31
$ 3.77 2,168 1.32 3.77 1,501 3.77
$10.00 307,600 4.13 10.00 -- --
------- ------
385,955 3.83 $ 8.41 16,914 $1.98
======= ======
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), 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 1997, 1998 and 1999 under the Company's
stock-based compensation plans been determined based on the fair value method
set forth under SFAS 123, the pro forma effect on the Company's net loss would
have been as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1997 July 31, 1998 July 31, 1999
--------------------- --------------------- ---------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss..... $(10,262) $(10,385) $(13,837) $(14,195) $(32,003) $(36,166)
</TABLE>
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 1997, 1998 and 1999, respectively: volatility of
66.69%, 90.07% and 98.44%; risk-free interest rate of 6.19%, 5.48% and 5.43%;
expected life of options of 4.0, 3.4 and 2.4 years; and 0% dividend yield for
all years. The weighted average fair value per share of options granted during
fiscal 1997, 1998 and 1999 was $0.34, $0.86 and $5.48, respectively.
The fair value of each stock option granted under the CMGI 1986 Plan has
been estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for fiscal 1997, 1998 and
1999, respectively: volatility of 66.69%, 90.07% and 100.00%; risk-free
interest rate of 6.19%, 5.50% and 5.16%; expected life of options of 6.2, 4.2
and 2.5 years; and 0% dividend yield for all years. The weighted average fair
value per share of options granted during fiscal 1997, 1998 and 1999 was $1.30,
$1.58 and $5.98, respectively.
1999 Employee Stock Purchase Plan
1999 Employee Stock Purchase Plan ("1999 ESPP") was adopted by the board of
directors in June 1999. The 1999 ESPP provides for the issuance of a maximum of
750,000 shares of common stock and will be administered by the compensation
committee. All employees of Engage whose customary employment is for more than
20 hours per week and for more than 6 months in any calendar year are eligible
to participate in the 1999 ESPP. As of July 31, 1999, no shares have been
issued under the 1999 ESPP.
63
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Comprehensive Income
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement requires that all components of comprehensive income be reported in
the financial statements in the period in which they are recognized. The
components of comprehensive loss for the Company include net loss, the net
change in foreign currency translation adjustments and unrealized holding gains
and losses on available-for-sale securities. The financial statements of prior
periods have been reclassified for comparative purposes.
The components of comprehensive loss, net of income taxes, are as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss........................................ $(10,262) $(13,837) $(32,003)
Foreign currency adjustments.................... -- -- 340
Net unrealized holding gain (loss) arising
during the period.............................. -- (1,193) 500
-------- -------- --------
Comprehensive loss.............................. $(10,262) $(15,030) $(31,163)
======== ======== ========
</TABLE>
The components of accumulated comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Accumulated
Foreign Unrealized Other
Currency Gains (Losses) Comprehensive
Adjustments on Securities Income (Loss)
----------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Balance, July 31, 1997................. $-- $ -- $ --
Activity, fiscal 1998.................. -- (1,193) (1,193)
---- ------- -------
Balance, July 31, 1998................. -- (1,193) (1,193)
Activity, fiscal 1999.................. 340 500 840
---- ------- -------
Balance, July 31, 1999................. $340 $ (693) $ (353)
==== ======= =======
</TABLE>
(14) Concentration of Credit Risk
Amounts included in the consolidated balance sheets for accounts receivable,
debt to CMGI, accounts payable and accrued expenses approximate their fair
value due to their short maturities. Financial instruments that potentially
subject the Company to credit risk consist primarily of accounts receivable and
cash investments. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral or
other security against trade receivable balances; however, it does maintain
reserves for potential credit losses and such losses have been within
management's expectations. At July 31, 1999, substantially all of the Company's
cash and cash equivalents are invested in one money market fund with a major
bank.
The Company's revenue for the year ended July 31, 1997 was derived from one
customer. Sales to three customers accounted for 20%, 12% and 11% of total
revenues for the year ended July 31, 1998. Sales to one customer accounted for
12% of total revenues for the year ended July 31, 1999. Accounts receivable due
from three customers approximated 23%, 12% and 12% of total accounts receivable
at July 31, 1998. Accounts receivable from two customers approximated 14% and
11% of total accounts receivable at July 31, 1999. The Company's customer base
consists of geographically diverse customers across many industries.
64
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Related Party Transactions
CMGI has provided the Company with systems and related services ("enterprise
services") at amounts that approximated the fair value of services received in
each of the periods presented in these financial statements. The Company also
occupies facilities that are leased by CMGI, whereby CMGI charges the Company
for its share of rent and related facility costs through an allocation based
upon the company's headcount in relation to total headcount for all CMGI
companies located in the premises. The Company has also purchased certain
employee benefits (including 401(k) plan participation by employees of the
Company) and insurance (including property and casualty insurance) through
CMGI. Amounts due CMGI are included in "Debt to CMGI" on the consolidated
balance sheets. See note 8. The following summarizes the expenses allocated to
the Company by CMGI for enterprise services, rent and facilities, and human
resources:
<TABLE>
<CAPTION>
Year Ended
July 31,
--------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Enterprise services.............................................. $129 $201 $223
Rent and facilities.............................................. $312 $366 $434
Human resources.................................................. $ 11 $ 30 $156
</TABLE>
In addition, beginning in fiscal 1997, the Company outsources data center
operations and management information services from CMGI and one of its
affiliates, for which fees were charged at estimated fair value of $1,162,000,
$889,000 and $2,122,000 during the years ended July 31, 1997, 1998 and 1999,
respectively.
The Company leases certain property and equipment from a subsidiary of CMGI.
Under the arrangement, the related party negotiates the terms and conditions of
the lease and obtains the assets to be leased. The related party bears all
liability for payment, and the Company is not financially obligated under the
leases. The Company is charged the actual lease fees paid by the related party,
plus an additional administrative charge that approximates the fair value of
the services received (see note 9).
The Company sells its products and services to companies that CMGI has an
investment interest or a significant ownership interest. The Company sold no
products to related parties in fiscal 1997. Total revenue realized from sales
to related parties were $235,000 and $1,938,000 for the fiscal year ended July
31, 1998 and 1999, respectively. The related cost of revenue is consistent with
the costs incurred on similar transactions with unrelated parties.
(16) Geographic Information
The Company currently has offices in the United States and the United
Kingdom. The Company markets its products worldwide. Revenues are grouped into
three main geographic areas; United States, Europe and Rest of world. Revenue
was distributed by geography as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
United States......................................... $ 25 $1,584 $13,241
Europe................................................ -- 71 1,199
Rest of world......................................... -- 562 1,583
---- ------ -------
$ 25 $2,217 $16,023
==== ====== =======
</TABLE>
The Company's assets located outside of the United States are immaterial to
the Company's financial statements.
65
<PAGE>
ENGAGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Subsequent Event
On September 23, 1999, the Company signed an agreement pursuant to which it
will acquire AdKnowledge, a provider of products and services which allow
online marketers and ad agencies to plan, target, serve, track and analyze
advertising campaigns. Under the terms of the merger and contribution
agreement, CMGI will initially acquire control of AdKnowledge through the
issuance of approximately $170 million of CMGI common stock in a merger of a
subsidiary of CMGI into AdKnowledge. The value of the CMGI common stock being
delivered is based on $84.80, the average of the last reported sales prices of
the CMGI common stock over the 45 consecutive trading days ending on September
20, 1999, which value may be adjusted upward by up to 10% or downward by up to
10% based upon the average of the last reported sales prices of such stock over
the 45 consecutive trading days ending two trading days prior to the effective
time of this merger.
Upon completion of this merger, CMGI will own approximately 88% of the
common stock of AdKnowledge. This merger will be followed by a contribution of
AdKnowledge shares held by CMGI and AdKnowledge shareholders to the Company in
exchange for approximately $193 million of the Company's common stock. The
value of the Company's common stock being delivered is $31.45, the average of
the last reported sales prices of the Company's common stock over the 45
consecutive trading days ending on September 20, 1999 and may be adjusted
upward or downward in the same manner as the CMGI stock described above. Any
remaining holders of AdKnowledge common stock will receive the Company's common
stock in a short-term merger with a subsidiary of the Company.
The transactions are intended to be tax-free under Section 368(a) and
Section 351 of the Internal Revenue Code of 1986, as amended. The transaction,
which will be accounted for as a purchase, is subject to certain conditions,
regulatory approval and the shareholder approval of the Company and
AdKnowledge.
66
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
The information regarding directors and executive officers required by Item
10 is incorporated by reference from the Company's definitive proxy statement
for its annual stockholders' meeting to be held on December 17, 1999.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on December 17, 1999. The information specified in Item 402 (k) and (l) of
Regulation S-K and set forth in the Company's definitive proxy statement for
its annual stockholders' meeting to be held on December 17, 1999 is not
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on December 17, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on December 17, 1999.
67
<PAGE>
ITEM IV.
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a)(1) List of Financial Statements
The following are the consolidated financial statements of Engage
Technologies, Inc. and its subsidiaries appearing elsewhere herein:
Report of Independent Accountants
Consolidated Balance Sheets as of July 31, 1998 and 1999
Consolidated Statements of Operations for the three years ended July 31,
1999
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended July 31, 1999
Consolidated Statements of Cash Flows for the three years ended July 31,
1999
(a)(2) List of Schedules
All other schedules to the consolidated financial statements are omitted as
the required information is either inapplicable or presented in the
consolidated financial statements.
(a)(3) List of Exhibits
The Exhibits which are filed with this report or which are incorporated by
reference are set forth in the Exhibit Index hereto.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Andover, Massachusetts on
October 29, 1999.
/s/ Stephen A. Royal
By: _________________________________
Stephen A. Royal
Chief Financial Officer and
Treasurer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed below by the following persons on
behalf of the Registrant and capacities indicated on October 29, 1999.
<TABLE>
<S> <C>
Signature Title(s)
/s/ Paul L. Schaut Chief Executive Officer, President and
_______________________________ Director (Principal Executive Officer)
Paul L. Schaut
/s/ Stephen A. Royal Chief Financial Officer and Treasurer
_______________________________ (Principal Financial and Accounting
Stephen A. Royal Officer)
/s/ David S. Wetherell Chairman of the Board of Directors
_______________________________
David S. Wetherell
/s/ Edward A. Bennett Director
_______________________________
Edward A. Bennett
/s/ Christopher A. Evans Director
_______________________________
Christopher A. Evans
/s/ Andrew J. Hajducky, III Director
_______________________________
Andrew J. Hajducky, III
/s/ Craig D. Goldman Director
_______________________________
Craig D. Goldman
/s/ Fredric D. Rosen Director
_______________________________
Fredric D. Rosen
</TABLE>
69
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Engage Technologies, Inc.:
Under the date of September 10, 1999, except for note 17, which is as of
September 23, 1999, we reported on the consolidated balance sheets of Engage
Technologies, Inc. as of July 31, 1998 and 1999, 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, 1999, which are included in the
Form 10-K for the year ended July 31, 1999. 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.
KPMG LLP
Boston, Massachusetts
September 10, 1999
<PAGE>
Schedule II
ENGAGE TECHNOLOGIES
VALUATION AND QUALIFYING ACCOUNTS
for the years ended July 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
----------------
Balance at Charged to Deductions Balance
Beginning Costs and From at End
Description of Year Expenses Other Reserves of Year
- ----------- ---------- ---------- ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1997:
Allowance for doubtful
accounts............... $-- -- -- -- $--
Year ended July 31, 1998:
Allowance for doubtful
accounts............... $-- 240 120(1) -- $360
Year ended July 31, 1999:
Allowance for doubtful
accounts............... $360 343 454(2) (171) $986
</TABLE>
- --------
(1) Represents allowance for doubtful accounts of Accipiter, Inc. as of April
1, 1998.
(2) Represents allowance for doubtful accounts of I/PRO as of April 1, 1999.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
3.1** Amended and Restated Certificate of Incorporation.
3.2 Second Amended and Restated Certificate of Incorporation.
3.4** By-laws.
3.5** Amended and Restated By-laws.
4.1** Specimen Certificate for shares of Common Stock.
Description of Capital Stock (contained in the Certificate of
4.2** Incorporation filed as Exhibit 3.1).
10.1** 1995 Equity Incentive Plan.
10.2** 1999 Employee Stock Purchase Plan.
10.3** 1999 Stock Option Plan for Non-Employee Directors.
10.4**+ Letter Agreement by and among Engage, CMGI and Red Brick Systems,
Inc., dated October 6, 1998.
10.5**+ Letter Agreement by and among Engage, NaviSite Internet Services
Corporation and ServerCast Communications, L.L.C., dated September
16, 1998.
10.6** Series B Convertible Preferred Stock Purchase Agreement by and
among Engage, Sumitomo Corporation and Sumitomo Corporation of
America, dated July 31, 1998.
License Agreement between Engage and Engage Technologies Japan,
10.7**+ Inc., dated July 31, 1998.
10.8**+ International Reseller Agreement between Engage and Engage
Technologies Japan, Inc., dated July 31, 1998.
10.9**+ Amended and Restated Software License Agreement by and between Red
Brick Systems, Inc. and Engage, dated July 31, 1998.
10.10**+ DSS Server Software License Agreement by and between Engage,
including its parent company CMGI and CMGI's majority-owned
subsidiaries, dated July 31, 1998.
10.11**+ Exclusive Strategic Alliance Agreement between Engage and AdSmart
Corporation and Cross Beam Networks Corporation, dated January 7,
1998.
Services and License Agreement between Lycos, Inc. and Engage,
10.12**+ dated October 29, 1997.
10.13**+ Sales and Marketing Agreement by and between Internet Profiles
Corporation and the Nielsen Media Research division of A. C.
Nielsen Company, dated September 5, 1995.
Capital & Counties plc and Engage Technologies Limited underlease,
10.14** dated April 27, 1999.
10.15** Anthony & Co. Office Lease between Milkson Associates, LLC and
Accipiter, Inc., dated April 9, 1997.
10.16** Amendment to Lease Agreement between Milkson Associates, LLC and
Accipiter, Inc., dated November 5, 1997.
10.17** Form of Director Indemnification Agreement.
10.18 Investor Rights Agreement by and among Engage and CMGI.
Facilities and Administrative Support Agreement between Engage and
10.19 CMGI.
Separation Agreement by and between CMGI and Chris Evans, dated
10.20** May 3, 1999.
10.21** Consulting, Invention and Non-Disclosure Agreement between Engage
and Chris Evans, dated May 3, 1999 (filed as Exhibit A to Exhibit
10.20).
Inter-Company Agreement between CMGI and Engage, dated April 7,
10.22** 1999.
Secured Convertible Demand Note issued by Engage to CMGI, dated as
10.23** of February 1, 1999.
Security Agreement by and between Engage and CMGI, dated as of May
10.24** 3, 1999.
10.25** Intellectual Property Security Agreement by and between Engage and
CMGI, dated as of May 3, 1999.
10.26** Stock Purchase Agreement among, Engage, CMGI, Internet Profiles
Corporation and the stockholders of Internet Profiles Corporation
listed on Schedule 1 attached thereto, dated April 7, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
10.27 Tax Allocation Agreement by and among CMGI and Engage.
10.28+ Strategic Development and License Agreement by and Between Engage
and Microsoft Corporation
21.1** Subsidiaries.
23.1 Consent of KPMG LLP.
24.1** Power of Attorney of Paul L. Schaut, Stephen A. Royal, David S.
Wetherell, Edward A. Bennett, Christopher A. Evans, Andrew J.
Hajducky, III and Craig D. Goldman.
24.2** Power of Attorney of Fredric D. Rosen.
27.1 Financial Data Schedule.
</TABLE>
- --------
** Incorporated by reference from the exhibits filed with the Company's
registration statement (333-78015) on Form S-1 filed under the Securities
Act of 1933, as amended.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ENGAGE TECHNOLOGIES, INC.
Engage Technologies, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
1. The Corporation filed its original Certificate of Incorporation with
the Secretary of the State of Delaware on July 18, 1995.
2. At a duly called meeting of the Board of Directors of the Corporation
at which a quorum was present at all times, a resolution was duly adopted,
pursuant to Sections 242 and 245 of the General Corporation Law of the State of
Delaware, setting forth an Amended and Restated Certificate of Incorporation of
the Corporation and declaring said Amended and Restated Certificate of
Incorporation advisable. The stockholders of the Corporation duly approved said
proposed Amended and Restated Certificate of Incorporation by written consent in
accordance with Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware. The resolution setting forth the Amended and Restated
Certificate of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, be and
- --------
hereby is amended and restated in its entirety so that the same
shall read as follows:
FIRST. The name of the Corporation is:
Engage Technologies, Inc.
SECOND. The address of its registered office in the State of Delaware is
1013 Centre Road, in the City of Wilmington, County of New Castle. The name of
its registered agent at such address is The Prentice-Hall Corporation.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
<PAGE>
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 155,000,000 shares, consisting of
(i) 150,000,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock").
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for
------
each share held at all meetings of stockholders. There shall be no cumulative
voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed
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to constitute different classes of shares for the purposes of voting by classes
unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without
limiting the generality of the foregoing, the resolutions providing for issuance
of any series of Preferred Stock may provide that such series shall be superior
or rank equally or be junior to the Preferred Stock of any other series to the
extent permitted by law. Except as otherwise provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Certificate of Incorporation, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. Election of directors need not be by written ballot, except as and
to the extent provided in the By-Laws of the Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or
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class of creditors, and/or on all the stockholders or class of stockholders, of
this corporation, as the case may be, and also on this corporation.
EIGHTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
NINTH. 1. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each person who was or is a
- ---------------
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer, partner, employee or trustee
of, or in a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan) (all
such persons being referred to hereafter as an "Indemnitee"), or by reason of
any action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
---- ----------
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
2. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer, partner, employee or trustee
of, or in a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit
4
<PAGE>
plan), or by reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees) and, to the extent
permitted by law, amounts paid in settlement actually and reasonably incurred by
him or on his behalf in connection with such action, suit or proceeding and any
appeal therefrom, if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery of Delaware
shall determine upon application that, despite the adjudication of such
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses (including
attorneys' fees) which the Court of Chancery of Delaware shall deem proper.
3. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
---- ----------
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not-opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition precedent to his
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the
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<PAGE>
defense thereof shall be at the expense of the Indemnitee unless (i) the
employment of counsel by the Indemnitee has been authorized by the Corporation,
(ii) counsel to the Indemnitee shall have reasonably concluded that there may be
a conflict of interest or position on any significant issue between the
Corporation and the Indemnitee in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of counsel
for the Indemnitee shall be at the expense of the Corporation, except as
otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above. The Corporation shall not be required to indemnify the Indemnitee
under this Article for any amounts paid in settlement of any Proceeding effected
without its written consent. The Corporation shall not settle any Proceeding in
any manner which would impose any penalty or limitation on Indemnitee without
Indemnitee's written consent. Neither the Corporation nor the Indemnitee will
unreasonably withhold their consent to any proposed settlement.
5. Advance of Expenses. Subject to the provisions of Section 6 below, in
-------------------
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
--------
however, that the payment of such expenses incurred by an Indemnitee in advance
- -------
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article; and
further provided that no such advancement of expenses shall be made if it is
- ------- --------
determined that (i) the Indemnitee did not act in good faith and in a manner he
reasonably believes to be in, or not opposed to, the best interests of the
Corporation, or (ii) with respect to any criminal action or proceeding, the
Indemnitee had reasonable cause to believe his conduct was unlawful. Such
undertaking shall be accepted without reference to the financial ability of the
Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses, unless ordered by a court shall
be
6
<PAGE>
made, with respect to requests under Section 1, 2 or 5, only as authorized in
the specific case upon a determination by the Corporation that the
indemnification of the Indemnitee is proper because the Indemnitee has met the
applicable standard of conduct set forth in Section 1, 2 or 5, as the case may
be. Such determination shall be made in each instance (a) by a majority vote of
the directors of the Corporation consisting of persons who are not at that time
parties to the action, suit or proceeding in question ("disinterested
directors"), whether or not a quorum, (b) by a majority vote of a committee of
disinterested directors designated by majority vote of disinterested directors,
whether or not a quorum, (c), if there are no disinterested directors, or if
disinterested directors so direct, by independent legal counsel (who may, to the
extent permitted by law, be regular legal counsel to the Corporation) in a
written opinion, or (d) by the stockholders of the Corporation.
7. Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction. Neither the failure of the Corporation to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because the Indemnitee has met the applicable
standard of conduct, nor an actual determination by the Corporation pursuant to
Section 6 that the Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the Indemnitee has
not met the applicable standard of conduct. The Indemnitee's expenses (including
attorneys' fees) incurred in connection with successfully establishing his right
to indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.
8. Limitations. Notwithstanding anything to the contrary in this
-----------
Article, except as set forth in Section 7 above, the Corporation shall not
indemnify an Indemnitee seeking indemnification in connection with a proceeding
(or part thereof) initiated by the Indemnitee unless the initiation thereof was
approved by the Board of Directors of the Corporation. Notwithstanding anything
to the contrary in this Article, the Corporation shall not indemnify an
Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of
insurance, and in the event the Corporation makes any indemnification payments
to an Indemnitee and such Indemnitee is subsequently reimbursed from the
proceeds of insurance, such Indemnitee shall promptly refund such
indemnification payments to the Corporation to the extent of such insurance
reimbursement.
9. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
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10. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time
to time by its Board of Directors, grant indemnification rights to other
employees or agents of the Corporation or other persons serving the Corporation
and such rights may be equivalent to, or greater or less than, those set forth
in this Article.
11. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
12. Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.
13. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
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14. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
TENTH. Except as otherwise provided herein, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute and this Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ELEVENTH. Special meetings of stockholders may be called at any time by
only the Chairman of the Board of Directors, the President, the Board of
Directors or the holders of at least 40% of the votes which all stockholders
would be entitled to cast in any annual election of directors. Business
transacted at any special meeting of stockholders shall be limited to matters
relating to the purpose or purposes stated in the notice of meeting.
TWELFTH. In furtherance and not in limitation of the powers conferred upon
it by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present shall be
required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least a majority of the votes which all of
the stockholders would be entitled to cast in any annual election of directors.
THIRTEENTH. The Corporation hereby elects not to be governed by Section
203 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Certificate of Incorporation to be signed by its
President this 19th day of July, 1999.
ENGAGE TECHNOLOGIES, INC.
By: /s/ Paul L. Schaut
----------------------------
Paul L. Schaut, President
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EXHIBIT 10.18
-------------
ENGAGE TECHNOLOGIES, INC.
INVESTOR RIGHTS AGREEMENT
This Agreement dated as of July 23, 1999 is entered into by and among
Engage Technologies, Inc., a Delaware corporation (the "Company"), and CMGI,
Inc. (the "Investor").
Recitals
--------
WHEREAS, the Company desires to undertake an initial public offering of its
Common Stock; and
WHEREAS, in order to induce the Investor to approve such offering, the
Company has agreed to provide for certain arrangements with respect to (i) the
registration of shares of capital stock of the Company under the Securities Act
of 1933 and (ii) the Investor's right of first refusal with respect to certain
issuances of securities of the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $.01 par value per share, of
------------
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"Initiating Holders" means the Stockholders initiating a request for
------------------
registration pursuant to Section 2.1(a) or 2.1(b), as the case may be.
<PAGE>
"Initial Public Offering" means the initial underwritten public
-----------------------
offering of shares of Common Stock pursuant to an effective Registration
Statement.
"Other Holders" shall have the meaning set forth in Section 2.2(b).
-------------
"Prospectus" means the prospectus included in any Registration
----------
Statement, as amended or supplemented by an amendment or prospectus supplement,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.
"Registration Statement" means a registration statement filed by the
----------------------
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 2.4.
---------------------
"Registrable Shares" means (i) the shares of Common Stock held by the
------------------
Investor upon the closing of the Initial Public Offering and (ii) any other
shares of Common Stock issued in respect of such shares (because of stock
splits, stock dividends, reclassifications, recapitalizations, or similar
events); provided, however, that shares of Common Stock which are Registrable
-------- -------
Shares shall cease to be Registrable Shares upon (i) any sale pursuant to a
Registration Statement or Rule 144 under the Securities Act or (ii) any sale in
any manner to a person or entity which, by virtue of Section 4 of this
Agreement, is not entitled to the rights provided by this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Selling Stockholder" means any Stockholder owning Registrable Shares
-------------------
included in a Registration Statement.
"Stockholders" means the Investor and any persons or entities to whom
------------
the rights granted under this Agreement are transferred by the Investor, its
successors or assigns, pursuant to Section 4 hereof.
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<PAGE>
2. Registration Rights
-------------------
2.1 Required Registrations.
----------------------
(a) At any time following 180 days after the closing of the
Initial Public Offering, a Stockholder or Stockholders may request, in writing,
that the Company effect the registration on Form S-1 or Form S-2 (or any
successor form) of Registrable Shares owned by such Stockholder or Stockholders
having an aggregate value of at least $10,000,000 (based on the then current
public market price).
(b) At any time after the Company becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to secondary
offerings), a Stockholder or Stockholders may request, in writing, that the
Company effect the registration on Form S-3 (or such successor form), of
Registrable Shares having an aggregate value of at least $2,500,000 (based on
the then current public market price).
(c) Upon receipt of any request for registration pursuant to
this Section 2, the Company shall promptly give written notice of such proposed
registration to all other Stockholders. Such Stockholders shall have the right,
by giving written notice to the Company within 15 days after the Company
provides its notice, to elect to have included in such registration such of
their Registrable Shares as such Stockholders may request in such notice of
election, subject in the case of an underwritten offering to the approval of the
managing underwriter as provided in Section 2.1(d) below. Thereupon, the Company
shall, as expeditiously as possible, use its best efforts to effect the
registration on an appropriate registration form of all Registrable Shares which
the Company has been requested to so register (provided, however, that in the
case of a registration requested under Section 2.1(b), the Company will only be
obligated to effect such registration on Form S-3 (or any successor form)).
(d) If the Initiating Holders intend to distribute the
Registrable Shares covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to Section
2.1(a) or (b), as the case may be, and the Company shall include such
information in its written notice referred to in Section 2.1(c). The right of
any other Stockholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a) or (b), as the case may be, shall be conditioned upon
such other Stockholder's participation in such underwriting on the terms set
forth herein. If the managing underwriter determines that the marketing factors
require a limitation of the number of shares to be underwritten, the number of
Registrable Shares to be included in a Registration Statement filed pursuant to
this Section 2.1, shall be reduced pro rata among the requesting Stockholders
based on the quotient of (1) the total Registrable Shares to be included in the
Registration Statement, divided by (2) the total number of Registrable Shares
that requested registration.
-3-
<PAGE>
(e) The Initiating Holders shall have the right to select the
managing underwriter(s) for any underwritten offering requested pursuant to
Section 2.1(a) or (b), subject to the approval of the Company, which approval
will not be unreasonably withheld.
(f) The Company shall not be required to effect more than two
registrations pursuant to Section 2.1(a) or more than five registrations
pursuant to Section 2.1(b). In addition, the Company shall not be required to
effect any registration within 90 days after the effective date of any other
Registration Statement of the Company relating to an underwritten offering. For
purposes of this Section 2.1(f), a Registration Statement shall not be counted
until such time as such Registration Statement has been declared effective by
the Commission (unless the Initiating Holders withdraw their request for such
registration (other than as a result of information concerning the business or
financial condition of the Company which is made known to the Stockholders after
the date on which such registration was requested) and elect not to pay the
Registration Expenses therefor pursuant to Section 2.4).
(g) If at the time of any request to register Registrable Shares
by Initiating Holders pursuant to this Section 2.1, the Company is engaged or
has plans to engage in a registered public offering or is engaged in any other
activity which, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration or
financial statements required for the requested registration are not then
available, then the Company may at its option direct that such request be
delayed for a period not in excess of 90 days from the date of such request,
such right to delay a request to be exercised by the Company not more than once
in any 12-month period.
2.2 Incidental Registration.
-----------------------
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to Section 2.1) at
any time and from time to time, it will, prior to such filing, give written
notice to all Stockholders of its intention to do so; provided, that no such
--------
notice need be given if no Registrable Shares are to be included therein as a
result of a determination of the managing underwriter pursuant to Section
2.2(b). Upon the written request of a Stockholder or Stockholders given within
20 days after the Company provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the Company shall
use its best efforts to cause all Registrable Shares which the Company has been
requested by such Stockholder or Stockholders to register to be registered under
the Securities Act to the extent necessary to permit
-4-
<PAGE>
their sale or other disposition in accordance with the intended methods of
distribution specified in the request of such Stockholder or Stockholders;
provided that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 2.2 without obligation to any
Stockholder.
(b) If the registration for which the Company gives notice
pursuant to Section 2.2(a) involves an underwriting, the Company shall so advise
the Stockholders as a part of the written notice given pursuant to Section
2.2(a). In such event, the right of any Stockholder to include its Registrable
Shares in such registration pursuant to Section 2.2 shall be conditioned upon
such Stockholder's participation in such underwriting on the terms set forth
herein. All Stockholders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for the underwriting by the Company.
Notwithstanding any other provision of this Section 2.2, if the managing
underwriter determines that the inclusion of all shares requested to be
registered would adversely affect the offering, the Company may limit the number
of Registrable Shares to be included in the registration and underwriting. The
Company shall so advise all holders of Registrable Shares requesting
registration, and the number of shares that are entitled to be included in the
registration and underwriting shall be allocated in the following manner. The
securities of the Company held by holders other than Stockholders and other
stockholders entitled to include shares therein ("Other Holders") shall be
excluded from such registration and underwriting to the extent deemed advisable
by the managing underwriter, and, if a further limitation on the number of
shares is required, the number of shares that may be included in such
registration and underwriting shall be allocated among all Stockholders and
Other Holders requesting registration in proportion, as nearly as practicable,
to the respective number of shares of Common Stock which they held at the time
the Company gives the notice specified in Section 2.2(a). If any Stockholder or
Other Holder would thus be entitled to include more securities than such holder
requested to be registered, the excess shall be allocated among other requesting
Stockholders and Other Holders pro rata in the manner described in the preceding
sentence. If any holder of Registrable Shares or any Other Holder disapproves of
the terms of any such underwriting, such person may elect to withdraw therefrom
by written notice to the Company, and any Registrable Shares or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
(c) Notwithstanding the foregoing, the Company shall not be
required, pursuant to this Section 2.2, to include any Registrable Shares in a
Registration Statement if such Registrable Shares can then be sold pursuant to
Rule 144(k) under the Securities Act and represent less than 1% of the then
outstanding shares of Common Stock.
-5-
<PAGE>
2.3 Registration Procedures.
-----------------------
(a) If and whenever the Company is required by the provisions of
this Agreement to use its best efforts to effect the registration of any
Registrable Shares under the Securities Act, the Company shall:
(i) file with the Commission a Registration Statement
with respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become effective as soon as possible;
(ii) as expeditiously as possible prepare and file with
the Commission any amendments and supplements to the Registration Statement and
the prospectus included in the Registration Statement as may be necessary to
comply with the provisions of the Securities Act (including the anti-fraud
provisions thereof) and to keep the Registration Statement effective for 12
months from the effective date or such lesser period until all such Registrable
Shares are sold;
(iii) as expeditiously as possible furnish to each Selling
Stockholder such reasonable numbers of copies of the Prospectus, including any
preliminary Prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such Selling Stockholder may reasonably request
in order to facilitate the public sale or other disposition of the Registrable
Shares owned by such Selling Stockholder;
(iv) as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the Selling Stockholders
shall reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Selling Stockholders to consummate the
public sale or other disposition in such states of the Registrable Shares owned
by the Selling Stockholder; provided, however, that the Company shall not be
-------- -------
required in connection with this paragraph (iv) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;
(v) as expeditiously as possible, cause all such
Registrable Shares to be listed on each securities exchange or automated
quotation system on which similar securities issued by the Company are then
listed; and
(vi) promptly make available for inspection by the Selling
Stockholders, any managing underwriter participating in any disposition pursuant
to such Registration Statement, and any attorney or accountant or other agent
retained by any such underwriter or selected by the Selling Stockholders, all
financial and other records, pertinent corporate documents and properties of the
Company and cause the Company's officers, directors, employees and independent
-6-
<PAGE>
accountants to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such Registration
Statement.
(b) If the Company has delivered a Prospectus to the Selling
Stockholders and after having done so the Prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Selling Stockholders and, if requested, the Selling Stockholders shall
immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the Selling
Stockholders with revised Prospectuses and, following receipt of the revised
Prospectuses, the Selling Stockholders shall be free to resume making offers of
the Registrable Shares.
(c) In the event that, in the judgment of the Company, it is
advisable to suspend use of a Prospectus included in a Registration Statement
due to pending material developments or other events that have not yet been
publicly disclosed and as to which the Company believes public disclosure would
be detrimental to the Company, the Company shall notify all Selling Stockholders
to such effect, and, upon receipt of such notice, each such Selling Stockholder
shall immediately discontinue any sales of Registrable Shares pursuant to such
Registration Statement until such Selling Stockholder has received copies of a
supplemented or amended Prospectus or until such Selling Stockholder is advised
in writing by the Company that the then current Prospectus may be used and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such Prospectus. Notwithstanding anything
to the contrary herein, the Company shall not exercise its rights under this
Section 2.3(c) to suspend sales of Registrable Shares for a period in excess of
90 days in any 365-day period.
2.4 Allocation of Expenses. The Company will pay all Registration
----------------------
Expenses for all registrations under this Agreement; provided, however, that if
-------- -------
a registration under Section 2.1 is withdrawn at the request of the Initiating
Holders (other than as a result of information concerning the business or
financial condition of the Company which is made known to the Stockholders after
the date on which such registration was requested) and if the Initiating Holders
elect not to have such registration counted as a registration requested under
Section 2.1, the requesting Stockholders shall pay the Registration Expenses of
such registration pro rata in accordance with the number of their Registrable
Shares included in such registration. For purposes of this Section, the term
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with this Agreement, including, without limitation, all registration
and filing fees, exchange listing fees, printing expenses, fees and expenses of
counsel for the Company and the fees and expenses of one counsel selected by the
Selling Stockholders to represent the Selling Stockholders, state Blue Sky fees
and expenses, and the expense of any special audits incident to or required by
any such registration, but excluding underwriting discounts, selling commissions
and the fees and expenses of Selling Stockholders' own counsel (other than the
counsel selected to represent all Selling Stockholders).
-7-
<PAGE>
2.5 Indemnification and Contribution.
--------------------------------
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the seller of such Registrable Shares, each
underwriter of such Registrable Shares, and each other person, if any, who
controls such seller or underwriter within the meaning of the Securities Act or
the Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, state securities or Blue Sky
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such Registration
Statement, or arise out of or are based upon the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Company will reimburse such seller,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
-------- -------
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each seller of
Registrable Shares, severally and not jointly, will indemnify and hold harmless
the Company, each of its directors and officers and each underwriter (if any)
and each person, if any, who controls the Company or any such underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which the Company, such
directors and officers, underwriter or controlling person may become subject
under the Securities Act, Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration
-8-
<PAGE>
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to such seller
furnished in writing to the Company by or on behalf of such seller specifically
for use in connection with the preparation of such Registration Statement,
prospectus, amendment or supplement; provided, however, that the obligations of
-------- -------
a Stockholder hereunder shall be limited to an amount equal to the net proceeds
to such Stockholder of Registrable Shares sold in connection with such
registration.
(c) Each party entitled to indemnification under this Section
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
-------- -------
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section except to the extent that the Indemnifying Party
is adversely affected by such failure. The Indemnified Party may participate in
such defense at such party's expense; provided, however, that the Indemnifying
-------- -------
Party shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding; provided further that in
-------- -------
no event shall the Indemnifying Party be required to pay the expenses of more
than one law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the expenses of such defense if
the Indemnifying Party does not elect to assume such defense. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 2.5 is
due in accordance with its terms but for any reason is held to be unavailable to
an Indemnified Party in respect to any losses, claims, damages and liabilities
referred to herein, then the Indemnifying Party shall, in lieu of indemnifying
such Indemnified
-9-
<PAGE>
Party, contribute to the amount paid or payable by such Indemnified Party as a
result of such losses, claims, damages or liabilities to which such party may be
subject in such proportion as is appropriate to reflect the relative fault of
the Company on the one hand and the Stockholders on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company and the Stockholders shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of material fact related to information supplied by the Company or the
Stockholders and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Stockholders agree that it would not be just and equitable if
contribution pursuant to this Section 2.5 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph of Section 2.5, (a) in no case shall any one Stockholder be
liable or responsible for any amount in excess of the net proceeds received by
such Stockholder from the offering of Registrable Shares and (b) the Company
shall be liable and responsible for any amount in excess of such proceeds;
provided, however, that no person guilty of fraudulent misrepresentation (within
- -------- -------
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties under this Section, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve such party from any other
obligation it or they may have thereunder or otherwise under this Section. No
party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its prior written consent, which consent
shall not be unreasonably withheld.
2.6 Other Matters with Respect to Underwritten Offerings. In the
----------------------------------------------------
event that Registrable Shares are sold pursuant to a Registration Statement in
an underwritten offering pursuant to Section 2.1, the Company agrees to enter
into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of the Company and
customary covenants and agreements to be performed by the Company, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering.
2.7 Information by Holder. Each holder of Registrable Shares
---------------------
included in any registration shall furnish to the Company such information
regarding such holder and the distribution proposed by such holder as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this
Agreement.
-10-
<PAGE>
3. Right Of First Refusal
----------------------
3.1 Rights of Investor
------------------
(a) Until the first date on which the Investor or any Permitted
Transferee (as defined below) owns less than a majority, by voting power, of the
outstanding shares of capital stock of the Company (assuming the exercise and
conversion of all outstanding options, warrants and convertible securities), the
Company shall not issue or sell (i) any shares of its Common Stock, (ii) any
other voting equity securities of the Company, including, without limitation,
shares of preferred stock, (iii) any option, warrant or other right to subscribe
for, purchase or otherwise acquire any voting equity securities of the Company,
or (iv) any debt securities convertible into voting capital stock of the Company
(collectively, the "Offered Securities"), unless in each such case the Company
shall have first complied with this Section 3.1. The Company shall deliver to
the Investor a written notice of any proposed or intended issuance or sale of
Offered Securities (the "Offer"), which Offer shall (i) identify and describe
the Offered Securities, (ii) describe the price and other terms upon which they
are to be issued or sold, and the number or amount of the Offered Securities to
be issued or sold, (iii) identify the persons or entities (if known) to which or
with which the Offered Securities are to be offered, issued or sold and (iv)
offer to issue and sell to the Investor a number of the Offered Securities (the
"Available Amount") such that, after the issuance and sale of all of the Offered
Securities, including the purchase of the Available Amount by the Investor, the
Investor would own at least a majority, by voting power, of the outstanding
capital stock of the Company (assuming the exercise and conversion of all
outstanding options, warrants and convertible securities). The Company shall
not be required to offer any Offered Securities to the Investor hereunder if,
after the issuance and sale thereof, the Investor (or the Permitted Transferee)
would continue to own at least a majority, by voting power, of the outstanding
capital stock of the Company (assuming the exercise and conversion of all
outstanding options, warrants and convertible securities).
(b) To accept an Offer, in whole or in part, the Investor must
deliver a written notice to the Company within 20 days after its receipt of the
Offer, setting forth the portion of the Available Amount that the Investor
elects to purchase (the "Notice of Acceptance").
(c) The Company shall have 180 days from the expiration of the
period set forth in Section 3.1(b) above to issue or sell all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given by
the Investor, upon terms and conditions which are not more favorable, in the
aggregate, to the acquiring person or persons or less favorable to the Company
than those set forth in the Offer. If the consideration to be received by the
Company from the sale of Offered Securities consists of anything other than
cash, the Board of Directors of
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<PAGE>
the Company shall in good faith determine the cash equivalent of such non-cash
consideration and the Investor may pay an equivalent portion of its purchase
price for the Offered Securities in cash.
(d) The purchase by the Investor of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company
and the Investor of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Investor.
(e) The rights of the Investor under this Section 3 shall not
apply to the grant of options to officers, directors, consultants and employees
of the Company or any subsidiary pursuant to any plan, agreement or arrangement
approved by a vote of not less than a majority of the members of the Board of
Directors of the Company, provided, however, that if the exercise of any such
--------
options results in the reduction of the Investor's, or Permitted Transferee's,
ownership to less than a majority, by voting power, of the outstanding capital
stock of the Company, the Company shall so notify the Investor (or Permitted
Transferee), and the Investor or Permitted Transferee shall have the right,
within 30 days after such notice, to purchase from the Company, at a price equal
to the then Fair Market Value (as defined below) thereof, such number of shares
of Common Stock as would increase its ownership to a majority, by voting power,
of the outstanding capital stock of the Company. "Fair Market Value" shall mean
the average closing price of the Common Stock, on the NASDAQ National Market (or
other principal securities exchange on which the Common Stock is traded), during
the 10-day period ending on the day prior to the date of purchase.
3.2 Termination. This Section 3 shall terminate upon the earlier of
-----------
(i) the sale of all or substantially all of the assets or business of the
Company, by merger, sale of assets or otherwise, and (ii) the first date on
which the Investor (or Permitted Transferee) owns less than a majority, by
voting power, of the outstanding capital stock of the Company for 30 consecutive
days.
3.3 Permitted Transferee. For purposes hereof, a "Permitted
--------------------
Transferee" shall mean any person or entity that acquires directly from the
Investor shares of Common Stock representing at least a majority of the
outstanding shares of Common Stock of the Company and to which the Investor
assigns, in writing, its rights under this Section 3. Upon such assignment, the
Permitted Transferee shall be considered the "Investor" for purposes of Section
3 of this Agreement.
4. Transfers of Rights. The rights and obligations of the Investor under
-------------------
Section 2 may be assigned by to any person or entity that requires at least
$2,500,000 shares of Common Stock (as adjusted in stock splits and similar
events) from the Investor. The rights and obligations of the Investor under
Section 3 may be assigned only to a Permitted Transferee, and, upon such
assignment, the rights and obligations
-12-
<PAGE>
of the Investor under Section 3 shall terminate. In the event of any such
transfer, the transferee must provide written notice of such assignment to the
Company and agree in writing to be bound by the applicable provisions of this
Agreement.
5. General.
-------
(a) Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(b) Specific Performance. In addition to any and all other remedies
--------------------
that may be available at law in the event of any breach of this Agreement, each
Investor shall be entitled to specific performance of the agreements and
obligations of the Company hereunder and to such other injunctive or other
equitable relief as may be granted by a court of competent jurisdiction.
(c) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the Commonwealth of Massachusetts
(without reference to the conflicts of law provisions thereof).
(d) Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at Engage Technologies, Inc., 100 Brickstone Square,
Andover, Massachusetts 01810, Attention: President, or at such other address or
addresses as may have been furnished in writing by the Company to the Investor;
or
If to the Investor, at CMGI, Inc., 100 Brickstone Square, Andover,
Massachusetts 01810, or at such other address or addresses as may have been
furnished to the Company in writing by such Investor.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
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<PAGE>
(e) Complete Agreement. This Agreement constitutes the entire
------------------
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter.
(f) Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or terminated and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the Investor.
(g) Pronouns. Whenever the context may require, any pronouns used in
--------
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
(h) Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which together shall constitute one and the same document.
This Agreement may be executed by facsimile signatures.
(i) Section Headings. The section headings are for the convenience
----------------
of the parties and in no way alter, modify, amend, limit or restrict the
contractual obligations of the parties.
(j) Effective Date. This Agreement shall become effective upon the
--------------
closing of the Company's initial public offering of Common Stock pursuant to an
effective registration statement and shall terminate if such offering does not
close prior to December 31, 1999.
-14-
<PAGE>
Executed as of the date first written above.
COMPANY:
ENGAGE TECHNOLOGIES, INC.
By: /s/ Stephen A. Royal
------------------------------
Name: /s/ Stephen A. Royal
----------------------------
Title: CFO
----------------------------
INVESTOR:
CMGI, INC.
By: /s/ Andrew J. Hajducky, III
------------------------------
Name:
----------------------------
Title:
----------------------------
-15-
<PAGE>
Exhibit 10.19
-------------
FACILITIES AND ADMINISTRATIVE SUPPORT AGREEMENT
-----------------------------------------------
THIS ADMINISTRATIVE SUPPORT AGREEMENT dated as of July 23, 1999 is
made between CMGI, Inc. ("CMGI"), a Delaware corporation, and Engage
Technologies, Inc. ("Engage"), a Delaware corporation.
Preliminary Statement
---------------------
Engage desires to obtain administrative and other services from CMGI and
CMGI is willing to furnish or make such services available to Engage.
By this Agreement, CMGI and Engage desire to set forth the basis for CMGI's
provision of services of the type referred to herein.
Agreements
----------
IT IS MUTUALLY agreed by CMGI and Engage (collectively the "Parties") as
follows:
1. Provision of Services. Beginning on the date of this Agreement, CMGI will
---------------------
provide or otherwise make available to Engage those CMGI supplied services and
third-party supplied services paid for by CMGI (collectively the "Services") on
the basis set forth on Schedule A and Schedule B attached hereto and consistent
---------- ----------
with the parties' practices as of the date hereof. It is understood that the
parties intend to enter into negotiations as soon as practicable regarding a
sublease for premises located at 100 Brickstone Square, Andover, Massachusetts
01810 and that upon execution by both parties of a mutually agreed upon
sublease, such sublease shall supercede that portion of this Agreement relating
to rent and related services as set forth on Schedule A.
----------
2. Billing and Payment. CMGI shall submit monthly invoices to Engage for the
-------------------
Services, and Engage shall make payment within 30 days after its receipt of such
invoices. Each invoice shall be itemized by the service provided.
3. Term and Termination. The initial term of this Agreement shall begin on the
--------------------
date of this Agreement and continue for a period of one year. This Agreement
shall automatically renew at the end of the initial term for successive one-year
periods unless terminated or modified in accordance with the following
provisions:
(a) Entire Agreement. Either party may elect not to renew this Agreement,
----------------
except for the services set forth on Schedule A, upon 180 days' written notice
----------
to the other party prior to the expiration of the initial term or any renewal
period.
<PAGE>
(b) Individual Services. Either party may terminate an individual service
-------------------
or services, except for the services set forth on Schedule A, upon 90 days'
----------
written notice to the other party.
(c) Rent and Related Services. Either party may terminate those services
-------------------------
set forth on Schedule A upon twelve months' written notice to the other party
----------
prior to the expiration of the end of the initial term or any renewal period.
(d) Material Breach. Either party may terminate this Agreement in the
---------------
event of a material breach of this Agreement by the other party that is not
cured within thirty days of written notice thereof from the other party.
(e) Automatic Termination. This Agreement, other than the services set
---------------------
forth on Schedule A, shall automatically terminate upon the date on which the
----------
ownership by CMGI of the outstanding voting capital stock of Engage shall first
be less than fifty percent (50%) of the then outstanding voting capital stock of
Engage.
4. Limitation on Liability. Neither party shall be liable to the other for
-----------------------
any amount in excess of the amount invoiced to Engage for the twelve-month
period preceding any event giving rise to liability. Neither party shall be
liable to the other for consequential damages except for those arising out of
intentional misconduct or gross negligence.
5. Force Majeure. CMGI shall be excused for failure to provide the Services
-------------
hereunder to the extent that such failure is directly or indirectly caused by an
occurrence commonly known as force majeure, including, without limitation,
-------------
delays arising out of acts of God, acts or orders of a government, agency or
instrumentality thereof (whether of fact or law), acts of public enemy, riots,
embargoes, strikes or other concerted acts of workers (whether of CMGI or other
persons), casualties or accidents, delivery of materials, transportation or
shortage of cars, trucks, fuel, power, labor or materials, or any other causes,
circumstances or contingencies within or without the United States of America,
which are beyond the control of CMGI; provided, however, that CMGI shall use its
-------- -------
best efforts to resume provision of the Services as soon as possible.
Notwithstanding any events operating to excuse the performance by CMGI, this
Agreement shall continue in full force for the remainder of its term and any
renewals thereof.
6. Notices. All notices, billings, requests, demands, approvals, consents and
-------
other communications which are required or may be given under this Agreement
shall be in writing and will be deemed to have been duly given if delivered
personally or sent by registered or certified mail, return receipt requested,
postage prepaid to the parties at their respective addresses set forth below:
<PAGE>
If to Engage: If to CMGI:
Engage Technologies, Inc. CMGI, Inc.
100 Brickstone Square 100 Brickstone Square
Andover, MA 01810 Andover, MA 01810
Attn: Chief Financial Officer Attn: Chief Financial Officer
7. No Assignment. This Agreement shall not be assignable except with the
-------------
prior written consent of the other party to this Agreement.
8. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance under the laws of the Commonwealth of Massachusetts applicable to
contracts made and to be performed therein.
9. Amendments. This Agreement and all attachments hereto constitute the
----------
entire agreement between the parties and supercede all prior negotiations,
undertakings, representations and agreements, if any, of the parties hereto.
This Agreement may not be amended orally but may be amended only by a written
instrument signed by all of the parties hereto.
10. Waivers. The failure of either party to require strict performance by the
-------
other party of any provision in this Agreement will not waive or diminish that
party's right to demand strict performance thereafter of that or any other
provision hereof.
11. Paragraph Titles. The paragraph titles used in this Agreement are for
----------------
convenience of reference only and will not be considered in the interpretation
or construction of any of the provisions thereof.
[Remainder of page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CMGI, INC. ENGAGE TECHNOLOGIES, INC.
By: /s/ Andrew J. Hajducky, III By: /s/ Stephen A. Royal
____________________________ _____________________________
Name: Name: /s/ Stephen A. Royal
_________________________ __________________________
Title: Title: CFO
__________________________ ___________________________
<PAGE>
Schedule A
----------
Rent and Related Services
-------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Services Provided by CMGI to Engage Allocation of Cost to Engage
----------------------------------- ----------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C>
1. Brickstone Square Rent. Provision of space Allocated based on headcount for Engage
----------------------
located at the Andover Premises (approximately divided by headcount for the CMGI Companies
28,000 square feet). located at the Andover Premises.
- -----------------------------------------------------------------------------------------------------------
2. Facilities. Salary, fringe benefits, payroll Allocated based on: (a) percentage of time that
----------
taxes for the entire facility department. the facilities department devotes to the Andover
Premises, and (b) headcount for Engage divided
by headcount for the CMGI Companies located
at the Andover Premises.
- -----------------------------------------------------------------------------------------------------------
3. Mass Electric. Utilities provided by Allocated based on headcount for Engage
-------------
Massachusetts Electric. divided by headcount for the CMGI Companies
located at the Andover Premises.
- -----------------------------------------------------------------------------------------------------------
4. Office Cleaning/ Plant Maintenance. Allocated based on headcount for Engage
----------------------------------
divided by headcount for the CMGI Companies
located at the Andover Premises.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Defined Terms:
- -------------
Andover Premises - those premises located at 100 Brickstone Square, Andover,
MA 01810 leased by CMGI.
CMGI Companies - those companies which are controlled by CMGI or in which
CMGI holds an equity interest.
headcount - the number of employees employed by a particular company
on the last day of a given month.
<PAGE>
Schedule B
----------
Provision of Other Services
---------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Services Provided by CMGI to Engage Allocation of Cost to Engage
----------------------------------- ----------------------------
- -------------------------------------------------------------------------------------------------------
<S> <C>
1. CMG Europe. All overhead costs for CMGI's Engage is charged 50% of all costs associated
----------
European office of Marcus Bicknell, his assistant with the European office.
and acountant.
- -------------------------------------------------------------------------------------------------------
2. Internet Marketing. Salary, fringe benefits Engage is one of six CMGI Internet companies
------------------
and taxes for Bill White and his assistant (both and absorbs 1/6 of total costs.
at CMGI).
- -------------------------------------------------------------------------------------------------------
3. Internet Development. Salary, fringe benefits Engage is one of six CMGI Internet companies
--------------------
and taxes for Dave Andonian and his assistant and absorbs 1/6 of total costs.
(both at CMGI).
- -------------------------------------------------------------------------------------------------------
4. Medical. Monthly medical insurance Allocated based on the number of employees at
-------
premium. Engage enrolled in the medical insurance plan
divided by the number of employees at the
CMGI Companies enrolled in the medical
insurance plan, offset by amounts withheld from
employees' pay.
- -------------------------------------------------------------------------------------------------------
5. Dental. Monthly dental insurance premium. Allocated based on the number of employees at
------
Engage enrolled in the dental insurance plan
divided by the number of employees at the
CMGI Companies enrolled in the dental
insurance plan, offset by amounts withheld
from employees' pay.
- -------------------------------------------------------------------------------------------------------
6. Life and Long-term Disability. Monthly Allocated based on headcount for Engage
-----------------------------
insurance premium. divided by headcount for the CMGI Companies
located at the Andover Premises. (All
employees of the CMGI Companies receive life
and long-term disability insurance.)
- -------------------------------------------------------------------------------------------------------
7. Federal Express/ United Parcel Service. CMGI's Accounts Payable department codes
--------------------------------------
each individual charge based on the identity of
the sender.
- -------------------------------------------------------------------------------------------------------
8. Pepsi/ Poland Springs. Allocated based on headcount for Engage
---------------------
divided by headcount for the CMGI Companies
located at the Andover Premises.
- -------------------------------------------------------------------------------------------------------
9. Telephone. Provision of common, modem, Modem, fax and 800 lines are charged to Engage
---------
fax and 800 lines. or the individual employee who is designated to
that particular line. Common inbound and
outbound lines are allocated based on headcount
for Engage divided by headcount for the CMGI
Companies located at the Andover Premises.
- -------------------------------------------------------------------------------------------------------
10. MobilComm/ Pagenet/ Skytel/ Cellular Charged back to the person or department
------------------------------------
One. which is assigned that particular pager or cell
---
phone.
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C>
11. Maxout Fitness. Fitness club membership. Allocated based on the number of employees at
--------------
Engage who belong to the fitness club. The cost
is offset by the fitness club dues that are
withheld from the paycheck of each employee
who is a member of the fitness club.
- -------------------------------------------------------------------------------------------------------
12. Legal Services. To the extent that legal fees and expenses of
--------------
Engage are paid for by CMGI, such fees and
expenses will be allocated based upon the actual
use of the legal services.
- -------------------------------------------------------------------------------------------------------
13. KPMG. Preparation of yearly income tax To the extent that legal fees and expenses of
----
returns. Engage are paid for by CMGI, such fees and
expenses will be allocated based upon the actual
use of KPMG services.
- -------------------------------------------------------------------------------------------------------
14. Funding Flex Spending. Charged for amounts reimbursed to an
---------------------
employee through the flexible spending account
on a person by person basis.
- -------------------------------------------------------------------------------------------------------
15. The TPA Fees. Administration of the Allocated based on number of employees at
------------
flexible spending program. Engage enrolled in the program divided by the
number of employees at the CMGI Companies
enrolled in the program.
- -------------------------------------------------------------------------------------------------------
16. 401K and 401K Match Funding. Engage credits the 401K contribution and 401K
---------------------------
matching contribution each month from its
payroll entry to a 401K withholding account.
Upon funding the 401K, CMGI charges back the
funds to Engage. Engage then charges those
funds to the 401K withholdings account. There
is usually a lag time of 15 days to 30 days for
funding the 401K.
- -------------------------------------------------------------------------------------------------------
</TABLE>
Defined Terms:
- -------------
Andover Premises - those premises located at 100 Brickstone Square, Andover,
MA 01810 leased by CMGI.
CMGI Companies - those companies that are controlled by CMGI or in which
CMGI holds an equity interest.
headcount - the number of employees employed by a particular company on
the last day of a given month.
7
<PAGE>
EXHIBIT 10.27
TAX ALLOCATION AGREEMENT
TAX ALLOCATION AGREEMENT (the "Agreement") is made as of July 23, 1999,
by and among CMGI, Inc., a Delaware corporation ("Parent"), and Engage
Technologies, Inc., a Delaware corporation ("Sub").
WHEREAS, prior to the Closing Date (as defined below) Sub was a member of
the Parent Group (as defined below);
WHEREAS, Parent will cause to be sold to the public a portion of the common
stock of Sub in a Public Offering (as defined below);
WHEREAS, the parties desire to provide for the allocation of
responsibilities, liabilities and benefits in respect of Taxes (as defined
below).
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
"Closing Date" means the close of business on the date on which Sub ceases
to be a member of the Parent Group.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Returns" means any consolidated, combined, or unitary Tax
Returns required to be filed by Parent with respect to United States federal,
state, or local Taxes imposed or based on net income, net worth or gross
receipts.
"Parent Group" means an affiliated group (within the meaning of Section
1504(a) of the Code, and any corresponding provisions of state, local, or
foreign tax law) having Parent as its common parent.
"Parent Subsidiary" or "Parent Subsidiaries" mean each corporation of which
Parent owns, directly or indirectly, capital stock representing more than 50% of
the outstanding voting stock. Parent Subsidiary or Parent Subsidiaries shall
not include Sub or any Sub Subsidiary.
"Public Offering" means either the sale to the public by Parent or the
issuance to the public by Sub of common stock of Sub.
<PAGE>
"Returns" means all returns, reports and information statements (including
all exhibits and schedules thereto) required to be filed with a taxing authority
with respect to any Taxes.
"Sub Subsidiary" or "Sub Subsidiaries" means each corporation of which Sub
owns on the Closing Date or thereafter, directly or indirectly, capital stock
representing more than 50% of the outstanding voting stock.
"Sub Taxes" means United States federal, state and local Taxes imposed or
based on net income, net worth or gross receipts (including interest and
penalties relating thereto) attributable to the operations of Sub and Sub
Subsidiaries.
"Taxes" means all federal, state, local and foreign income, profits,
franchise, sales, use, occupation, property, severance, excise, payroll,
withholding, and any other taxes (including interest and penalties thereon).
ARTICLE II
REPRESENTATIONS
Section 2.1 Parent represents and warrants to the Sub that all
Consolidated Returns for any taxable year or Tax period ending on or before the
Closing Date have been or shall be timely filed in accordance with all
applicable laws, and all Taxes shown as due on such Consolidated Returns have
been or shall be paid, and any proposed deficiency asserted by any taxing
authority with respect thereto has been paid or properly protested.
Section 2.2 Sub represents and warrants to Parent that all Tax Returns
for any taxable year or Tax period ending on or before the Closing Date with
respect to Sub and Sub Subsidiaries, excluding any Consolidated Returns, have
been or shall be timely filed in accordance with all applicable laws, and all
Taxes shown as due on such Returns have been or shall be paid, and any proposed
deficiency asserted by any taxing authority with respect thereto has been paid
or properly protested.
ARTICLE III
TAX MATTERS
Section 3.1 Parent shall include (to the extent required by law) in
Consolidated Returns the taxable income or loss and all other Tax items of Sub
for the taxable years or Tax periods ending on or before the Closing Date. For
the period commencing on August 1 immediately preceding the Closing Date and
ending on the Closing Date the following arrangement shall apply to ensure that
<PAGE>
the correct amount of Sub Taxes due in respect of the Consolidated Returns is
billed to and paid by Sub:
(a) An estimate of the amount of such Sub Taxes due, which estimate shall
be determined in good faith and shall reflect amounts, if any, previously paid
by Sub with respect to Sub Taxes through the Closing Date, shall be billed to
Sub and paid to Parent prior to the Closing Date.
(b) Upon filing of the Consolidated Returns for the taxable year which
shall include the period commencing on August 1 and ending on the Closing Date,
either
(i) the unpaid amount, if any, of Sub Taxes due in respect of such
Consolidated Returns shall be billed to Sub, and Sub or its designee shall pay
such amount to Parent within 30 days after receiving written notice from Parent
of such amount, or,
(ii) if the amount of such Sub Taxes paid to Parent, if any, exceeds
the amount of the Sub Taxes due in respect of such Consolidated Returns, Parent
or its designee shall pay such excess to Sub or its designee within 30 days
after filing the Consolidated Returns for the taxable year which includes the
Closing Date.
(c) Sub Taxes due in respect of Consolidated Returns shall be determined
in accordance with (i) the method set forth in Section 1552(a)(1) of the Code
and U.S. Federal Income Tax Regulation Sections 1.1552-1(a)(1) and 1.1552-1(b),
(ii) none of the three methods of allocation under Section 1.1502-33(d)
(sometimes referred to as the three "Complementary Methods"), and (iii) the
practices of the parties for Tax periods ended prior to the Closing Date.
(d) Except as provided in Section 3.7 and the last sentence of this
subsection (d), no party shall have any obligation to make any payments to
another party for the use of such other party's Tax attributes pursuant to U.S.
Federal Income Tax Regulation Section 1.1502-33(d), or otherwise.
Notwithstanding the preceding sentence, Parent shall be required to reimburse
Sub for any payments required to be made in respect of periods ending on or
before the Closing Date by Sub to Sumitomo pursuant to Section 3.4.1 of the
License Agreement between Sub and Sumitomo dated as of July 31, 1998.
Section 3.2 Subject to the provisions of Section 3.1, Parent shall be
liable for any and all Sub Taxes in respect of all Consolidated Returns due or
payable by Parent for any taxable year or Tax period ending on or before the
Closing Date.
Section 3.3 Subject to the provisions of Section 3.1, Sub and Sub
Subsidiaries shall be liable for (i) any and all Sub Taxes in respect of
Consolidated Returns due or payable to Parent by Sub under Section 3.1, and (ii)
any and all Taxes (other than Sub Taxes in respect of Consolidated Returns)
<PAGE>
due or payable by Sub or Sub Subsidiaries for any taxable year or Tax period
(whether ending before, on or after the Closing Date).
Section 3.4 Any Taxes (other than ad valorem, personal property and real
property Taxes) for any Tax period beginning before the Closing Date and ending
after the Closing Date shall be apportioned between Sub as a member of the
Parent Group and Sub as a separate company which is not a member of the Parent
Group, respectively, based on the actual operations of Sub and/or Sub
Subsidiaries, as the case may be, during the portion of such period ending on
the Closing Date, and the portion of such period beginning on the day following
the Closing Date, and each portion of such period shall be deemed to be a Tax
period subject to the provisions of Sections 3.2 and 3.3. In the case of ad
valorem, personal property and real property Taxes such apportionment shall be
on a per diem basis.
Section 3.5 Sub shall file or cause to be filed all required state,
local and foreign non-Consolidated Returns with respect to Sub and Sub
Subsidiaries for the Tax period beginning before the Closing Date and ending
after the Closing Date, and any such unfiled Tax Returns for periods ending on
or before the Closing Date, and Sub shall pay or cause its Subsidiaries to pay
all Taxes shown as due on any such Tax Returns.
Section 3.6 Any refunds or credits of Sub Taxes in respect of
Consolidated Returns for any taxable year or Tax period ending on or before the
Closing Date shall be for the account of Parent and Parent Subsidiaries. Any
refunds or credits of Taxes (other than Sub Taxes in respect of Consolidated
Returns) paid by Sub or Sub Subsidiaries for any taxable year or Tax period
(whether ending before, on or after the Closing Date) shall be for the account
of Sub and its Subsidiaries.
Section 3.7
(a) Parent shall promptly pay to Sub the amount of any incremental Tax
savings generated by (i) a deduction, credit or exclusion that (A) is actually
realized by the Parent Group with respect to Taxes for a taxable period ending
on or before the Closing Date and (B) relates to or is based on an item that is
the basis for a similar deduction, credit or exclusion taken on a Return with
respect to Taxes of Sub or Sub Subsidiaries for a taxable period ending after
the Closing Date that is denied, disallowed, forfeited, or accelerated prior to
the Closing Date, or (ii) a reduction in the amount of any gross income or
revenue that (A) is actually realized by the Parent Group with respect to Taxes
for a taxable period ending on or before the Closing Date and (B) relates to, or
is based on, a similar item of gross income or revenue that Sub or Sub
Subsidiaries are required to include on a Return or otherwise required to
include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise with respect to Taxes for a taxable
period ending after the Closing Date.
<PAGE>
(b) Sub shall promptly pay to Parent the amount of any incremental Tax
savings generated by (i) a deduction, credit or exclusion that (A) is actually
realized by the Sub or Sub Subsidiaries with respect to Taxes for a taxable
period ending after the Closing Date and (B) relates to or is based on an item
that is the basis for a similar deduction, credit or exclusion taken on a
Consolidated Return with respect to Taxes for a taxable period ending on or
before the Closing Date that is denied, disallowed, forfeited, or deferred until
after the Closing Date, or (ii) a reduction in the amount of any gross income or
revenue that (A) is actually realized by Sub or Sub Subsidiaries with respect to
Taxes for a taxable period ending after the Closing Date and (B) relates to, or
is based on, a similar item of gross income or revenue that the Parent Group is
required to include on a Consolidated Return or otherwise required to include in
its computation of taxable income as a result of an audit, other administrative
proceeding or otherwise.
Section 3.8 Parent or Parent designee shall exercise, at Parent's
expense, complete control of the audit, appeal, litigation and/or settlement of
any issues raised in any official inquiry, examination or proceeding that could
result in an official determination with respect to Taxes due or payable by the
Parent Group, Parent Subsidiaries, Sub or Sub Subsidiaries for any taxable year
or Tax period (including a period deemed to be a Tax period under Section 3.4)
ending on or before the Closing Date, except in respect of Taxes for which Sub
or Sub Subsidiaries are responsible in connection with non-Consolidated Returns
required to be filed by Sub or Sub Subsidiaries, in which case Sub shall
exercise, at Sub's expense, complete control of the audit, appeal, litigation
and/or settlement. The parties shall cooperate in any such inquiry, examination
or proceeding.
Section 3.9 Sub irrevocably designates Parent (and shall cause each Sub
Subsidiary to irrevocably designate Parent) as its agent and attorney in fact
(and shall execute any necessary powers of attorney) for the purpose of taking
any and all actions necessary or incidental to the filing of Consolidated Tax
Returns. Parent and Sub will each furnish to the other any and all information
which the other may reasonably request in order to carry out the provisions of
this Agreement to determine the amount of any Tax liability.
<PAGE>
ARTICLE IV
INDEMNIFICATION
Section 4.1
(a) Except to the extent of any due and unpaid obligations of Sub with
respect to its payment obligations under Article III, Parent shall indemnify and
hold harmless Sub against the amount of any and all liability, loss, expense or
damage Sub may suffer or incur as a result of any or all claims, demands, costs
or expenses (including, without limitation, attorneys' and accountants' fees),
interest, penalties, or judgments made against it arising from or incurred in
relation to all Taxes in respect of all Consolidated Returns, and shall make any
payment, remove any lien, and take any action reasonably necessary to prevent
Sub from incurring such liabilities, losses, expenses, or damages.
(b) Except to the extent of any due and unpaid obligations of Parent with
respect to its payment obligations under Article III, Sub shall indemnify and
hold harmless Parent and each Parent Subsidiary against the amount of any and
all liability, loss, expense or damage any such company may suffer or incur as a
result of any or all claims, demands, costs or expenses (including, without
limitation, attorneys' and accountants' fees), interest, penalties, or judgments
made against it arising from or incurred in relation to (i) any failure of Sub
to pay any amount to Parent with respect to Sub's obligations under Article III,
and (ii) any and all Taxes (other than Taxes in respect of Consolidated Returns)
due or payable by Sub or Sub Subsidiaries for any taxable year or Tax period
beginning before, on or after the Closing Date.
Section 4.2 Payments under this Agreement shall be due no later than
thirty (30) days after the date written demand therefor, with a reasonably
detailed explanation for the basis of the claim, is actually received by Parent
or Sub.
Section 4.3 In the event that any party fails to pay any amount owed
pursuant to this Agreement within ten (10) days after the date when such amount
is due, interest shall accrue on the unpaid amount at the rate applicable to
underpayments of the Tax with respect to which such amount relates from the due
date until such amounts are fully paid.
<PAGE>
ARTICLE V
MISCELLANEOUS
Section 5.1 For all purposes of this Agreement, Sub shall be the agent
for each Sub Subsidiary, with full power to give any consent and/or exercise any
right provided for herein on behalf of such Sub Subsidiary.
Section 5.2 Any dispute concerning the calculation or basis of
determination of any payment provided for hereunder shall be resolved by a law
firm or "big five" accounting firm, selected jointly by Parent and Sub, whose
judgment shall be conclusive and binding upon the parties in the absence of
manifest error. The fees and other expenses of such law or accounting firm
shall be paid 50% by Parent and 50% by Sub.
Section 5.3 This Agreement shall be binding upon the parties hereto and
shall inure to the benefit of and be binding upon any of their successors or
assigns; provided, however, that none of Parent, Sub, or any of the Sub
Subsidiaries may assign or delegate any of its obligations hereunder without the
consent of Sub (in the case of a proposed assignment or delegation by Parent) or
Parent (in the case of a proposed assignment or delegation by Sub or any of the
Sub Subsidiaries).
Section 5.4 This Agreement embodies the entire understanding between the
parties relating to its subject matter and supersedes and terminates all prior
agreements and understandings among the parties with respect to such subject
matter. Any and all prior correspondence, conversations and memoranda with
respect to such subject matter are merged herein and shall be without effect
hereon. No promises, covenants or representations of any kind, other than those
expressly stated herein, have been made to induce any party to enter into this
Agreement. This Agreement shall not be modified or terminated except by a
writing duly signed by each of the parties (or, in the case of a Sub Subsidiary,
by Sub acting as its agent on its behalf), and no waiver of any provisions of
this Agreement shall be effective unless in a writing duly signed by the party
sought to be bound (or, in the case of a Sub Subsidiary, by Sub acting as its
agent on its behalf).
Section 5.5 Any payment, notice or communication required or permitted
to be given under this Agreement shall be in writing (including telegraphic,
telecopy, telex or cable communication) and mailed, telegraphed, telecopied,
telexed, cabled or delivered:
<PAGE>
If to Parent, to:
100 Brickstone Square
Andover, Massachusetts 01810
Attention: Mr. Don Combs, Vice President for Finance
If to Sub on its own behalf, or as agent for the Sub Subsidiaries, to:
100 Brickstone Square
Andover, Massachusetts 01810
Attention: Mr. Stephen A. Royal, Chief Financial Officer
or to such other person or address as a party shall furnish in writing to all
the other parties. All such notices and communications shall be effective
(i) when received, if mailed or delivered, or (ii) when delivered to the
telegraph company, transmitted by telecopier, confirmed by telex answerback or
delivered to the cable company, respectively.
Section 5.6 This Agreement may be executed in two 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.
Section 5.7 This Agreement shall be governed by the laws applicable to
contracts entered into and to be fully performed within the State of Delaware by
residents thereof.
Section 5.8. Each of Parent, Sub, and any of the Sub Subsidiaries agree
that, in the event of any legal suit or proceeding arising in connection with
this Agreement and the obligations of the parties hereunder, it shall submit to
the jurisdiction of the United States District Court of Delaware and further
agrees to venue in such court.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its respective duly authorized officer as of the date first set
forth above.
CMGI, INC.
By: /s/ Andrew J. Hajducky III
-------------------------------------------
Title:
----------------------------------------
ENGAGE TECHNOLOGIES, INC.
By: /s/ Stephen A. Royal
-------------------------------------------
Title: CFO
----------------------------------------
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
Exhibit 10.28
STRATEGIC DEVELOPMENT & LICENSE AGREEMENT
This Strategic Development & License Agreement (the "Agreement") is entered
into and effective as of July 28, 1999 (the "Effective Date") by and between
Microsoft Corporation, a Washington corporation located at One Microsoft Way,
Redmond, WA 98052 ("Microsoft") and Engage Technologies, Inc., a Delaware
corporation located at 100 Brickstone Square, Andover, MA 01810 ("Company").
Introduction
Pursuant to the terms of this Agreement, Company intends to license to Microsoft
the current and a certain upcoming commercial release of Company's AdManager
software and to develop for and license to Microsoft certain proprietary
features and functionality for such software.
Agreement
1. Definitions
1.1 "Affiliate" means, with respect to any legally recognizable entity, any
other such entity directly or indirectly Controlling, Controlled by, or
under common Control with such entity. "Control," as used in this
definition, means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a legally
recognizable entity, whether through ownership of voting shares, by
contract, or otherwise. Where such entity is a partnership, limited
liability company, corporation, or similar entity and has partners,
members, or shareholders with equal ownership interests or equal control
interests, by contract or otherwise, then each such partner, member, or
shareholder will be deemed to possess, directly or indirectly, the power to
direct or cause the direction of the management and policies of that
entity.
1.2 "Company AdManager Product" means the following two (2) versions of
Company's commercially available AdManager software: (a) Version 4.0.x;
and (b) the Subsequent Release Deliverable (or the substitute version of
such Subsequent Release which shall be a Deliverable under the
circumstances set forth in Section 10.4(c)). The "Company AdManager
Product" also includes Error Corrections and any software provided to
Microsoft by Company as part of support and maintenance services. Company
AdManager Product does not include any localized version of the AdManager
software.
1.3 "Company Licensed Materials" means the Deliverables, Error Corrections, and
all other software technology, know-how and other materials that Company
provides to Microsoft in the course of performing Services under this
Agreement.
1.4 "Confidential Information" means: (i) the Source Code for the Deliverables;
(ii) any business or technical information including, but not limited to,
information relating to either party's products, product plans, designs,
costs, prices and names, finances, marketing plans, business opportunities,
personnel, research development or know-how; and (iii) the terms and
conditions of this Agreement (but excluding the fact and nature of this
Agreement). "Confidential Information" shall not include information that:
(i) is or becomes generally known or available by publication, commercial
use or otherwise through no fault of the receiving party; (ii) is known and
has been reduced to tangible form by the receiving party at the time of
disclosure and is not subject to restriction; (iii) is independently
developed or learned by the receiving party through its own independent
research and without reference to or use of the other party's Confidential
Information; (iv) is lawfully obtained from a third party that has the
right to make such disclosure; or (v) is made generally available by the
disclosing party without restriction on disclosure. The party invoking
these exclusions has the burden of proving the applicability to the
particular facts.
1
Microsoft and Engage Confidential & Proprietary
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
1.5 "Core Technologies", each a "Core Technology" means the following
components of the Company AdManager Product:
. [**] used in building and analyzing content [**] to fulfill contractual
assignments.
. [**] criteria to determine the proper content to deliver.
. [**] reporting of content activity within the system's reach.
. [**] mechanism that maintains [**] in a distributed environment.
. [**] used for [**] within the system.
1.6 "Deliverables" means each version or component of the Company AdManager
Product (including without limitation new features and functionality
designed for use with Version 4.0.x as the same are described in the
Specifications) that Company is obligated to deliver to Microsoft under
this Agreement. The Deliverables include the Documentation and the Source
Code and Object Code versions of all of the foregoing versions and
components of the Company AdManager Product.
1.7 "Derivative Technology" means: (i) for copyrightable or copyrighted
material, any translation (including translation into other computer
languages), portation, modification, correction, addition, extension,
upgrade, improvement, compilation, abridgment or other form in which an
existing work may be recast, transformed or adapted; (ii) for patentable or
patented material, any improvement thereon; and (iii) for material which is
protected by trade secret, any new material derived from such existing
material which extends, upgrades, improves or adapts such existing
material, including new material which may be protected by copyright,
patent and/or trade secret.
1.8 "Distribute" means to sublicense, rent, lease, sell, transfer, transmit and
otherwise distribute, directly and indirectly and including through further
sublicenses.
1.9 "Documentation" means the user guide provided by Company as part of the
Deliverables.
1.10 "Error(s)" means defect(s) in a Deliverable which prevent it from
performing in accordance with the Specifications.
1.11 "Error Corrections" means modifications provided by the Company to correct
Errors.
1.12 "Intellectual Property" means all intellectual property rights throughout
the world, whether existing under statute or at common law or equity,
including but not limited to (i) copyrights, trade secrets, trademarks,
patents, inventions, designs, logos and trade dress, mask works and any
other intellectual property rights as defined by Article 2 of the World
Intellectual Property Organization Convention of July 1967; and (ii) any
application or right to apply for or renew any of the rights referred to in
(i).
1.13 "Microsoft Ad Server Software" means (i) [**] the Company AdManager Product
that is delivered by Company as a Deliverable under this Agreement, or (ii)
[**] pursuant to this Agreement [**] the Company AdManager Product [**] for
use with Version 4.0.x as the same are described in the Specifications)
[**] of the Company Ad Manager Product pursuant to the Copyright Act of
1976 [**].
1.14 "Microsoft Federated Partner Site" means a third party web site or other
online site or service that is either branded or co-branded under a valid
existing agreement by Microsoft (where "co-branding" is intended to include
without limitation licensed use of a compound mark such as "MSNBC"), or is
licensed under a valid existing agreement by Microsoft or a Microsoft
Affiliate [**].
1.15 "Object Code" means machine-executable computer software code in binary
form.
1.16 "Schedule" means the development and implementation schedule for
completion of the development Services referred to in Section 2.1, as set
forth in Exhibit A.
1.17 "Services" means Company's delivery of the development work product
described in Exhibit A, onsite consulting services, and support and
maintenance services, all as provided to Microsoft pursuant to this
Agreement.
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
1.18 "Source Code" means computer software code in human-readable, high-level
language form which, when compiled or assembled, becomes the Object Code of
a software program. Source Code also includes all logic diagrams, flow
charts, and developer comments, in their most recent versions which are
available from within the Company at the date of the applicable delivery,
concerning all of the Deliverables and software required to be delivered
under this Agreement.
1.19 "Specifications" means the specifications for certain of the Deliverables,
which specifications are attached to this Agreement as Exhibit A.
1.20 "Spin-Off Product" means a software product that does not qualify as
Microsoft Ad Server Software but that includes a substantial portion of any
of the Core Technologies.
1.21 "Subsequent Release" means the first new commercial release of the Company
AdManager Product that occurs on or after Company's delivery to Microsoft
of all Phase II Deliverables
1.22 "The Microsoft Network" (or "MSN") means The Microsoft Network online
service as operated on Microsoft proprietary and/or Internet platforms,
including without limitation www.msn.com and related web sites, whether or
-----------
not located under different domain names (e.g., hotmail.com), and further
including without limitation MSN-branded sites that are hosted and/or
managed by third parties and MSN-branded or co-branded web pages that are
part of a third party's site, provided that such third party sites or pages
are branded or co-branded with an MSN brand pursuant to a valid existing
agreement with Microsoft or an Affiliate of Microsoft. The Microsoft
Network further includes all subsequent versions or upgrades of any of the
foregoing which may be available from time to time in any online
environment, provided that such subsequent versions or upgrades continue to
meet the definition set forth above.
1.23 "Use Restriction Period" means the period beginning as of the Effective
Date and lasting until the later of (i) the [**] year anniversary of the
Effective Date and (ii) the [**] year anniversary of the date specified in
Exhibit A for Company's delivery of the Phase II Deliverables.
1.24 "Version 4.0.x" means the most recent U.S. version of the Company AdManager
product that Company has commercially released as of the Effective Date.
3
Microsoft and Engage Confidential & Proprietary
<PAGE>
2. Development and Additional Services
2.1 Phases. Company will perform development in two phases in order to develop
------
and deliver, in accordance with the Specifications, Deliverables comprising
customized features and functionality in Source Code form that are interoperable
with Version 4.0.x. Phase I begins as of the Effective Date and will conclude
upon Microsoft's acceptance of the Phase I Deliverables, as such Deliverables
are defined in Exhibit A. Phase II will begin upon completion of Phase I (or at
any earlier time that Company may elect to begin relevant development) and will
conclude upon Microsoft's acceptance of the Phase II Deliverables, as such
Deliverables are defined in Exhibit A. Company will also deliver the Subsequent
Release to Microsoft following completion of Phase II, as further described in
Exhibit A. Company agrees to deliver the Subsequent Release in Source Code and
Object Code form to Microsoft upon its commercial release, regardless of whether
Microsoft is receiving support and maintenance services (as described in Section
2.6) from Company as of the date of such release. Company, at its sole
discretion, may elect to include all, some or none of the Deliverables described
by the Specifications in the Subsequent Release and/or any other release of the
Company AdManager Product.
2.2. Services. Company will perform the development Services referred to above
--------
in accordance with the Schedule and pursuant to the Specifications and this
Agreement. Subject to Section 2.5, Company may retain independent contractors
with relevant knowledge and experience to perform such Services, provided that
Company will consider in good faith any Microsoft request that Company cease
using any independent contractor(s) who are not adequately performing the
applicable Services.
2.3 Acceptance.
----------
(a) Version 4.0.x, the Subsequent Release and all software required to be
delivered as part of Company's support and maintenance services are
deemed accepted upon delivery.
(b) For Deliverables as described on Exhibit A that are comprised of software
Source Code, Company shall deliver and Microsoft shall evaluate proposed
final versions of each such Deliverable and Microsoft shall submit a
written acceptance or rejection to Company within five (5) weeks after
Microsoft's receipt thereof. Acceptance shall be in writing and shall not
be withheld if a Deliverable performs substantially in accordance with
the Specifications. If Microsoft identifies Errors in any Deliverable
before acceptance, then Company shall correct such Errors within ten (10)
business days following receipt of notice of such Errors from Microsoft
and Microsoft shall thereafter submit a written acceptance or rejection
to Company concerning such Error Correction within ten (10) business days
of delivery of a requested Error Correction.
(c) For Deliverables that are comprised of Documentation or reports, if any,
Microsoft shall evaluate a proposed final version of such Deliverable
within two (2) weeks of its receipt of any such Deliverable. In the
event that it requires corrections, Microsoft shall specify the
corrections needed and Company shall deliver an amended version of such
Deliverable within five (5) days following receipt of notice of such need
for corrections from Microsoft.__Acceptance of Deliverables of this type
shall not be unreasonably withheld.
(d) If Company fails to deliver any Deliverable within the dates specified in
the Schedule, or if any Errors discovered before acceptance in the
Deliverables described in Exhibit A cannot be eliminated in the
correction periods specified in Section 2.3(b) or (c), as applicable,
then Microsoft may notify Company in writing of Company's breach of this
Agreement, in which case Company shall cure the breach as soon as
possible but in no event later than twenty (20) days from receipt of such
notice. If Company fails to cure the breach within such period, then
Microsoft, at its option, may: (i) retain the Deliverable (including any
applicable Documentation) with rights as set forth in Section 3, and
terminate this Agreement for cause in accordance with Section 10.2(b),
whereupon Microsoft will have no further obligations to request or use
any development, consulting, or support or maintenance services from
Company in connection with this Agreement; or (ii) extend the correction
period.
(e) If a Deliverable is not accepted or rejected in writing by the last day
of the applicable period described in Sections 2.3(a)-(c) , the
Deliverable shall be deemed accepted.
2.4 Design Review & Specifications Changes. Company understands that there may
--------------------------------------
be additions, deletions or other changes which may affect the Specifications at
any time during the performance of the development Services referred to in
Section 2.1. Such changes shall not add new functionality not
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
contemplated by Exhibit A unless otherwise mutually agree in writing by the
parties. Upon notice of any such changes by Microsoft, which notice may be made
only in writing (including, for this purpose, in an email communication) to the
attention of Company's General Counsel, Company and Microsoft will work together
to make any necessary changes to the Specifications, and Company shall alter
such Services in order to accommodate any such changes to the Specifications;
provided, however, that with respect to any change to the Specifications that is
required solely by Microsoft, Company will be entitled to charge and Microsoft
agrees to pay additional fees of [**] for any incremental development work that
results from such change to the Specifications. The Schedule set forth on
Exhibit A shall be adjusted appropriately to take into account changes to the
Specifications.
2.5 Onsite Consulting Services. During the term of this Agreement or as
--------------------------
otherwise set forth in Section 10.4(c)(ii), Company shall make mutually agreed
members of its senior engineering staff available to provide Microsoft personnel
with such consulting Services as Microsoft may request with respect to the
Deliverables for the purposes and within the parameters set forth in Exhibit A.
The parties anticipate that Microsoft will desire to receive up to [**] to
include at least [**] of services) of such onsite consulting Services, and
Company agrees to provide such level of Services upon request (and no more),
provided that the precise dates on which Company will provide such consulting
Services shall be in compliance with Exhibit A and subject to the reasonable
approval of each party and that nothing herein shall be deemed to require that
Microsoft engage Company for such Services. Company will provide the consulting
Services requested by Microsoft hereunder at Microsoft's Redmond, Washington
headquarters unless the parties mutually agree on another arrangement.
Microsoft shall pay all reasonably incurred travel and living expenses of
Company personnel performing work at Microsoft facilities. The parties agree
that Company may fulfill its consulting Services obligations under this Section
2.5 by providing the services of any of [**] (the "Senior Company Engineers"),
at Company's discretion. If one or more of such Senior Company Engineers is no
longer employed by Company, the parties will endeavor to mutually agree upon
qualified replacement senior engineers whom Company may use to provide
consulting Services to Microsoft hereunder.
2.6 Support and Maintenance. For a period of [**] after the Effective Date
-----------------------
(or, if Company delivers its initial Deliverables more than three (3) days after
Company receives the payment due to Company under Section 4.1(a), then for a
period of [**] after such initial delivery by Company hereunder), Company will
provide software support and maintenance Services for the Deliverables
(including, for purposes of clarification, both commercial release versions of
the Company AdManager Product provided by the Company to Microsoft hereunder and
modifications and Error Corrections thereof developed by Company pursuant to
this Agreement) in accordance with the Support and Maintenance Plan attached
hereto as Exhibit B. Microsoft shall have the right to renew such software
support and maintenance Services from Company for an additional period of [**]
following such initial year by giving Company written notice of such renewal at
least forty-five (45) days prior to the expiration of the initial one (1) year
term and paying the additional fee set forth in Section 4.3.
2.7 The ongoing consulting Services and the support and maintenance Services
shall be performed in a professional manner and shall be of a high grade,
nature, and quality. Microsoft agrees that any claimed deficiency by Company in
performing the consulting Services and the support and maintenance Services
under this Agreement shall not constitute a breach under this Agreement unless
such deficiency is not cured within thirty (30) days of written notice thereof
by Microsoft to Company.
5
Microsoft and Engage Confidential & Proprietary
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission.
Asterisks denote omissions
3. License Grants
In consideration of the payments set forth in Section 4, Company hereby grants
to Microsoft the following perpetual, nonexclusive, irrevocable (subject to
Section 10.4(a)), sub-licensable (subject to the restrictions set forth
herein), royalty-free (subject to the restrictions and royalty provisions set
forth in Sections 3.4, 3.5 and 3.6), worldwide (subject to Section 3.10) rights
and licenses, under all of Company's applicable Intellectual Property, except
for trademarks, tradenames, trade dress, logos, or any other distinguishing
marks or features which serve to identify the source or provider of the product
or service with the exception of the user interface which may contain elements
which constitute trade dress.
3.1 Development License: Microsoft may use, copy, edit, format, modify,
-------------------
translate and otherwise create Derivative Technology from the Company Licensed
Materials, including both Source Code and Object Code forms of all software
included therein, and may use independent contractors to undertake such
development on Microsoft's behalf as work for hire (i.e., transfer of all
Intellectual Property rights to Microsoft), subject to written agreements
containing confidentiality requirements consistent with this Agreement.
Microsoft agrees to maintain, as part of any version of the Microsoft Ad Server
Software developed by or for Microsoft pursuant to the foregoing license, the
open profile API as contained in the Deliverables delivered by Company to
Microsoft hereunder, until the [**] anniversary of the date specified [**],
whereupon Microsoft may but will not be obligated to modify such open profile
API. Microsoft will not be obligated to implement any future versions of such
open profile API software code beyond the version that Company includes as a
Phase II Deliverable.
3.2 Commercial Use and Distribution License: Subject to the restrictions and
---------------------------------------
conditions set forth in Sections 3.3 through 3.11, Microsoft may use, market,
Distribute, and otherwise commercially exploit the Company Licensed Materials
and Derivative Technology thereof, including without limitation in order to
serve advertisements and provide other functions and services for any and all
web sites and online services.
3.3 License Limitations. Microsoft may exercise the license rights set forth
-------------------
in Section 3.2 only under one of two conditions: (a) in accordance with the
provisions of Sections 3.4, 3.5 and 3.6 with respect to the Microsoft Ad Server
Software or a Spin-Off Product, as applicable, and (b) to the extent Microsoft
exercises such license rights only with respect to combinations of software code
from the Company Licensed Materials (or Derivative Technology thereof) with any
other software code and then subject to the further condition that the resulting
software combinations do not meet the definition of Microsoft Ad Server Software
or a Spin-Off Product.
3.4 Limitations on Use for Ad Serving by Microsoft and its Affiliates.
-----------------------------------------------------------------
(a) If Microsoft or an Affiliate of Microsoft uses the Microsoft Ad Server
Software to serve advertisements on behalf of any third party web site or
online service (including without limitation any Microsoft Federated
Partner Site or portion thereof) other than as part of The Microsoft
Network during the Use Restriction Period, Microsoft agrees to pay
Company a royalty equal to [**] of Microsoft's Applicable Gross Revenues,
except as provided in Sections 3.4(b) and (c). As used herein,
"Applicable Gross Revenues" means cash revenues or other value received
by Microsoft (by barter or otherwise) or a Microsoft Affiliate as payment
for the provision of services that are provided by means of the Microsoft
Ad Server Software during the Use Restriction Period, less any agency
commissions or other revenue sharing payments that Microsoft is obligated
to pay to third parties in respect of such cash revenues or value.
Barter, giveaways and other transactions not involving cash payment shall
be valued at Microsoft's then-current average charge for the service
provided. Company acknowledges that Microsoft currently does not have
procedures in place to identify, track and report such non-cash
transactions as of the Effective Date, and Company agrees that if
Microsoft, having acted diligently and in good faith, fails timely to
report barter transactions which give rise to Applicable Gross Revenues
under this Agreement, Company shall be entitled to collect royalties on
Applicable Gross Revenues for such transactions, but Company shall not be
entitled to receive any late fees in respect of such royalties pursuant
to Section 4.6, unless and until Company has notified Microsoft
specifically of its obligation to pay royalties with respect to
Applicable Gross
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
Revenues from the barter transaction in question, and Microsoft has
thereafter failed to pay applicable royalties within sixty (60) days of
receiving such a notice.
(b) Notwithstanding the terms of Section 3.4(a), if Microsoft elects, during
the Use Restriction Period, to participate in [**] its direct successors
(which as of the Effective Date would entail providing to Company [**]
with The Microsoft Network [**], authorizing Company to use such data for
the sole purpose of [**] making substantially all such [**] through the
[**] network), then Microsoft shall have no obligation to pay any royalty
on Microsoft's Applicable Gross Revenues which relate to services
provided during the time that Microsoft is participating as specified
above in such profiling network.
(c) Also notwithstanding anything to the contrary in Section 3.4(a),
Microsoft shall have no obligation to pay any royalties to Company with
respect to the following activities during the Use Restriction Period
(i.e., revenues associated with the following activities shall not be
deemed to be "Applicable Gross Revenues"):
(i) Serving advertisements for any web site or online service owned or
operated by a member of the [**] or any direct successor or version
thereof but only as long as [**] Microsoft.
(ii) Serving advertisements for any portion of The Microsoft Network, any
web site or online service of a Microsoft Affiliate, or any
Microsoft Federated Partner Site or portion thereof.
(iii) Serving advertisements on behalf of advertisers and/or advertising
agencies to any third party site or service, worldwide.
3.5 Distribution License: Microsoft may Distribute the Microsoft Ad Server
--------------------
Software only in accordance with the following terms and conditions:
(a) Subject to the exceptions set forth in Section 3.5(c), Microsoft may not
Distribute the Microsoft Ad Server Software in Object Code form until the
[**] (the period before such date being referred to herein as the
"Initial Distribution Restriction Period").
(b) Following the Initial Distribution Restriction Period, Microsoft may
Distribute the Microsoft Ad Server Software in Object Code form in its
sole discretion, provided, however, that for [**] after the expiration of
such Initial Distribution Restriction Period, Microsoft will pay Company
a [**] royalty based on Net Receipts received by Microsoft during such
[**] period in consideration of any Distribution by Microsoft of the
Microsoft Ad Server Software other than as provided in Section 3.5(c).
As used herein, "Net Receipts" means the value of any royalties, fees, or
other sums received by Microsoft from such Distribution (subject to the
exceptions set forth in Section 3.5(c)), less applicable returns,
rebates, applicable freight and sales or use taxes payable by Microsoft.
In the event Microsoft engages in any applicable Distribution of the
Microsoft Ad Server Product that constitutes a barter or a promotional
give-away or a "loss leader" transaction (as determined by reference to
the fair market value of the Microsoft Ad Server Product), Microsoft
agrees to pay a [**] royalty based on "imputed standard Net Receipts" for
such software product.
(c) Notwithstanding anything to the contrary in Section 3.5(a) or (b),
Microsoft may Distribute the Microsoft Ad Server Software in Object Code
form to Microsoft Affiliates and Microsoft Federated Partner Sites at any
time, including without limitation during the Initial Distribution
Restriction Period, for use solely in serving advertisements for sites
and services owned and/or operated by such Microsoft Affiliates or
Microsoft Federated Partner Sites. Further, Microsoft shall have no
obligation to pay royalties to Company pursuant to Section 3.5(b) with
respect to any Distribution by Microsoft of Microsoft Ad Server Software
to any Microsoft Affiliate pursuant to the foregoing sentence.
Microsoft agrees to pay Company a one-time fee of [**] with respect to
each Microsoft Federated Partner to which Microsoft or a Microsoft
Affiliate
7
Microsoft and Engage Confidential & Proprietary
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
Distributes the Microsoft Ad Server Software during the Use
Restriction Period defined in Section 3.4(a).
(d) Microsoft shall not Distribute the Source Code of the Microsoft Ad Server
Software, Company AdManager Product, or the Deliverables, except to a
Microsoft Affiliate or as expressly set forth in Section 3.1 with respect
to independent contractors; provided, however, that Microsoft may
Distribute insubstantial amounts of Source Code from the Deliverables as
part of Source Code versions of Microsoft products that do not constitute
Microsoft Ad Server Software or Spin-Off Products, and subject to the
same confidentiality and license restrictions as apply to the Microsoft
Source Code that is part of such Distribution. In the event Microsoft
desires to lift such restrictions on the use of such Source Code in the
future, Company agrees to give good faith consideration to such request
and to discuss with Microsoft possible arrangements to accommodate both
parties' concerns.
3.6 Spin-Off Products. In the event Microsoft (a) intends to use any Spin-Off
-----------------
Product during the Use Restriction Period (other than use of a Spin-Off Product
by or on behalf of the entities permitted in Section 3.4(c)), or (b) intends to
Distribute any Spin-Off Product during the Initial Distribution Restriction
Period or for [**] after expiration of such period (other than Distribution of a
Spin-Off Product to one of the entities permitted in Section 3.5(c)), then the
parties shall negotiate in good faith with respect to royalties to be paid by
Microsoft for such use or Distribution as applicable of the Spin-Off Product,
taking into account both the proportionate value of the Core Technology or
Technologies included in the Spin-Off Product as a portion of the overall
Company AdServer Product, and the proportionate value of the Core Technology or
Technologies that is included in the Spin-Off Product as a portion of such Spin-
Off Product; provided however that the royalty for use shall not exceed that
specified in Section 3.4(a) and the royalty for Distribution shall not exceed
that specified in Section 3.5(b).
3.7 Terms of Distribution. Microsoft may Distribute the Microsoft Ad Server
---------------------
Software only pursuant to licenses that contain disclaimers of warranties and
liability on behalf of Microsoft and its suppliers, and subject to reservations
of rights in intellectual property that are equivalent to the terms of licenses
of Microsoft-developed software products. During the Initial Distribution
Restriction Period and for [**] after the expiration of such Initial
Distribution Restriction Period, and unless otherwise agreed by the parties,
Microsoft shall restrict licensees of the Microsoft Ad Server Software from
using it for service bureau purposes (i.e., using the software for the purpose
of serving ads to third parties in exchange for fees or other value). Upon
request from Company, Microsoft will provide Licensee with a copy of each form
of license agreement then used or intended to be used by Microsoft with respect
to the Microsoft Ad Server Software.
3.8 Ownership. Except as expressly licensed to Microsoft in this Agreement,
---------
Company retains all right, title and interest in and to the Company Licensed
Materials; provided, however, that subject to the licenses granted and the
restrictions set forth in this Section 3 and Company's ownership of the
underlying Company Licensed Materials and Company Ad Server Software and all
Intellectual Property rights associated therewith, Microsoft shall own all
right, title and interest in and to any Derivative Technology of the Company
Licensed Materials created by or for Microsoft.
3.9 Scope of Patent Licenses. For purposes of clarification, the foregoing
------------------------
license grants include a license (without the right to grant sublicenses other
than to third parties as permitted by this Section 3) under any patents now or
hereafter owned, controlled or licensed by Company (which patents are embodied
in or arise from a Deliverable) having an earliest effective filing date prior
to the [**] the date on which Company delivers the Subsequent Release to
Microsoft, to the extent necessary (i) to exercise any license right granted in
Section 3; and (ii) to combine the MS Ad Server Software with any hardware and
software.
3.10 Territorial Restrictions. Notwithstanding any other provision of this
------------------------
Agreement, Microsoft shall not, without the prior written consent [**]: (i)
install or otherwise use the Microsoft Ad Server Software, Company AdManager
Product, or any Derivative Technology of Company AdManager Product that is
competitive with the Company Ad Manager Product [**] except that Microsoft may
install and use any of the foregoing [**] solely for the purposes of The
Microsoft Network and Microsoft Affiliates[**], and web sites located outside
[**]; or (ii) Distribute any of the foregoing to any person or entity located
[**] or to any person or entity located outside [**] with knowledge that such
person or entity intends to redistribute
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
any of the foregoing to any person or entity located [**] for purposes of
competing directly with [**]. This Section 3.10 shall not restrict Microsoft
from using the Microsoft Ad Server Software outside for any purpose [**]. An
uncured breach of subsection (ii) of this provision shall constitute a material
breach of this Agreement and shall cause irreparable harm to the Company that
cannot be remedied with money damages; accordingly, Company shall be entitled to
injunctive relief against the conduct causing the breach in addition to other
remedies.
3.11 Source Code Security. Microsoft agrees to apply substantially the same
--------------------
security policies and procedures with respect to maintaining the confidentiality
of the Company Source Code licensed under this Agreement as Microsoft applies to
Source Code of technologies that Microsoft has developed and implemented in The
Microsoft Network, including, without limitation restrictions on copying, access
and location of the Company Source Code and any copies permitted to be made. As
of the Effective Date, security measures applied to Source Code used in
operating The Microsoft Network include storage on a central server; limiting
access according to two levels of security (a read/write access level and a read
only access level, with the read/write level of access being provided on the
most restricted basis).
3.12 This Agreement shall be binding on all Microsoft Affiliates to which the
rights and benefits and obligations of this Agreement are extended as provided
for in this Agreement. Microsoft assumes full responsibility and accountability
for the compliance of its Affiliates with the terms and conditions of this
Agreement.
4. Payment Obligations
4.1 Source Code License Fee. Microsoft agrees to pay a guaranteed,
-----------------------
nonrefundable license fee of [**] in consideration of the license rights set
forth in Section 3, including without limitation the development license rights
as to the Source Code form of Company's Deliverables. Microsoft will pay such
fee in three parts, in accordance with the following payment schedule:
(a) Microsoft will pay [**] promptly following the Effective Date, and
Microsoft agrees that Company will be obligated to deliver (via secure FTP
connection) to Microsoft the Source Code for Version 4.0.x within twenty-
four (24) hours of receiving such initial payment from Microsoft.
(b) Microsoft will pay [**] within thirty (30) days after (i) Microsoft
receives the initial Phase I Source Code delivery from Company (as further
specified in Exhibit A), and (ii) Company has delivered to Microsoft an
invoice for such amount, whether or not the final Phase I Source Code is
accepted or not.
(c) Microsoft will pay a final payment of [**] within thirty (30) days
after Microsoft receives (i) the initial Phase II Source Code delivery
from Company (as further specified in Exhibit A), and (ii) Company has
delivered to Microsoft an invoice for such amount, whether or not the
final Phase II Source Code is accepted or not.
4.2 Development Fee. In consideration of Company's provision of Services
---------------
comprised of development in order to deliver_the Phase I and Phase II
Deliverables, Microsoft will pay Company a fee of [**], in accordance with the
following payment schedule: Microsoft will pay this fee in [**], each payable in
advance within thirty (30) days of Microsoft's receiving an invoice from Company
for such fee; provided, however, that in the event Company fails timely to
deliver Phase I Deliverables that meet the acceptance criteria described in
Section 2.3, then Microsoft shall have no obligation to pay any monthly payments
for Company's development Services from the date on which Company is obligated
to deliver such Phase I Deliverables until Microsoft accepts such Phase I
Deliverables. Thereafter, Microsoft shall pay any withheld fees immediately and
pay all remaining monthly fees hereunder on a monthly basis (i.e., payments
shall resume and shall continue to be paid monthly until Microsoft has paid a
total of [**] pursuant to this Section 4.2). Company may issue the initial
invoice for such fees on or after the Effective Date.
9
Microsoft and Engage Confidential & Proprietary
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
4.3 Support and Maintenance Fee. Microsoft will pay Company [**] in
---------------------------
consideration of receiving support and maintenance Services in accordance with
Section 2.6 and Exhibit B for [**] after the Effective Date (or, if Company
delivers its initial Deliverables more than three (3) days after Microsoft makes
the payment due to Company under Section 4.1(a), then for a period of [**] after
such initial delivery by Company hereunder). Microsoft will pay this fee [**],
each payable in advance within thirty (30) days of Microsoft's receiving an
invoice from Company for such fee. Company may issue the initial invoice for
such fees on or after the Effective Date. At Microsoft's sole discretion,
Microsoft may renew its right to receive such support and maintenance Services
for an additional period of [**] upon written notice to Company at least forty-
five (45) days before the expiration of such initial support term, and subject
to payment by Microsoft of an additional [**] in accordance with the same
payment procedures as apply to the initial term.
4.4 Fees for Onsite Consulting Services. Company will be entitled to invoice
-----------------------------------
Microsoft on a monthly basis for any onsite consulting Services provided in
accordance with this Agreement, at a rate of [**] for the Services of Senior
Company Engineers who have been authorized by Microsoft pursuant to Section 2.5
to provide such services. In no event shall Company invoice, or Microsoft be
obligated to pay, for any onsite consulting Services which represent Services
that Company must provide as part of its support and maintenance obligations to
Microsoft pursuant to Section 2.6 and Exhibit B. Microsoft agrees to pay
Company all amounts properly shown in invoices for such Services within thirty
(30) days of their receipt.
4.5 Fees for Other Consulting Services. Company will be entitled to invoice
-------------------------------------
Microsoft on a monthly basis for any other consulting Services provided at the
request of Microsoft pursuant to Section 2.4 at a rate of [**]. In no event
shall Company invoice, or Microsoft be obligated to pay, for any consulting
Services which represent Services that Company must provide as part of its
support and maintenance obligations to Microsoft pursuant to Section 2.6 and
Exhibit B. Microsoft agrees to pay Company all amounts properly shown in
invoices for such Services within thirty (30) days of their receipt.
4.6 Royalties and Other Payments Under Section 3. Within forty-five (45) days
--------------------------------------------
after the end of each calendar quarter with respect to which Microsoft owes
Company any royalties or fees based on Applicable Gross Receipts, Net Receipts,
or licenses to Microsoft Federated Partner Sites as set forth in Sections 3.4-
3.6, Microsoft will furnish Company payment of such fees together with a
statement describing such fees for the quarter then ended. Each such statement
shall contain information sufficient to discern how the payment from Microsoft
to Company was computed. Any payment not made when due shall bear interest at
the rate of one percent (1%) per month until paid.
4.7 Additional Consideration. Microsoft will make available to Company at no
------------------------
charge run of site advertising opportunities for products and services selected
by Company, subject to the terms described in this Section 4.7 on The Microsoft
Network equivalent in value to [**] (as calculated with reference to the
Microsoft standard rate card in effect at the time such advertising is
fulfilled). Microsoft will fulfill such advertising commitment within the [**]
after the Effective Date, and the precise timing and placement of such
performance shall be at Microsoft's discretion. The parties will cooperate in
good faith to develop administrative procedures to facilitate Company's use of
such advertising inventory. The parties may, by mutual agreement, use such
inventory to support [**] advertising. All advertising proposed for inclusion
on The Microsoft Network will be subject to Microsoft's standard specifications
and standard terms and conditions.
5. Audits
5.1 Record-Keeping. Microsoft agrees to keep, all proper, complete and
--------------
accurate records and books of account and all proper, complete and accurate
entries therein relating to the Distribution and use of Microsoft Ad Server
Software, and Microsoft's Applicable Gross Revenues and Net Receipts in
connection therewith, sufficient to establish the basis of payments owed by
Microsoft pursuant to Section 4.6 of this Agreement.
5.2 Audit Right. Company may cause an audit to be made, at its expense, of
-----------
Microsoft's applicable records in order to verify statements provided to Company
under Section 4.6 and to determine amounts due under Sections 3.2 and 3.3. Any
such audit shall be conducted only by an independent certified public accountant
(other than on a contingency fee basis) after prior written notice to Microsoft,
and shall be
<PAGE>
conducted during regular business hours at Microsoft's offices and in such a
manner as not to interfere with Microsoft's normal business activities. In no
event shall an audit with respect to any payment statement commence later than
eighteen (18) months from the date of the statement involved, nor shall the
audits be made hereunder more frequently than once annually unless the Company
has reasonable grounds to believe that any royalty payments have been
understated, nor shall any period be audited more than once. The results of any
such audit shall be subject to the nondisclosure obligations set forth in
Section 7. In the event that Company makes any claim against Microsoft with
respect to any such audit, Company hereby agrees to make available to Microsoft,
upon request, its records and reports pertaining to the audit and any such
records and reports prepared for Company by its accountant(s). If the audit
reveals an underpayment regarding a period of more than five percent (5%),
Microsoft shall pay the fees and expenses for the audit.
6. No Obligation/Independent Development
Notwithstanding any other provision of this Agreement, Microsoft shall have no
obligation to use, market, sell or otherwise Distribute the Company AdManager
Product or any Derivative Technology thereof, either alone or in any Microsoft
product or service. Except as provided in Section 7, nothing in this Agreement
will be construed as restricting Microsoft's ability to acquire, license,
develop, manufacture or distribute for itself, or have others acquire, license,
develop, manufacture or distribute for Microsoft, similar technology performing
the same or similar functions as the technology contemplated by this Agreement,
or to market and distribute such similar technology in addition to, or in lieu
of, the technology contemplated by this Agreement, provided that such technology
does not use any of the Company's Intellectual Property.
7. Confidentiality
7.1 Each party shall protect the other's Confidential Information from
unauthorized dissemination and use with the same degree of care that such party
uses to protect its own like information, which in no event shall be less than
reasonable care. Neither party will use the other's Confidential Information
for purposes other than as contemplated by this Agreement. Neither party will
disclose to third parties the other's Confidential Information without the prior
written consent of the other party, with the exception that either party may
disclose Confidential Information received from the other party in accordance
with judicial or other governmental order, and provided that the party that
receives such an order shall give the party whose Confidential Information would
be subject to such disclosure at least five (5) business days' advance notice
prior to making any disclosure pursuant to such order, and shall comply with any
applicable protective order or equivalent. In addition, the parties agree to
cooperate in good faith to review and mutually agree upon a procedure for
addressing the contents of any disclosure of Confidential Information that
either party believes in good faith is required by the rules of the Securities
and Exchange Commission. Except as expressly provided in this Agreement, no
ownership or license rights are granted in any Confidential Information.
7.2 The parties' obligations of confidentiality under this Agreement shall not
be construed to limit either party's right to independently develop or acquire
products without use of or access to the other party's Confidential Information.
Further, either party shall be free to use for any purpose the residuals
resulting from access to or work with such Confidential Information, provided
that such party shall maintain the confidentiality of the Confidential
Information as provided herein. The term "residuals" means information in non-
tangible form, which may be retained in the unaided memory by persons who have
had access to the Confidential Information, including ideas, concepts, know-how
or techniques contained therein. Neither party shall have any obligation to
limit or restrict the assignment of such persons or to pay royalties for any
work resulting from the use of residuals. However, the foregoing shall not be
deemed to grant to either party a license under the other party's copyrights or
patents. _
8. Warranties
8.1 Company. Company warrants, represents and covenants that:
-------
(a) It has the full power to enter into this Agreement and grant the license
rights set forth herein;
11
Microsoft and Engage Confidential & Proprietary
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
(b) It has not previously and will not grant any rights in the Company
Licensed Materials to any third party that are inconsistent with the
rights granted to Microsoft herein [**]; it being understood, however,
that the Company may grant similar or identical rights to third parties
for identical or similar purposes;
(c) The Company Licensed Materials do not and will not infringe any copyright
or trade secret right held by any third party.
(d) Company does not have knowledge of any third party patent or trademark
that is infringed by or accused of infringement by Version 4.0.x.
(e) The Intellectual Property embodied in the Deliverables described on
Exhibit A will be created by employees of Company within the scope of
their employment and under obligation to assign inventions to Company, or
by independent contractors (i.e., a third party temp or other individual)
or independent contractor organizations approved by Microsoft, which
approval shall not be unreasonably withheld or delayed, who or which are
under written agreement with Company to develop, complete, or assist with
the development or completion of the Deliverables described in Exhibit A
and to assign all rights in the Deliverables described in Exhibit A to
Company.
(f) Company will cooperate with Microsoft and provide all necessary
information in a prompt manner in accordance with its Year 2000 readiness
policy should Microsoft have any inquiries regarding the Year 2000
readiness of Company or any of the information or technology that is the
subject of this Agreement.
(g) Company warrants that (i) the [**] components of the Version 4.0.x Source
Code delivered to Microsoft will [**] in the standard Microsoft [**]
environment which is substantially similar to that currently in use by
Company, and (ii) the [**] components of the Subsequent Release Source
Code delivered to Microsoft will [**] in Company's standard [**]
environment (or if such [**] environment is not then comprised of
standard commercially available tools and technologies, in the standard
Microsoft [**] environment existing at the time of the delivery of the
Phase II Deliverables). The Company's sole obligation and Microsoft's
sole and exclusive remedy for a breach of the warranty in clause (i) or
(ii) hereof shall be for Company promptly to remedy the applicable
Deliverable at no charge to Microsoft until such a subsequent delivered
version satisfies the applicable warranty set forth in this clause.
8.2 Microsoft. Microsoft warrants and represents that it has the full power to
---------
enter into this Agreement, and has taken the necessary steps to authorize the
execution of this Agreement by the person signing it.
8.3 DISCLAIMER. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 8, NEITHER PARTY
-------------
MAKES ANY WARRANTIES, EXPRESS OR IMPLIED BY OPERATION OF LAW OR OTHERWISE, WITH
RESPECT TO SUCH PARTY'S SERVICES, CONFIDENTIAL INFORMATION, DELIVERABLES, OTHER
LICENSED MATERIALS, OR PERFORMANCE UNDER THIS AGREEMENT, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
<PAGE>
9. Indemnity
9.1 Indemnity. Company shall, at its expense, defend any claim or action
---------
brought against Microsoft, and/or Microsoft's subsidiaries, affiliates,
directors, officers, employees, agents and independent contractors, (a) which,
if true, would constitute a breach of a warranty by Company in Section 8.1(a)-
(e); (b) alleging that any of the Company Licensed Materials violates the
Intellectual Property (except for patents and for intellectual property rights
that are of a nature that is not recognized in the domestic laws of the United
States (e.g., certain forms of moral rights); or (c) alleging any infringement
of a patent; and Company will indemnify and hold Microsoft harmless from and
against any costs, damages and fees reasonably incurred by Microsoft, including
but not limited to fees of attorneys and other professionals, that are
attributable to such claim, subject to the limitation set forth in Section 11.4.
Microsoft shall: (i) provide Company reasonably prompt notice in writing of any
such claim or action, but in any case sufficient notice to respond reasonably to
pleadings, and permit Company, through counsel selected by the Company and
acceptable to Microsoft (with such acceptance not to be unreasonably withheld),
to answer and defend such claim or action; and (ii) provide Company information,
assistance and authority, at Company's expense, to help Company to defend such
claim or action. Microsoft will not settle any claim without the Company's
written permission and Company will not be responsible for any settlement made
by Microsoft without Company's written permission, which will not be
unreasonably withheld.
9.2 Duty to Correct. Notwithstanding Section 9.1, should the Deliverables or
---------------
any portion thereof appear likely to be held to infringe any third party
intellectual property or other proprietary right and Microsoft's exercise of its
license rights under this Agreement appear likely to be enjoined, in whole or in
part, Company shall notify Microsoft and at Company's expense may elect to: (i)
procure for Microsoft the right to continue exercising its rights in the
Deliverables or portion thereof, as applicable, as licensed in this Agreement;
or (ii) replace or modify the Deliverables or portion thereof with a version
that is non-infringing, provided that the replacement or modified version
substantially meets the Specifications (if applicable) to Microsoft's reasonable
satisfaction. If Microsoft's exercise of its license rights is enjoined, the
Company must endeavor immediately to implement either (i) or (ii) above. If (i)
or (ii) cannot be achieved by the Company on commercially reasonably terms, then
in addition to any damages or expenses payable by Company under Section 9.1,
Company shall refund to Microsoft such portion of the fees paid to Company by
Microsoft under this Agreement as reasonably reflects the proportionate value of
the infringing portion of the Deliverables and the license to such portion shall
terminate in full.
9.3 Exceptions. The Company shall have no obligation to defend or indemnify
----------
Microsoft with respect to any claims, or damages awarded, against Microsoft
based upon Microsoft's (i) combination, operation or use of the Deliverables
with any non-Company software programs(s), apparatus or data if the claim would
have been avoided had such combination, operation or use not occurred and such
contribution, operating or use is not within the intended scope of use of the
Deliverables, or (ii) use of a previous version of any of the Deliverables if,
after Company has (x) notified Microsoft of a potential infringement claim, and
(y) delivered to Microsoft an updated non-infringing version of the affected
Deliverable that meets all applicable specifications under this Agreement,
Microsoft has not within a commercially reasonable period thereafter substituted
use of such updated version for the earlier version.
9.4 Microsoft Indemnity Obligations. Microsoft shall, at its expense,
-------------------------------
indemnify, hold harmless and defend Company from and against any and all
damages, costs and expenses, including reasonable attorney's fees incurred by
the Company in connection with any claim against the Company (i) arising from a
claim which if true would represent a breach of Microsoft's warranty in Section
8.2, (ii) by a customer of Microsoft relating to such customer's relationship
with Microsoft (and not to any relationship which the Company may have with such
customer), or (iii) with respect to any claim based upon Microsoft's
combination, operation or use of the Company Licensed Materials with any non-
Company software programs(s), apparatus or data if the claim would have been
avoided had such combination, operation or use not occurred.
9.5 Sole and Exclusive Remedy. The provisions of Sections 9.1, 9.2 and 9.3
-------------------------
constitute Microsoft's sole and exclusive remedy in connection with this
Agreement for third party claims of infringement of Intellectual Property.
13
Microsoft and Engage Confidential & Proprietary
<PAGE>
10. Termination
10.1 Term. The term of this Agreement shall commence as of the Effective Date
----
and shall continue for one (1) year.
10.2 Termination by Microsoft.
------------------------
(a) Microsoft shall have the right to terminate this Agreement in the
event Company breaches Section 8.1(g). Termination of this Agreement
pursuant to this Section 10.2(a) must be exercised within thirty (30)
days of delivery of Version 4.0.x of the Source Code and shall be
effective upon written notice from Microsoft to the Company of such
termination and the return to the Company of the entire Deliverable,
together with all copies, notes and other materials generated by
Microsoft based on the Deliverable.
(b) Microsoft also shall have the right to cancel Phase II of the
development Services and terminate this Agreement if Company fails to
deliver Phase I Deliverables that are accepted by Microsoft pursuant
to Section 2.3 and Exhibit A. As set forth in Section 2.3(e),
Microsoft may terminate this Agreement under this Section 10.2(b) only
if Company fails to deliver required Deliverables following notice of
breach and an opportunity to cure. Termination of this Agreement
pursuant to this Section 10.2(b) shall be effective upon written
notice from Microsoft to the Company of such termination.
10.3 Termination By Either Party For Cause. In addition to Microsoft's rights
-------------------------------------
of termination under Section 10.2 and 12.5, either party may suspend performance
and/or terminate this Agreement immediately upon written notice at any time if:
(a) The other party is in material breach of any material warranty, term,
condition or covenant of this Agreement, other than those contained in
Section 7, and fails to cure that breach within thirty (30) days after
written notice thereof; or
(b) The other party is in material breach of Section 7.
10.4 Effect of Termination.
---------------------
(a) In the event of termination of this Agreement for any reason, Sections 1,
3, 4.1, 4.6, 5, 6, 7, 8, 9, 10, 11 and 12 shall survive, with the
exception that Section 3 shall not survive if the breach relates to (i) a
willful and substantial material breach initiated by a senior manager at
Microsoft (i.e., General Manager or higher) of the license grants or
restrictions or confidentiality provisions in Section 3 or 7 of this
Agreement or the acquiescence by any such senior manager with actual
knowledge in such violation, which breach is not cured by Microsoft
within thirty (30) days after written notice thereof; (ii) failure by
Microsoft to make a payment due under Section 4.1 within thirty (30) days
after receiving notice of breach of such payment obligation; or (iii) in
the event Microsoft terminates this Agreement pursuant to Section
10.2(a), in which case Section 3 and Section 4.1 shall also terminate.
Otherwise, for purposes of clarification, all licenses granted by Company
to Microsoft under this Agreement will survive any termination of this
Agreement in accordance with their terms and Company's sole remedies with
respect to breach by Microsoft of this Agreement (including without
limitation material breach of the license restrictions and payment
provisions of Sections 3 and 4) shall be to pursue injunctive relief
(including without limitation specific performance) and/or monetary
damages; the sole exception to such survival of all license rights shall
be as set forth above.
(b) Following any termination of this Agreement, Microsoft will have no
further payment obligations to Company under this Agreement except as
follows:
(i) Except in the event of a termination by Microsoft pursuant to Section
10.2(a), Microsoft will pay any Source Code license fee payments
under Section 4.1 that Microsoft has not previously paid to Company
within forty-five (45) days of such termination (notwithstanding the
payment schedule set forth in Section 4.1). Microsoft will have no
further payment obligations to Company under Section 4.1 if it
terminates this Agreement pursuant to Section 10.2(a).
<PAGE>
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission
Asterisks denote omissions.
(ii) Microsoft will pay any amounts properly invoiced by Company for
onsite consulting services provided by Company in accordance with
Section 2.5 or other services provided by Company at Microsoft's
request in accordance with Section 2.4, before the date of such
termination.
(iii) Microsoft will pay all amounts that may become due to Company under
the terms of Sections 3.4-3.6 in accordance with the terms of such
provisions and with Section 4.6.
(c) Following any termination or expiration of this Agreement, Company will
have no obligation to provide additional Deliverables or Services to
Microsoft, with the following limited exceptions:
(i) In the event that this Agreement expires and Company has failed to
deliver the Source Code form of the Subsequent Release, then
Company's sole obligation, and Microsoft's exclusive remedy with
respect to such failure, shall be delivery by the Company of the
Source Code form of Company's next commercial release of the
AdManager software product when available, which release will be
deemed, but only under such circumstances, to constitute the
Subsequent Release described in Exhibit A; and
(ii) In the event that Company delivers an acceptable form of the Phase II
Deliverables or the Subsequent Release within forty-five (45) days of
the end of the term or at any time thereafter, then upon request from
Microsoft, Company will provide onsite consulting services to
Microsoft as Described in Section 2.5 and Exhibit A with respect to
the Source Code of its next commercial release of the Company
AdManager Product as delivered to Microsoft pursuant to Section
10(c)(i) above for a period of thirty (30) days after the expiration
of this Agreement.
(d) Neither party shall be liable to the other for damages of any sort
resulting solely from terminating this Agreement in accordance with its
terms (provided, however, that either party may pursue damages from the
other party based on breach of this Agreement, but Microsoft agrees that,
its sole and exclusive remedy for (i) a breach by the Company of Section
8.1(g) is limited to the amount of fees under Section 4.1 actually paid
by Microsoft to Company, and (ii) the failure of the Company to deliver
Phase I or Phase II Deliverables is to terminate this Agreement subject
to the provisions of Section 10.4(a)-(c).
11. Limitation Of Liabilities
11.1 NEITHER PARTY SHALL BE LIABLE FOR ANY COVER, INDIRECT, INCIDENTAL,
CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
11.2 The Company's aggregate liability for claims arising in connection with
this Agreement shall in no event exceed the following maximums:
(a) Claims arising in connection with nondelivery of the Deliverable
referred to as Version 4.0.x of the Company AdManager Product: [**], or
the aggregate fees actually paid under Section 4.1, whichever is less.
(b) Claims arising in connection with the Services and Deliverables
described in Sections 2.1 - 2.4: Amounts paid Company under Section 4.2
or damages actually incurred, whichever is less.
(c) Claims arising in connection with Services described in Section 2.5:
Amounts paid under Section 4.4, or damages actually incurred, whichever is
less.
(d) Claims arising in connection with Section 2.6: Amounts paid under
Section 4.3 for the period to which the payment relates, or damages
actually incurred, whichever is less.
15
Microsoft and Engage Confidential & Proprietary
<PAGE>
11.3 THE PROVISIONS OF SECTION 11.1 AND 11.2 ABOVE SHALL HAVE NO APPLICATION TO
SECTIONS 3, 7 AND 9.
11.4 Company's aggregate liability to Microsoft pursuant to Section 9.1 with
respect to patent infringement claims, other than patent infringement
claims concerning Version 4.0.x of which Company has knowledge as of the
Effective Date (for which there are no limitations), shall be limited to
[**] or amounts actually incurred by Microsoft, whichever is less.
12. General
12.1 Notices. All notices and requests in connection with this Agreement shall
-------
be deemed given as of the day they are received either by messenger, delivery
service, or in the United States of America mails, postage prepaid, certified or
registered, return receipt requested, and addressed as follows:
To Company: To Microsoft:
Engage Technologies, Inc. Microsoft Corporation
100 Brickstone Square One Microsoft Way
Andover, MA 01810 Redmond, WA 98052-6399
Attention:
Attention:
Phone: Phone: (425) 882-8080
Fax: Fax: (425) 936-7329
Copy to: Copy to:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attention: Law & Corporate Affairs
Fax: Fax: (425) 936-7409
or to such other address as a party may designate pursuant to this notice
provision.
12.2 Independent Contractors. Company and Microsoft are independent
-----------------------
contractors, and nothing in this Agreement shall be construed as creating
an employer-employee relationship, a partnership, or a joint venture
between the parties.
12.3 Taxes.
-----
(a) The amounts to be paid by Microsoft to Company herein do not include
any foreign, U.S. federal, state, local, municipal or other
governmental taxes, duties, levies, fees, excises or tariffs, arising
as a result of or in connection with the transactions contemplated
under this Agreement including, without limitation, (i) any state or
local sales or use taxes now or hereafter imposed on the provision of
goods and services to Microsoft by Company under this Agreement, (ii)
taxes imposed or based on or with respect to or measured by any net or
gross income or receipts of Company, (iii) any franchise taxes, taxes
on doing business, gross receipts taxes or capital stock taxes
(including any minimum taxes and taxes measured by any item of tax
preference), (iv) any taxes imposed or assessed after the date upon
which this Agreement is terminated, (v) taxes based upon or imposed
with reference to Company's real and/or personal property ownership
and (vi) any taxes similar to or in the nature of those taxes
described in (i), (ii), (iii), (iv) or (v) above, now or hereafter
imposed on Company (or any third parties with which Company is
permitted to enter into agreements relating to its undertakings
hereunder) (all such amounts, together with any penalties, interest or
any additions thereto, collectively "Taxes"). Microsoft is not liable
for any Taxes incurred in connection with or
<PAGE>
related to the sale of goods and services under this Agreement, and
all such Taxes shall be the financial responsibility of Company,
provided that Microsoft shall pay to Company Collected Taxes in
accordance with Section 12.3(b) below. Company agrees to indemnify,
defend and hold Microsoft harmless from any Taxes (other than
Collected Taxes) or claims, causes of action, costs (including,
without limitation, reasonable attorneys' fees) and any other
liabilities of any nature whatsoever related to such Taxes.
(b) Any sales or use taxes described in Section 12.3(a)(i) above that (i)
are owed by Microsoft solely as a result of entering into this
Agreement and the payment of the fees hereunder, (ii) are required to
be collected from Microsoft by Company under applicable law, and (iii)
are based solely upon the amounts payable under this Agreement (such
taxes the "Collected Taxes"), shall be stated separately as applicable
on Company's invoices and shall be remitted by Microsoft to Company,
and as required Company shall remit to Microsoft official tax receipts
indicating that such Collected Taxes have been paid by Company.
Microsoft may provide to Company an exemption certificate acceptable
to the relevant taxing authority (including without limitation a
resale certificate) in which case Company shall not collect the taxes
covered by such certificate. Company agrees to take such steps as are
requested by Microsoft to minimize such Collected Taxes in accordance
with all relevant laws and to cooperate with and assist Microsoft, all
at Microsoft's request and expense, in challenging the validity of any
Collected Taxes or taxes otherwise paid by Microsoft. Company shall
indemnify and hold Microsoft harmless from any Collected Taxes,
penalties, interest, or additions to tax arising from amounts paid by
Microsoft to Company under this Agreement, that are asserted or
assessed against Microsoft to the extent such amounts relate to
amounts that have already been paid to or collected by Company from
Microsoft under this section. If any taxing authority refunds any tax
to Company which Microsoft originally paid to Company, or Company
otherwise becomes aware that any tax was incorrectly and/or
erroneously collected from Microsoft, or Company otherwise receives an
economic benefit (such as an audit offset) as the result of
incorrectly and/or erroneously receiving Collected Taxes from
Microsoft, then Company shall promptly remit to Microsoft an amount
equal to such refund, incorrect collection or tax benefit as the case
may be plus any interest thereon.
(c) If any taxes are required to be withheld on payments made by Microsoft
to Company by any U.S. (state or federal), Canadian (federal or
provincial) or foreign government, Microsoft may deduct such taxes
from the amount owed Company and pay them to the appropriate taxing
authority. Microsoft will use reasonable efforts to secure and deliver
to Company an official receipt for any taxes withheld. Microsoft will
use reasonable efforts to minimize such taxes to the extent
permissible under applicable law.
(d) This tax section shall govern the treatment of all taxes arising as a
result of or in connection with this Agreement notwithstanding any
other Section of this Agreement.
12.4 Governing Law. This Agreement shall be governed by the laws of the State
-------------
of New York as though entered into between New York residents and to be
performed entirely within the State of New York. In any action or suit to
enforce any right or remedy under this Agreement or to interpret any provision
of this Agreement, the prevailing party shall be entitled to recover its costs,
including reasonable attorneys' fees.
12.5 Assignment. Neither party may assign this Agreement, or any rights or
----------
obligations hereunder, whether by contract or by operation of law, except in
connection with an assignment to an Affiliate or a sale of substantially all its
assets or substantially all the assets of its ad-serving product division (or,
in the case of Microsoft, of The Microsoft Network), and provided that any
permitted assignee shall assume all of the assignor's obligations under this
Agreement after such assignment and that the assignor shall thereafter have no
rights under this Agreement, but shall remain liable for the performance of the
assignee's obligations._
12.6 Solicitation Restrictions. Microsoft agrees that its MSN group (including
-------------------------
both its Advertising Operations/Technologies and LinkExchange units, and their
respective successors, if any) and its Commerce Server development group (and
its direct successors, if any) (collectively, the "Restricted Microsoft
17
Microsoft and Engage Confidential & Proprietary
<PAGE>
Groups") will not solicit or hire any Company employee or consultant to Company
who (a) has performed Services under this Agreement and (b) is named on a list
to be provided in writing by Company to Microsoft within sixty (60) days after
the Effective Date, which list shall not include more than fifteen (15) names
(each such individual being referred to herein a "Restricted Company Employee"),
during the period between the Effective Date and the two (2) year anniversary of
the date on which Company is obligated to deliver the Phase II Deliverable
pursuant to Exhibit A (the "Restricted Period"), and subject to the exception
that Microsoft may hire any such Restricted Company Employee six (6) months or
more after he/she has terminated employment with Company, except pursuant to an
arrangement with Microsoft providing for employment in six (6) months. The
Company may add names to (but not remove names from) the list from time to time,
the Company agrees not to modify any names from the list once the list has 15
names. Company agrees to inform all Restricted Company Employees of the
restrictions set forth in this paragraph promptly after delivering the list of
Restricted Company Employees to Microsoft. Microsoft agrees to deliver copies of
the list of Restricted Company Employees to the Director of Human Resources
promptly after deliver of the list, or any permitted additions thereto, to
Microsoft. In the event Company believes that Microsoft has hired a Restricted
Company Employee in a manner that violates this Section 12.6, Company shall
promptly notify Microsoft's Human Resources director of such hire, and
thereafter Microsoft shall take prompt good faith action to remedy such error.
Company may not pursue other remedies with respect to such a breach without
initially following such escalation procedure and allowing Microsoft to correct
its error within a forty-five (45) day period thereafter. By way of further
clarification, the Restricted Microsoft Groups may not hire a Restricted Company
Employee from another division or group of Microsoft during the Restricted
Period, regardless of whether the initial hiring by Microsoft of such Restricted
Company Employee was compliant with the terms of this paragraph.
12.7 Construction. If for any reason a court of competent jurisdiction finds
------------
any provision of this Agreement, or portion thereof, to be unenforceable, that
provision of the Agreement will be enforced to the maximum extent permissible so
as to effect the intent of the parties, and the remainder of this Agreement will
continue in full force and effect. Failure by either party to enforce any
provision of this Agreement will not be deemed a waiver of future enforcement of
that or any other provision. This Agreement has been negotiated by the parties
and their respective counsel and will be interpreted fairly in accordance with
its terms and without any strict construction in favor of or against either
party.
12.8 Injunctive Relief. The parties acknowledge and agree that any violation by
-----------------
Microsoft of Section 3 or 12.6, or by either party of Section 7, may cause
significant and irreparable harm to the other party for which money damages are
inadequate. Accordingly, the non-breaching party shall be entitled to
injunctive relief in such event, subject, however, to the limitations set forth
in Section 12.6.
12.9 Entire Agreement. This Agreement does not constitute an offer by either
----------------
party and it shall not be effective until signed by both parties. This Agreement
constitutes the entire agreement between the parties with respect to the
Services and all other subject matter hereof and merges all prior and
contemporaneous communications as to such subject matter. It shall not be
modified except by a written agreement dated subsequent to the date of this
Agreement and signed on behalf of Company and Microsoft by their respective duly
authorized representatives.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
Effective Date written above.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
MICROSOFT CORPORATION ENGAGE TECHNOLOGIES, INC.
- -----------------------------------------------------------------------------------------
<S> <C>
By: s/s Brad Chase By: s/s Stephen A. Royal
- -----------------------------------------------------------------------------------------
Name (print): Brad Chase Name (print): Stephen A. Royal
- -----------------------------------------------------------------------------------------
Title: VP Consumer Commerce Title: CFO
- -----------------------------------------------------------------------------------------
Date: July 28, 1999 Date: July 28, 1999
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SPECIFICATIONS; SCHEDULE; AND
DESCRIPTION OF DELIVERABLES
Project Overview:
Company will provide Microsoft with Deliverables based on Microsoft's
requirements specified in Table A-1 (including the notes thereto). Company will
deliver Source Code and Object Code versions of each such Deliverable, and will
provide on-site consulting related to the same throughout the two-phase project.
Schedule.
All work specified in this document will be targeted for the Microsoft Windows
NT 4.0 operating system (most current release service pack) running on the 32-
bit Intel i86 Pentium Processor platform.
Resource requirements:
Company will ensure that Senior Company Engineers (as defined in Section 2.5 of
the Agreement) will be the primary developers of the Deliverables. These Senior
Company Engineers will be responsible for presenting all the code during the
Code Reviews, as specified in Table A-2.
19
Microsoft and Engage Confidential & Proprietary
<PAGE>
EXHIBIT B
SUPPORT AND MAINTENANCE PLAN
Maintenance Problem Severity and Resolutions.
(a) Premium Support. Company agrees to provide the following support and
maintenance services to Microsoft for the period described in Section 2.6
of this Agreement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Deliverable Premium Level Support Specifications
- -----------------------------------------------------------------------------------------------
<S> <C>
Technical Expertise Senior Resources
- -----------------------------------------------------------------------------------------------
Response (call back) . 15 minute call back for Severity 1 and 2 calls (as
defined below)
. 60 minute call back for Severity 3 and 4 (as defined
below)
- -----------------------------------------------------------------------------------------------
Time to begin problem resolution . 60 minutes for Severity 1 and 2 (as defined below)
. 1 business day for Severity 3 and 4 (as defined below)
- -----------------------------------------------------------------------------------------------
Availability 24 x 7 by telephone or, for Severity 1 and 2, as defined
below, beeper
- -----------------------------------------------------------------------------------------------
Queue Priority for Call Back Highest
- -----------------------------------------------------------------------------------------------
Knowledge of Customer Known environment, applications and business sensitivities
Environment
- -----------------------------------------------------------------------------------------------
Fault Management Reporting Problem report within 24 hours of problem resolution for
Severity 1 and 2 calls (as defined below)
- -----------------------------------------------------------------------------------------------
Service Activity Review Hardware/Software monthly review
- -----------------------------------------------------------------------------------------------
Account Management Escalation/coordination of resources
- -----------------------------------------------------------------------------------------------
Product Engineering Elevations Priority by problem severity
- -----------------------------------------------------------------------------------------------
Proactive Support: . Proactive Patch Reporting
. Notification of known problems and fixes
. Monthly call review
. O/S upgrade impact planning
- -----------------------------------------------------------------------------------------------
</TABLE>
(b) Severity Levels Defined.
Severity 1 - Critical Business Impact. The Software, regardless of the
environment or product usage, has complete loss of service or resources and work
cannot reasonably continue.
Severity 2 - Serious Business Impact. The Software, regardless of the
environment or product usage, has significant or degraded loss of service or
resources.
Severity 3 - Minor Business Impact. The Software, regardless of the environment
or product usage, has minor loss of service or resources.
Severity 4 - No Business Impact. The Software is in full work mode; there is not
work being impeded at this time. Information is requested or reported.
(c) Software Upgrade Support. Company agrees to provide assistance in upgrades
in the form of Release Notes, technical consulting, and on-site support as
deemed necessary by Microsoft. Both parties will work in good faith to perform
software upgrades which minimize any advertising service outages.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Engage Technologies, Inc.:
We consent to incorporation by reference in the registration statement No. 333-
83245 on Form S-8 of Engage Technologies, Inc., of our report dated September
10, 1999, except for note 17, which is as of September 23, 1999, relating to the
consolidated balance sheets of Engage Technologies, Inc. as of July 31, 1998 and
1999, 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, 1999, and our report dated September 10, 1999 relating to the consolidated
financial statement schedule, which reports appear in the July 31, 1999 annual
report on Form 10-K of Engage Technologies, Inc.
KPMG LLP
Boston, Massachusetts
October 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 112,034
<SECURITIES> 1,067
<RECEIVABLES> 6,618
<ALLOWANCES> 986
<INVENTORY> 0
<CURRENT-ASSETS> 119,328
<PP&E> 3,039
<DEPRECIATION> 1,238
<TOTAL-ASSETS> 163,948
<CURRENT-LIABILITIES> 15,775
<BONDS> 0
0
0
<COMMON> 487
<OTHER-SE> 145,811
<TOTAL-LIABILITY-AND-EQUITY> 163,948
<SALES> 14,167
<TOTAL-REVENUES> 16,023
<CGS> 3,494
<TOTAL-COSTS> 9,451
<OTHER-EXPENSES> 37,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313
<INCOME-PRETAX> (32,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,003)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
